Middle East: UAE and Saudi Arabia move forward with implementation of Advance Pricing Agreements

14 Oct 2024    4 minute read

In brief

Tax reforms have accelerated over the last decade in the Middle East. These have in turn led to uncertainties and increased risk of tax controversies. An area of particular focus for tax authorities is transfer pricing which requires extensive documentation and compliance obligations and may result in multiyear adjustments of taxable income for companies. In these circumstances, instruments to reach tax certainty and prevent tax disputes with tax authorities would become especially valuable and important.

One of relevant instruments are Advance Pricing Agreements (APA) which are well-known for managing transfer pricing risks. Many countries have successfully adopted APAs in their toolkit and many APAs are concluded each year in major jurisdictions such as the US, Japan and European countries. Recently, the UAE and Saudi Arabia made also further steps towards implementing APAs.

Contents

Entering into an APA aims to provide tax certainty to taxpayers and tax administrations, to reduce the likelihood of tax disputes, and to avoid double taxation. As defined by the OECD Transfer Pricing Guidelines, an APA is an arrangement whereby taxpayers and tax administrations agree ex ante on the application of the most appropriate transfer pricing method and the critical assumptions for selected controlled transactions. This agreement then remains in place for a fixed period of time, for example a three-year period. APAs are initiated by a taxpayer and requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations.

Saudi Arabia

In 2023, the Saudi Arabia Zakat, Tax and Customs Authority (ZATCA) amended its Transfer Pricing Bylaws by introducing a possibility of applying for an APA. However, ZATCA did not clarify the procedure for such applications at the time. . 

Recently, ZATCA published an updated version of the Transfer Pricing Guidelines which now includes a separate chapter on APAs covering eligibility requirements and procedure. ZATCA also announced that it will now start accepting applications for unilateral APAs.

APAs may be requested for transactions between related persons with a value of transactions of not less than SAR 100,000,000 (approx. USD 27,000,000). In certain cases, ZATCA can grant an exemption from this threshold for some complex transactions.

Below are also the key points of the APA procedure:

  1. If transactions meet eligibility requirements, taxpayers must first contact ZATCA to assess and discuss possibility of requesting an APA. If the possibility of requesting the APA is confirmed, the taxpayer would still have to file a complete application to ZATCA at least 12 months before the start of the first fiscal year in question.
  2. ZATCA has specified what information and documents should be included in the application. This includes the information that would typically be covered by the KSA transfer pricing local file as well as certain financial statements.
  3. If ZATCA reaches an agreement with the taxpayer, the taxpayer will be notified of this and will have the option to accept or reject the agreement.
  4. If the taxpayer accepts the APA conditions, the APA becomes binding for a period of three (financial) years, which means that during this period ZATCA will not object to the transfer pricing methodology of the transaction covered by the APA.
  5. In the event that any of the critical facts relating to the APA change, the taxpayer would have to notify ZATCA. ZATCA may then check whether the APA should be amended or terminated.

UAE

The possibility to apply to the Federal Tax Authority (FTA) for concluding an APA is envisaged in Article 59 of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

The FTA issued a Decision in June 20241 to amend its existing Policy on Issuing Clarifications and Directives. The FTA added a separate section on APAs stating that the start date for receiving applications for APAs and procedures related to the submission of applications and the issuance of APAs will be announced in the fourth quarter of 2024.

At this stage it is yet not known how the APA framework in the UAE will look like, however given that in the past the UAE generally followed OECD Transfer Pricing Guidelines, it can be expected that much of the OECD recommendations will be used as a reference for the UAE APA process as well.

We recommend considering APAs as an instrument to ensure tax certainty and mitigate tax risks for complex transactions and/or transactions of high value. Significant advantages of APAs are ability to negotiate with tax authority and potential for establishing cooperation, trust and transparency with tax authorities.

Our Baker McKenzie team will be able to advise on APAs and help with initiating a dialog with tax authorities, applying for an APA, and negotiations. We have an extensive team of tax lawyers and economists in the region and globally which have profound experience related to APAs, as well as with tax and transfer pricing matters in general.

To speak with us about APAs, any transfer pricing issues or any Middle East tax matters please contact one of the team members above.

1 No. 4 of 2024

Contact Information
Folkert Mulder
Legal Director at BakerMcKenzie
Amsterdam
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folkert.mulder@bakermckenzie.com
Tina Hsieh
Partner
Dubai
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tina.hsieh@bakermckenzie.com
Reggie Mezu
Special Counsel
Dubai
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reggie.mezu@bakermckenzie.com
Khrystyna Knygynytska
Associate at BakerMcKenzie
Berlin
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khrystyna.knygynytska@bakermckenzie.com

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