Fair Market Value in place of the agreed price under amended Article 38
As a general rule, Article 26(2) of the Common VAT Agreement provides that the value of a Supply is the value of Consideration less the Tax. Article 26(5) leaves each Member State to determine the conditions for adjusting the value of a Supply between Related Persons, and Article 15(2) of the VAT Law provides that the Regulations shall determine the competition conditions required for determining fair market value and the terms and conditions required to amend the value of a Supply between Related Persons. Article 38 of the Implementing Regulations is the provision that does so.
Article 38(1) was amended by ZATCA Board Resolution No. (01-06-24), published in the Official Gazette on 18 April 2025 and effective from the date of publication. The amended text is the one that applies.
The rule as amended
Amended Article 38(1) provides that the value of a Supply shall be its fair market value, instead of the agreed-upon value between the parties to the transaction, when all of the following conditions are met:
- the supply is made between two related persons or their affiliates, as defined in the Agreement or the Regulations;
- the consideration of the Supply is less than the fair market value of the Supply; and
- the Customer is not entitled to a full Input Tax deduction or refund in relation to the Supply.
What the amendment changed
Compared with the June 2023 text, the amended paragraph:
- refers to the "agreed-upon value between the parties to the transaction" rather than to "any actual Consideration paid";
- extends the first condition to supplies between two related persons "or their affiliates"; and
- extends the third condition so that it is met where the Customer is not entitled to a full Input Tax deduction "or refund".
The last change brings within the rule a customer whose recovery of tax would otherwise come through a refund rather than a deduction.
All three conditions must be met
The rule is cumulative. Where a related-party supply is priced at or above fair market value, the second condition is not met. Where the customer is entitled to full deduction or refund, the third condition is not met. In either case the agreed value stands. The rule is therefore directed at undervalued supplies to related customers that cannot fully recover the tax.
How Fair Market Value is measured
Paragraphs (2) to (4) of Article 38 were not amended:
- The comparable test. Under Article 38(2), Fair Market Value is the Consideration that would be payable for a Similar and Contemporaneous Supply of Goods or services freely offered and made between Persons who are not Related Persons.
- Similar and Contemporaneous Supply. Under Article 38(3), this means another Supply of Goods or services supplied at the same time that are identical to, or closely or substantially resemble, the Goods and services being supplied, ascertained on all relevant factors including characteristics, quality, quantity, the place and date of Supply and the reputation of the Supplier.
- The fallback. Under Article 38(4), where the value of a Similar and Contemporaneous Supply cannot be ascertained, the Taxable Person or the Authority may prescribe an alternative Fair Market Value based on other comparable transactions or the costs of the Supplier to make the supply, whichever is higher, with the decision of the Authority prevailing in the event of a difference.
Practical considerations
Suppliers within a group, or dealing with other Related Persons as defined in Article 37 of the Regulations and the Agreement, should identify supplies priced below market to customers with restricted recovery, such as businesses making exempt supplies, and retain evidence of comparable market prices or supplier costs to support the value used.
Instruments relied on: VAT Law, Article 15(2); Common VAT Agreement, Articles 1 and 26; Implementing Regulations, ninth edition, 26/11/1444H corresponding to 15/6/2023G, unofficial English translation, Articles 37 and 38(2) to (4), with Article 38(1) as amended by ZATCA Board Resolution No. (01-06-24) dated 17/05/1446H, published in the Official Gazette (Umm Al-Qura, issue 5082) on 18 April 2025, unofficial English translation. The Arabic text prevails.