Safe Harbour Rules

Amendment in Financial transactions and definition of operating expense / income
December 2023

Summary

The Central Board of Direct Taxes issued Notification No. 104/2023 dated 19 December 2023 to update the Safe Harbour Rules w.r.t. financial transactions and definition of operating income and operating expenses, effective from Financial Year 2023-24 (i.e., Assessment Year 2024-25).

In the notification, the benchmark rate in the Safe Harbour Rules have been transitioned from existing LIBOR to Alternate Reference rates viz., SOFR (USD), EURIBOR (EUR), SONIA (GBP), TORF (Yen), BBSW (AUD) and SORA (SGD). Further, the definition of intra-group loan was substituted to cover advance of loan to any associated enterprise and the loan can be sourced in any currency. Currently the definition covered only loans to wholly owned subsidiaries and loans sourced in INR. The definition of operating income and expense has been parallelly updated to include income / loss on transfer of assets for which depreciation forms part of operating expense. This alert summarizes the updates to the Safe Harbour Rules and the key takeaways / way forward in the following sections.

Financial Transactions

Benchmark rates, Quantum and Credit rating

Benchmark Rates – Transition to Alternate Reference Rates

The key amendment in this notification is the transition from LIBOR as the benchmark rate to Alternate reference rates for the respective currencies as on 30th September of the relevant year. With the phasing out of LIBOR, various legislations have transitioned to alternate reference rates and the same was expected with respect to Safe Harbour Rules as well, which was effected through this notification. While updating the references to alternate rates, the CBDT also increased these reference rate by certain basis points (bps), on a case-to-case basis.

The alternate reference rates currently in this notification has been provided for six currencies viz.:

1. US Dollar: 6-month Term SOFR by Chicago Mercantile Exchange (CME), increased by 45 bps.
2. Euro: 6-month EURIBOR by European Money Markets Institute.
3. GBP: 6-month SONIA by ICE Benchmark Administration/Refinitiv, increased by 30 bps.
4. JPY: 6-month TORF by QUICK Benchmarks Inc, increased by 10 bps.
5. Australian Dollar: 6-month Bank Bill Swap Rates (BBSW) by Australian Securities Exchange.
6. Singapore Dollar: 6-month Compounded SORA by Monetary Authority of Singapore, as increased by 45 bps.

Increase in the quantum of covered transaction

With respect to loans denominated in foreign currency, the consideration for loan advanced to associated enterprise has been split into two categories viz.,

1. Total sum of loans to all associated enterprises as on 31 March of the year not exceeding INR 250 crores.
2. Total sum of loans to all associated enterprises as on 31 March of the year exceeding INR 250 crores.

Currently the Safe Harbour rules cover only loans where the aggregate value of which does not exceed INR 100 crores. The spread to the reference rate has also been revised for the respective categories as follows:

Aggregate Loan not exceeding INR 250 crores	Aggregate Loan exceeding INR 250 crores
150 bps, where AEs have credit rating of AAA, AA+, AA, AA-, A+, A, A- or equivalent	150 bps, where AEs have credit rating of AAA, AA+, AA, AA-, A+, A, A- or equivalent
300 bps, where AEs have credit rating of BBB+, BBB, BBB- or equivalent	300 bps, where AEs have credit rating of BBB+, BBB, BBB- or equivalent
400 bps, where AEs have credit rating of BB+, BB, BB-, B+, B, B-, C+, C-, C-, D or equivalent or	450 bps, where AEs have credit rating of BB+, BB, BB-, B+, B, B- or equivalent
where the credit rating of AE is not available	600 bps, where AEs have credit rating of C+, C, C-, D or equivalent or where the credit rating of AE is not available

The key aspect to note is that in the current Safe Harbour Rules, the spread in case where credit rating of the associated enterprises if not available was 400 bps, while in the revised Safe Harbour Rules the spread has been mapped with the lowest credit rating.

In connection with the loans denominated in INR, the spread and the associated credit ratings has remained unchanged.

Credit Ratings

An explanation for Credit Rating has been inserted in the Safe Habour Rules to mean credit rating assigned by an agency registered with SEBI and accredited by RBI. Consequently, the specific reference to “CRISIL credit rating” has been modified to “credit ratings” in all the applicable sections.

Further the explanation also states that where there are multiple credit ratings for an associated enterprise, the lowest of all the ratings shall be considered while arriving at the spread for the purpose of Safe Harbour Rules.

Other Aspects / Definition

1. The definition of intra-group loan has been modified to in order to widen the coverage of applicability of the Safe Harbour Rules to any associated enterprise. Currently, the Safe Harbour Rules defines intra-group loan as that which is extended to non-resident wholly owned subsidiary. Wholly owned subsidiary has been replaced with associated enterprises, thereby extending the coverage of Safe Harbour Rules.
2. The condition on sourcing the loan in INR has been omitted in the updated definition. Currently, the Safe Harbour Rules are applicable where loans are sourced in INR, which can be either through internally generated reserves or external lenders which provide INR denominated loans. However, businesses often source funds from overseas owing to myriad economic factors, in order to funds their foreign subsidiaries / associated enterprises. With this amendment, businesses sourcing such loans in foreign currency can also opt under the Safe Harbour Rules.

Operating Income / Expenses – Definition

The Safe Harbour Rules defines operating income and operating expenses for the purpose of computing the arm’s length mark-up for provision of services to associated enterprises. These definitions provide illustration of both operating and non-operating items. Among others ‘income on transfer of assets or investments’ has been excluded as non-operating in nature. Similarly, ‘loss on transfer of assets or investments’ has been excluded as non-operating in nature.

Under operating income and operating expense, the revised Safe Harbour Rules have restricted the ‘income / loss on transfer of assets’ to other than assets on which depreciation is included in operating expense. In other words, in case of assets for which depreciation is included in the operating expenses, the profit or loss due to transfer of such assets will be treated as operating in nature.

The key point to note is that while computing the arm’s length mark-up under the Safe Harbour Rules, since the depreciation on such assets are usually included in operating expense, the loss on transfer of assets will also have to be included in the cost base. Similarly, any income arising out due to transfer of assets can also be considered as operating income arriving at the mark-up for the purpose of Safe Harbour Rules.

Through this amendment, the CBDT seeks to harmonise the classification of income / loss as the expensing of the asset during the year of transfer would otherwise be two-fanged i.e., as per the existing definition for assets transferred, the depreciation portion would be considered as operating in nature and considered in operating expense while the loss or profit on account of such sale would be treated as non-operating in nature. With the amendment, this variance will be removed.

Key Takeaways / Way Forward

The transition of benchmark rates from LIBOR to Alternate Reference Rates was expected in the Safe Harbour Rules. Revision of the Safe Harbour Rules before the close of the corresponding financial year is a welcome move, considering that applicability of Safe Harbour Rules are usually extended after the year-end. Further, the removal of the ceiling for financial transactions w.r.t. loans advanced in foreign currency from the existing threshold of INR 100 crores would incentivize taxpayers to opt under Safe Harbour Rules and thereby increasing tax certainty.

Nevertheless, there exists other facets of Safe Harbour route on which businesses await amendments including rationalization of mark-up for manufacturing of core and non-core auto components, increase of the threshold for low value adding services and inclusion of other commonly litigated transactions such as royalty under the Safe Harbour Rules. With these changes, Safe Harbour route should witness wider adoption by businesses, as it would be effective and efficient approach in transfer pricing dispute resolution and contribute to the ease of doing business in India.

About us

VSTN Consultancy Private Ltd is a boutique Transfer pricing firm with extensive expertise in the field of international taxation and transfer pricing.

Our offering spans the end-to-end Transfer Pricing value chain, including design of intercompany policy and drafting of Interco agreement, ensuring effective implementation of the Transfer Pricing policy, year-end documentation and certification, BEPS related compliances (including advisory, Masterfile, Country by Country report), Global Documentation, safe harbour filing, audit defense before all forums and dispute prevention mechanisms such as Advance Pricing agreement.

We are structured as an inverse pyramid where leadership get involved in all client matters, enabling clients to receive the highest quality of service.

Being a specialized firm, we offer advice that is independent of an audit practice, and deliver it with an uncompromising integrity.

Our expert team bring in cumulative experience of over five decades in the transfer pricing space with Big4s spanning clients, industries and have cutting edge knowledge and capabilities in handling complex TP engagements.

---

As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

India | UAE | USA | KSA | Dubai | Asia Pacific | Europe | Africa | North America

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

Contact us today to explore how we can partner with you to optimize your global transfer pricing approach.

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Pillar One – Amount B

Final report issued by OECD / Inclusive Framework

21 February 2024

Summary

The Organisation for Economic Co-operation and Development (OECD) / G20 Inclusive Framework (IF) issued the report on simplified and streamlined approach, earlier referred to as Amount B, on 19 February 2024. This report, which was an outcome of the two Pillar solution, will now form part of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (TP Guidelines) – Chapter IV.

The report is largely on the lines of the public consultation document issued in July 2023 and includes additional guidance for operation of the simplified and streamlined approach (‘the approach’). It is optional for Jurisdictions to consider this approach. When adopted in their respective tax regime, it can either be elective – in the nature of a Safe Harbour or prescriptive – mandatory for taxpayers and tax authority to follow the approach for in scope transactions. The approach cannot be considered as the basis to interpret the application of the remainder of the TP Guidelines.

Election of the approach by a jurisdiction cannot be binding on counterparty jurisdiction where the approach has not been adopted. The IF members commit to respect the outcome where the approach has been adopted by a Low-capacity jurisdiction (LCJ) and relieve potential double taxation arising due to adoption of the approach. IF explicitly caveats that the arm’s length consideration under this approach does not represent a ‘floor’ or ‘ceiling’ for the distribution activities in other cases. IF is working on an additional optional qualitative scope to apply as an additional step to identify baseline distribution activities, which it expects to conclude by March 2024. The IF will agree on the list of LCJ by March 2024. Jurisdictions can apply / implement the approach for fiscal years commencing on or after Jan 2025.

India has made reservations in areas pending finalization such as inclusion of definition of LCJ, political commitment on the approach. India has also made critical reservations to support the approach in the absence of additional qualitative criterion being incorporated in the scoping criteria.

This alert discusses in detail the report on the approach in the ensuing sections.

Qualifying and In Scope Transactions

The Approach is applicable to wholesale distributors, sales agents, and commissionaires involved in the sale of goods, excluding distribution of digital goods, commodities and digital services. Where distributors undertake both wholesale and retail distribution, retail sales should not exceed 20% of the total annual net sales.

Distributors (tested parties) that meet qualifying transactions definition and scoping criteria are eligible under the approach.

Qualifying Transactions

The qualifying transactions under the approach are as follows:

Buy-sell marketing & distribution transactions	Purchasing goods from AE(s) for wholesale distribution to unrelated parties
Sales agency, commissionaire transactions	Contributing to wholesale distribution of goods from AE(s) to unrelated parties

Scoping Criteria

In-Scope

Qualifying transactions will be ‘In-scope’ if:

1. They can be reliably priced using one-sided transfer pricing method, with the distributors, sales agents or commissionaire being the tested party and the most reliable method for pricing distribution activity should be Transactional Net Margin (TNMM). Exception being where there is availability of reliable internal comparables for the in-scope transactions and comparable uncontrolled price (CUP) method can be adopted as the most appropriate method.
2. Annual operating expenses/Net sales of the tested party is not lower than 3% or greater than the band between 20% to 30%. Jurisdictions can select any point between 20% to 30% while applying the approach in their tax laws. The three-year weighted average ratio is considered while computing the said ratio. The ratio for Year ‘y’ would be computed based on three-year data prior to the year under consideration:

   ∑(Operating Expenses)y-3, y-2 and y-1 / ∑(Net Sales)y-3, y-2 and y-1

Out of Scope

Qualifying transactions will be ‘Out-scope’ if:

1. They are involved in distribution of non-tangible goods, services or commodities.
2. Tested party undertakes non-distribution activities in addition to qualifying transactions and where either the non-distribution activities and qualifying transactions cannot be evaluated on a separate basis or cannot be reliably priced separately.

Non-distribution activities include manufacturing, R&D, procurement, financing or retail distribution. The guidance in TP Guidelines are to be referred for allocation of income, expenses and assets and liabilities between distribution and non-distribution segment – Chapter II (TP methods) and VII (intragroup services).

Arm’s length consideration

Arm’s length price under the approach is captured through ‘Pricing Matrix’. The arm’s length price ranges in the pricing matrix will be updated once in 5 years, unless in case of significant change in market conditions, where interim updates will be provided. In addition, operating expenses cross-check guardrail and net risk adjustment will have to be factored in for the qualifying jurisdictions.

Pricing Matrix

Pricing Matrix is a translation of arm’s length results which is determined from global datasets in a matrix form. Segments of this matrix are Operating asset to sales intensity (OAS), operating expense to sales intensity (OES) and industry. Factory intensity i.e., OAS and OES should be computed using three-year weighted average viz., three years prior to the year under consideration. Industry grouping is as follows:

• Group 1: Perishable foods, Grocery, household consumables, construction materials and supplies, plumbing supplies and metal.
• Group 2 –IT hardware and components, electrical components and consumables, animal feeds, agricultural supplies, alcohol and tobacco, pet foods, clothing and apparel, textiles, hides, furs, jewellery, plastics and chemicals, consumer electronics and products and components not listed in group 1 and 3.
• Group 3 – medical machinery, industrial machinery including industrial and agricultural vehicles, industrial tools, industrial components miscellaneous supplies.

In determining the arm’s length return for the tested party involved in qualifying in-scope transactions a three-step process will have to be followed.

• Firstly, determine the industry grouping. Where more than one industry group exists the weighted average return for the 2 or 3 groupings should be considered. If one of the grouping has greater than 80% sales into a single group, then this industry group should be considered for the entire distribution activities.
• Secondly, determine relevant factor intensity classification of the tested party. There are 5 classifications provided viz., A,B,C,D and E. Accounts payable guardrail will have to be considered i.e., the accounts payable will have to restated to 90 days credit period, for the purpose of this approach, where the payable days is greater than 90 days.
• Thirdly, identify the arm’s length price viz., return on sales %, that corresponds to the intersection of relevant parameters

The pricing matrix derived from the global dataset, as per the document, is as follows:

Factor Intensity	Industry Grouping 1	Industry Grouping 2	Industry Grouping 3
[A] High OAS (>45%) and any OES	3.50% +/- 0.5%	5.00% +/- 0.5%	5.50% +/- 0.5%
[B] Med to High OAS (30%-44.99%) and any OES	3.00% +/- 0.5%	3.75% +/- 0.5%	4.50% +/- 0.5%
[C] Med to low OAS (15%-29.99%) and any OES	2.50% +/- 0.5%	3.00% +/- 0.5%	4.50% +/- 0.5%
[D] Low OAS (<15%) and non-low OES (10% or higher)	1.75% +/- 0.5%	2.00% +/- 0.5%	3.00% +/- 0.5%
[E] Low OAS (<15%) and Low OES (<10%)	1.50% +/- 0.5%	1.75% +/- 0.5%	2.25% +/- 0.5%

Net operating assets for this purpose is tangible assets (property, plant, and equipment net of accumulated depreciation, land and net capital leases) and intangible fixed assets (include all intangible fixed assets, net of accumulated amortisation, but excluding goodwill) plus working capital (stock plus debtors less creditors).

Net expenses are total costs excluding cost of goods sold, pass-through costs and costs related to financing, investment activities or income taxes. It should not include any exceptional items that are unrelated to recurring business. Expenses should be quantified as per the applicable accounting standards (i.e., accounting standards permitted in the tested party’s jurisdiction).

For net operating assets and operating expenses, the three-year average i.e., three years prior to relevant year, has to be considered for this computation.

In determining whether the qualifying in-scope transactions are at arm’s length, the tested party margins should be within the range. If the tested party margins are outside the range, adjustment would be made to bring it to the range.

Operating expense cross-check

A guardrail in the form of operating expenses cross-check, through a cap-and-collar, has been included. For qualifying jurisdictions, the guardrail has been extended. Subsequent to arriving at arm’s length consideration as per pricing matrix, the return on operating expense is computed for the tested party. This return is mapped with the prescribed operating expense cap-and-collar range:

Factor Intensity	Default cap rates	Alternative cap rates for qualifying jurisdictions	Collar Rate
High OAS [A]	70%	80%	10%
Med to High OAS [B], [C]	60%	70%
Low OAS [D], [E]	40%	45%

Where the tested party’s return on operating expense is outside the range, the return on sales will have to be adjusted until the above return on operating expense reaches cap or collar, as the case maybe.

Country Risk adjustment

Certain jurisdictions have been observed to not have sufficient or to have no data points in the global dataset. For these qualifying jurisdictions, a net risk adjustment is to be applied after the application of the aforementioned steps. Adjusted return on sales is arrived by:

ROS™ + (NRA¹ * OAST) where ROS™ is the return on sales of tested party computed after pricing matrix and operating expenses cap-and-collar, NRA¹ is the net risk adjustment percentage with reference to the sovereign credit rating of the jurisdiction of the tested party and OAST² is the operating asset to sales intensity of the tested party for the relevant period and should not exceed 85% for computing the adjusted return on sales.

The list of qualifying jurisdictions for operating expenses cap-an-collar and country risk adjustment will be published on the OECD website and periodically updated.

Other Aspects

• Documentation: Local file of the distributor opting under the approach should include accurate delineation and detailed functional analysis of the qualified in-scope transactions, calculations and workings to align with pricing approach, etc. Taxpayers and tax administration can also leverage information in Master File to support their position. Once the taxpayer decides to opt under the approach for the first time, it needs to notify the local tax authorities and may need to continue to apply the approach for minimum three years.
• Transitional Issues: MNEs may restructure the entities either to opt-in or opt-out from the approach, evaluating its pros and cons. When doing so, the tax authorities have the right to analyse such reorganization in light of OECD guidelines (Chapter IX – Restructuring).
• Tax certainty: Taxpayer invoking MAP (mutual agreement procedure) cases should rely on rest of the OECD Guidelines where the relevant jurisdiction has not adopted the approach. Where primary adjustment is on the premise of application of pricing approach by one of the jurisdiction and the counterparty jurisdiction has not adopted the approach, the issue should be resolved by the competent authorities in light of the guidance in the rest of the OECD Guidelines and request for corresponding adjustment also should be evaluated. Instances where APA or MAP cases have already been settled prior to the adoption of the pricing approach, the agreed terms and conditions to prevail for the covered years. This will ensure uncertainty is not created owing to pricing approach, which is against the premise of the approach.

India

Several reservations were made by India in the report on the simplified and streamlined approach.

• Qualitative criterion: India opined that a critical aspect to determine baseline activities is having qualitative criteria. Since the existing report did not include these criteria, India conveyed its inability to support the approach if the same was not included.
• LCJ: As LCJ was not defined / listed, India expressed its reservation in any political commitment unless the definition of LCJ is agreed by the IF.
• Pricing Methodology: In connection with pricing of baseline activities, reservations by India included exclusion of goodwill from the definition of intangible fixed assets, no requirement of variation band of +/-0/5% to the operating margin in the pricing matrix, use of single commercial database and hence the dataset not being geographically representative, appropriateness of filtering criteria and factor used in the matrix and their categorisation.
• Operating expenses cross-check: India is of the view that value created by a distributor is more of a function of sales generated than the operating expenses incurred, and therefore made its reservation. This can be viewed parallel to stand of India to factor in demand side rather than just the supply side. Further, considering that low-income countries would having lower operating costs, as compared to high income countries and hence India argued operating expenses cross-check would not principally meet its objective.
• Qualifying Jurisdiction: India made its objection to non-inclusion of definition of qualifying jurisdiction w.r.t. operating expenses cross-check and country risk adjustment.
• Framework development: IF is to gather information on practical application of the approach after a period of time. India made a reservation as no details w.r.t. framework has been provided, and the exercise being resource intensive and in light of capacity constrained jurisdictions.

In light of the reservations / objections made, the adoption of the simplified and streamlined approach in the Indian tax laws will have to be awaited. Further points for consideration with regard to adoption of the approach in India Tax laws include current stance of Indian tax authorities to treatment of incurring of ‘excessive’ AMP/marketing intangible and its preference on use of local database / selection of local comparable companies.

Conclusion and Key Takeaways

The publication of the final report on the simplified and streamlined approach is itself a milestone considering complexity and multi-dimensionality of the topic. Incorporating the approach in the OECD guidelines, post the demerger from the two-pillar approach (referred as ‘erstwhile Amount B’) is in alignment with its spirit of effecting administrative procedures aimed to minimize transfer pricing dispute. The approach will become an elective safe harbor w.r.t. the OECD Guidelines, similar to low value adding activities, and thereby providing jurisdictions to decide implementation in their respective tax / transfer pricing regime.

The approach provides a right tool to MNE facing protracted litigation on baseline distribution activities and in applicable cases businesses can be expected to reorganize their structure (including demerger / hive-off) to insulate on transfer pricing disputes. Reorganization should be undertaken optimally as the provisions on restructuring (OECD TP Guidelines – Chapter IX) will be carefully analyzed by the tax authorities.

Considering the quantitative thresholds for applicability adopts data of the previous three years – instead of the relevant / current year, MNEs can be well prepared whether they would be in scope for the relevant year, upfront contemporaneously

One needs to be aware of that no economic adjustments will be available for the tested party distributor while opting for the approach. Further to the returns in the pricing matrix, the other adjustments such as operating expenses cap-and-collar, accounts payable guardrail and country risk adjustment will have an impact on the expected returns

The continuum of the success of the simplified and streamlined approach will depend on the wide adoption of this ‘safe harbour’ by the jurisdictions. Though the quantitative benefits accruing to tax administrations have largely not been arrived at, unlike the two-pillar solution, jurisdictions can be expected to implement the approach as the report issued is post the consensus of the Inclusive framework(exception of India). This may find favour with jurisdictions having marked ‘limited capacity’ with high litigation on baseline distribution activities for implementation in their local tax / transfer pricing laws. Jurisdictions with emerging tax reforms / introduction of tax regime may also consider adoption of the approach.

---

As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

India | UAE | USA | KSA | Dubai | Asia Pacific | Europe | Africa | North America

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

Contact us today to explore how we can partner with you to optimize your global transfer pricing approach.

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Saudi Arabia

Advent of APA in KSA
Transfer Pricing Regime

May 2024

1. Introduction

In March 2023, the Board of Directors of Zakat, Tax and Customs Authority, “ZATCA” approved the amendments to the Transfer Pricing Bylaws, introducing the provisions relating to Advance Pricing Agreements (“APA”) under Article 23, to Taxpayers and Zakat payers, vide Authority No. (8-2-23) dated 08/28/1444 AH corresponding to 20/03/2023 AD, applicable from Financial Year beginning on or after 1st January 2024.

Accordingly, on May 19, 2024, ZATCA officially launched the Unilateral APA Process by inviting applications from Taxpayers and Zakat Payers. While the amended TP Bylaws are yet to be published by ZATCA, it is expected that the KSA APA guidelines would also fall in line with the OECD APA guidelines.

This alert highlights the key attributes of the KSA APA program and provides a general overview of the APA process with an intent to familiarize businesses and keep them abreast of the upcoming changes.

2. KSA APA Program- Key highlights

Applicability	• Applicable from Financial year beginning on or after 1 January 2024 • Applicable to Tax payers and Zakat payers
Eligibility	• Value of related party transaction to be not less than SAR 100 million(-26.66 million USD) • Application for APA must be filed 12 months prior to the first year in which APA is applied for
Type of APA	• From May 19, 2024, ZATCA has started receiving applications from Tax payers and Zakat payers for Unilateral APAs .

3. What is APA?

• An APA is an agreement between a tax payer and tax authority determining the transfer pricing methodology for pricing the tax payer’s related party transactions for future years.
• It is a proactive way to eliminate future litigation for covered transactions once the agreement is signed between the tax authority and the tax payer.
• Entering into an APA offers the following advantages to the taxpayers

Tax Certainty

Can assist in audits for the open years

Can be renewed if no changes in facts

Lower administrative burden

Saving of time and cost

Avoidance of potential audit risk/controversy procedures

Reduced record-keeping obligations

BAPA can reduce/eliminate double taxation risk

4. Coverage

• Generally an APA would cover a specified period ranging from 3 to 5 years and would also provide for a rollback provision for prior years (for 3-5 years).
• However more clarity is expected when additional guidance is published by ZATCA on the years covered including roll back.

5. Types of APA

• Unilateral
  Agreement between:
  – Taxpayer &
  – Tax Authority of host country i.e country in which the tax payer is located
  Disadvantage– May result in double taxation issues
• Bilateral
  Agreement between:
  – Taxpayer &
  – Tax Authority of host country &
  – Foreign Tax Authority i.e. Tax Authority of the country in which the related party operates
  Disadvantage– Longer timelines for finalisation of APA
• Multilateral
  Agreement between:
  – Taxpayer &
  – Tax Authority of host country &
  – Multiple Foreign Tax Authorities (i.e.tax authorities of the related parties)

In KSA, ZATCA has invited applications for unilateral APA’s at the moment, however once the guidance is published it is likely to provide more clarity on ZATCA’s stand relating to Bilateral and Multilateral APAs. Further details regarding the filing fees, format of application etc. are yet to be intimated by ZATCA.

6. APA Process

• The below steps describe the general APA process, more information specific to KSA APA regulations is awaited
• Step 1:-Pre Filing Consultation: Before a formal APA application can be made, a tax payer is required to request for a pre filing consultation with the Tax Authorities to enable the taxpayer and tax authorities to assess the possibility of entering into an APA. The consultation would involve discussions around the nature and scope of agreement, transfer pricing issues, related party transactions proposed to be covered, Transfer Pricing method to be adopted, pricing adjustments etc. The discussion in pre filing consultation is generally not binding on either party and allows tax payers to maintain anonymity.

KSA mandates pre-filing consultation before a formal APA application can be filed. Accordingly Taxpayers must initiate this process in advance to be able to meet the timing requirement for filing the APA application under the eligibility criteria.

• Step 2:-APA Application: A formal APA application under a Unilateral APA (as in the case of KSA), shall be filed by the tax payers with the tax authority of the country in which it operates. The application shall require details of the multinational structure, organisation arrangement, operational set-up including major transaction flows, detailed functional analysis of the taxpayer and the relevant entities, critical assumptions and economic analysis for the covered transaction. The application filed may be withdrawn anytime before finilasation of terms of the agreement.

The intimation regarding the format and contents of the application is yet to be published by ZATCA. However as per ZATCA’s latest notification, an interested taxpayer seeking to apply for an APA can approach APA-gma@zatca.gov.sa for further information and guidance.

• Step3:-Preliminary processing of application: The application filed shall be validated by the APA authorities for any defects or want of information and also if the application is in accordance with the pre-filing consultation. Any deficiency shall then be intimated to the applicant. The applicant would be required to address the same within the specified time. Once rectified the application will be accepted for further processing.
• Step 4:-Procedure: At this stage the APA authorities will conduct a thorough analysis of the application filed, hold meetings with applicant, call for additional documents or information, visit the applicant’s business premises and make such enquiries as it may deem fit. The APA authorities would also undertake a detailed Functional Analysis and finally conclude on their views regarding the Transfer Pricing approach of the applicant through a position paper.
• Step 5:-Negotiation: In this stage, the final terms of the APA agreement are negotiated and concluded between the applicant and the APA authorities.
• Step 6:-Signing of Agreement: Once negotiation is concluded and the terms are agreed upon, the Taxpayer and the Tax Authority will sign the APA agreement, which shall be binding on either parties for the period mentioned therein. However the taxpayer is required to comply with all the terms and conditions as specified and agreed upon during the tenure of the agreement.
• Step 7:-Post APA procedures–Annual Compliance Report and compliance audit: The Taxpayer would be required to file an annual compliance report throughout the APA period and the APA authorities may also undertake compliance audit to ensure that the critical assumptions, terms and conditions of the Agreement are complied with.

7. APA Preparedness

• Considering the nature, complexity and the value of related party transactions, businesses may need to evaluate the option of entering into an APA, keeping in mind the cost, effort and time involved in the said process.
• Once the decision to enter into an APA is made, it is critical for businesses to:
  • Maintain robust TP Policy aligned with commercial substance
  • Maintain intercompany agreements reflecting the TP policy
  • Documentation to support that actual business conduct adheres to the TP Policy
  • Deciding on information, documents and agreements to be shared with the APA authorities.

8. Way Forward

The introduction of APA programme in KSA will definitely serve as a precursor to promoting and fostering a healthy Transfer Pricing environment, providing businesses with much needed tax certainty and facilitating ease of doing business. However the businesses are required to assess and evaluate the need for entering into an APA on case to case basis considering the nature, criticality and value of the related party transactions vis-à-vis the time & cost that would be involved in that process.

9. How we can help!

• VSTN offers end to end support in APA process including:
  • In-depth analysis of business and aligning the transfer pricing policy with the business model
  • Providing strategic guidance in preparation and submission of APA application
  • Negotiation with Tax Authorities
  • Post conclusion support
    • Filing of annual compliance report and
    • Audit

About us

VSTN Consultancy Private Ltd is a boutique Transfer pricing firm with extensive expertise in the field of international taxation and transfer pricing.

Our offering spans the end-to-end Transfer Pricing value chain, including design of intercompany policy and drafting of Interco agreement, ensuring effective implementation of the Transfer Pricing policy, year-end documentation and certification, BEPS related compliances (including advisory, Masterfile, Country by Country report), Global Documentation, safe harbour filing, audit defense before all forums and dispute prevention mechanisms such as Advance Pricing agreement.

We are structured as an inverse pyramid where leadership get involved in all client matters, enabling clients to receive the highest quality of service.

Being a specialized firm, we offer advice that is independent of an audit practice, and deliver it with an uncompromising integrity.

Our expert team bring in cumulative experience of over Six decades in the transfer pricing space with Big4s spanning clients, industries and have cutting edge knowledge and capabilities in handling complex TP engagements.

---

As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

India | UAE | USA | KSA | Dubai | Asia Pacific | Europe | Africa | North America

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

Contact us today to explore how we can partner with you to optimize your global transfer pricing approach.

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm