Transfer pricing (TP) disputes can be complex, costly, and time-consuming for both taxpayers and tax authorities. Advance Pricing Agreements (APAs) offer a proactive solution, allowing taxpayers to establish acceptable TP methodologies in advance. By ensuring compliance with the arm’s length principle, APAs provide much-needed clarity and certainty in cross-border transactions.
Following the publication of the KSA’s Guidelines on APAs in February 2025, this article discusses the key aspects of APAs, including eligibility, types, benefits, and critical assumptions involved.
About Advance Pricing Agreement
As per the Guidelines, an APA is an agreement between the ZATCA and a taxpayer that confirms appropriate TP methods, in advance, that will be used to determine the arm’s length price. It applies to (a) specific transactions, (b) between the taxpayer and related persons or between a head office and its permanent establishment (“PE”), (c) for the specified tax year and (d) under specified terms and conditions.
APAs rely on predefined critical assumptions that impact their validity. These assumptions may include economic conditions, market trends, and industry developments. Other factors such as exchange rates, interest rates, inflation trends, regulatory changes, tariff modifications, and tax law amendments also play a role. Additionally, functional and risk profiles of related entities are considered. If any assumption changes significantly, the APA may need to be renegotiated or terminated. All these aspects must be taken care of while making the APA application.
APAs provide tax certainty for future transactions, reducing the need for exhaustive TP audits and disputes. They clarify compliance obligations, ensuring a predictable tax liability.
Types of APAs
Internationally, 3 kinds of APAs are recognized:
|
Type of APA |
Parties Involved |
Key Benefits |
Limitations |
|
Unilateral APA |
Taxpayer & one tax jurisdiction |
Provides domestic tax certainty |
No protection against double taxation |
|
Bilateral APA |
Taxpayer & two tax jurisdictions |
Ensures consistency, reduces double taxation risks |
Limited to two jurisdictions |
|
Multilateral APA |
Taxpayer & multiple tax jurisdictions |
Comprehensive tax certainty for cross-border transactions |
Complex negotiation process |
This Guideline explains the key concepts, processes, and steps for having a finalized unilateral APA with the tax authority. However, the tax Authority will not process Bilateral APAs and Multilateral APAs until further notice.
Eligibility for APA Applications
To apply for an APA in KSA, taxpayers must meet specific conditions:
· The application should be filed at least 12 months before the start of the first fiscal year covered in the application.
· It applies only to related party transactions and does not cover profit attribution to a PE.
· The annual transaction value should meet the prescribed threshold e.g., SAR 100 million, though some complex transactions may be exempted, viz. where it is difficult to determine the appropriate TP method or the appropriate arm’s length price due to the nature of the transaction or where it is difficult to find reliable comparables.
Conclusion
Many jurisdictions as well as the OECD publish periodic statistics on the APAs executed. Such is the importance of APAs in cross-border taxation. Companies with global presence must take advantage of this mechanism in consultation with their tax advisors.
Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
