Advance Pricing Agreements in KSA - Update

3 minute read
October 31, 2024

KSA APA programme updates

On October 22nd, 2024, the Zakat, Tax and Customs Authority (“ZATCA”) held a virtual workshop to clarify and provide further guidance on the Advance Pricing Agreement (“APA”) programme which was recently introduced in the Kingdom of Saudi Arabia (“KSA”). This document provides an overview of the information provided in the workshop.

APA Background

What is an APA?

An APA is a written agreement between a Tax/Zakat payer and the KSA Tax administration (i.e., ZATCA). The agreement determines an approach for resolving transfer pricing issues in advance of a return being filed. When the terms of the agreement are complied with, it provides compliance assurance to the Tax/Zakat payer that the treatment of those transfer pricing issues will be accepted by the ZATCA for the period covered by the agreement without risk of audit.

APA becomes law in KSA

On March 20th, 2023, the Board of Directors of the ZATCA announced the approval of the proposed amendments to the Transfer Pricing Guidelines, which opened the APA programme in KSA effective January 1, 2024. As part of this update, ZATCA also extended the applicability of transfer pricing to Zakat Payers in KSA making an APA an attractive option to both Tax payers and Zakat Payers in KSA.

When an APA is most beneficial

Complex transactions with uncertain treatment
High value transactions
Strategic business planning
Transactions being disputed by the ZATCA
Cross border transactions

Benefits of an APA

Certainty in treatment by ZATCA
Reduced litigation costs
Operational efficiency
Reduced compliance costs
Compliance risk mitigation

1. APA Application Requirements

The transactions covered by the APA must not be less than SAR 100 million, although exceptions may apply for complex transactions.
An APA application must be submitted at least 12 months prior the effective date.

2. Threshold

The threshold of SAR 100 million applies to individual transaction. However, in cases where it is challenging to segregate the transactions, an aggregation of the transactions may be permitted.
This threshold is applicable for each reporting year throughout the entire duration of the APA, which is currently set at three years.

3. Key Considerations

The duration of the APA is three years. During the APA, the company must submit an annual compliance report to demonstrate adherence to the terms of the agreement.
APA may be renewed, following the same timeline as the initial application, which requires submission at least 12 months prior to commencement.
Transactions covered by the APA include those between related parties within KSA, including transactions involving economic zones or related parties that benefit from tax incentives, as well as transactions between related parties located outside the Kingdom.
Currently, there are no fees associated with the application for the APA.
The APA cannot be made effective retrospectively; it is only applicable on a prospective/future basis.
The relevant critical facts that are material to the agreement are to be specified within the APA. If the Tax/Zakat payer fails to meet any of the critical facts outlined in the agreement, or if changes occur that materially impact the appropriateness of the selected transfer pricing method, it may be necessary to review or terminate the APA.
The ZATCA will soon publish a detailed APA guideline.

4. Transfer Pricing Compliance Obligations

In addition to the annual compliance report, the company must continue to submit a Controlled Transactions Disclosure Form (“CTDF”) and certified TP Affidavit.
Whilst the APA transactions will be exempt from the Local File and Master File requirements, the transactions not covered by the APA and exceeding the threshold will still need to prepare these reports.

APA Process and Timeline

The following timeline outlines the key steps in the APA process, providing a clear overview of the procedural timeline and important milestones.

Pre-file meeting (optional)

The Tax/Zakat payer may request a pre-file meeting with the APA team to address questions.
It is important to note that the Tax/Zakat payer must disclose their name, as participation cannot occur on an anonymous basis.

Phase 1 (2-3 months)

Submission of the formal application through the ERAD portal.
Review of the application by the APA team.
Initiation of preliminary discussions between the Tax/Zakat payer and the APA team.

Phase 2 (8-9 months)

The Tax/Zakat payer will be requested to submit additional information to ZATCA.
ZATCA will conduct additional meetings with the Tax/Zakat payer, along with technical reviews, analysis, and pre-agreed site visits to assess the functional profile of the Tax/Zakat payer.
Upon completion of ZATCA’s due diligence, ZATCA will communicate its position with the Tax/Zakat payer in preparation for the negotiation phase.
Once consensus is reached, the agreement will be drafted and exchanged with the Tax/Zakat payer for approval and signature.

Phase 3

The Tax/Zakat payer is required to submit an annual compliance report that complies with the terms agreed in the APA.
ZATCA will conduct an annual inspection and audit to ensure compliance with the terms of the APA.
The Tax/Zakat payer will be required to maintain records and documentation that allow ZATCA to verify compliance with the APA.

Additional remarks on the processes above

The application service will be launched soon in ERAD portal. In the meantime, Tax/Zakat payers may request an application by communicating with the relationship manager, or the APA team on (APA-gma@zatca.gov.sa)
Multiple Transactions: Tax/Zakat payers can include several transactions in one application form.
Submission Confirmation: After submitting the application, ZATCA will confirm receipt and assess its completeness.
Preliminary Meeting: If the application is complete, a preliminary meeting will be scheduled, ideally within 60 days.
Incomplete Applications: If the application is incomplete, ZATCA will notify the Tax/Zakat payer regarding what is missing.
After submitting a complete application and concluding the preliminary meeting, the Tax/Zakat payer will receive notification regarding the outcome of the agreement application. The possible outcomes are:
Accepted: If the application is accepted, it does not guarantee that an agreement will be finalized.
Rejected: If the application is rejected, the Tax/Zakat payer will be informed of the reasons for the rejection.
If ZATCA rejects the application, the Tax/Zakat payer must respond to the rejection within 30 days. If they do not, the rejection will be considered final.
Withdrawal from Application: If the Tax/Zakat payer withdraws the application during the submission phase, both ZATCA and the Tax/Zakat payer will have no further obligations to each other related to the application. Any previous agreements or understandings connected to the application will also become void.

Next Steps

Tax/Zakat payers interested in exploring the APA process should reach out to our specialist team to discuss their specific facts and circumstances. We can support you in the entire APA process and provide guidance and insights from our globally experienced team.

It is important to submit the formal APA application before December 31, 2024 to ensure eligibility for the agreement effective in 2026. If desired, Tax/Zakat payers may request a pre-file meeting with the APA team to address any questions.