Our Baker McKenzie team will be able to advise on APAs and help with initiating a dialogue 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 below.
In more detail
We provide below our key takeaways on the current APA process and implications in the KSA:
| 1. When a transaction can be covered by an APA |
2. When a transaction is excluded from an APA |
- APAs can be concluded by both corporate income taxpayers and zakat payers.
- APAs can cover transactions with an amount above SAR 100 million (USD 27 million) annually, with a potential exception for complex transactions subject to approval by ZATCA.
- The APA period can cover up to three years and can be renewed for another three years as mutually agreed by the parties.
- APAs can only be concluded for prospective transactions and cannot be applied retrospectively.
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- Bilateral APAs and multilateral APAs presently cannot be concluded.
- ZATCA is not obliged to defend the APA before the counterparty's competent authority, including in cases of potential double taxation. Amendments to the APA arising from any possible adjustments from another tax authority are not possible.
- Matters related to profit attribution to permanent establishment are excluded from the scope of APAs.
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3. APA process
- Process and timing of concluding an APA
Taxpayers must start the APA procedures at least 12 months before the beginning of the first fiscal year contained in the application. According to ZATCA's indication, an estimated duration for finalizing a unilateral APA is typically around 12 months.
The process covers the below stages which have different durations.
In addition to the above stages, taxpayers have an option to request a pre-filing meeting (on a named basis) prior to submitting their formal application to discuss the APA process, clarify procedural steps, and address any preliminary concerns or questions.
After the filing, the processing of the APA application is subject to a case-by-case basis. During the analysis of the application, ZATCA may require additional information which can be obtained through meetings, site visits, functional interviews with employees of the applicant, and written follow-up questions. Taxpayers are required to fully collaborate during the APA process otherwise the application might not be successful.
- The proposed Transfer Pricing (TP) method must be applied consistently also to historical zakat/tax years or the most recent business cycle
An APA application must contain detailed information supporting the application of the chosen TP method. Taxpayers have to demonstrate the impact of the proposed TP method on the covered transactions by consistently applying it to historical zakat/tax years or the most recent business cycle or clarify why the new proposed TP method provides a more accurate Arm's Length result.
Following the review and evaluation stage, ZATCA will discuss its position and findings with the taxpayer through the negotiation process and upon reaching a consensus, ZATCA will draft the APA along with relevant documents, submitting those to the taxpayer for approval.
- The Organisation for Economic Co-operation and Development (OECD) TP Guidelines can be used as assistance
The OECD Transfer Pricing Guidelines can be used if an issue is not addressed in domestic Saudi transfer pricing bylaws and guidance. However, the APA Guidelines contain the reservation that APA applications may not at all times rely on the OECD Transfer Pricing Guidelines.
4. Ongoing APA compliance
Once an APA is established, the Taxpayer must file an APA annual compliance report for each year covered by the APA. Such report would have to be filed along with the tax/zakat return.
Entering into an APA does not prevent ZATCA from conducting TP audits and making adjustments for controlled transactions and years not covered by the APA. Taxpayers must also keep records enabling ZATCA to verify compliance with the APA and ZATCA may conduct annual audits to ensure adherence to the terms of the APA.
An APA may include a provision allowing the taxpayer to make compensating adjustments in the annual zakat/tax return. These adjustments align the taxpayer's financial statements and return of covered transactions with the results determined by the APA's TP method in case of deviation.
- APAs can be potentially revised, revoked or cancelled
An APA may be revised if there are critical changes that impact the APA implementation. Under extreme circumstances, an APA may be cancelled and revoked. Both scenarios result in a termination of the APA, but in case of cancellation, the APA will not be valid from the effective date of cancellation, while in case of revocation, the APA will not be effective for any part of the period specified in the APA (retroactive disapplication).
5. APA renewal
Renewal requests should be submitted at least 12 months before the beginning of the first fiscal year concerning the new agreement. ZATCA may consider renewing an APA under similar terms and conditions or updating the APA terms if needed through review and evaluation of the renewal APA documentation package and negotiations.
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Dania Nugali, Counsel, has contributed to this legal update.
