VSTN Consultancy

APA Guidelines – ZATCA 2025

Kingdom of Saudi Arabia
February 2025

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Background

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. Further in February 2025, the Zakat, Tax, and Customs Authority (ZATCA) has introduced the Advance Pricing Agreement (APA) Guidelines to provide tax certainty and minimize transfer pricing (TP) disputes for taxpayers engaging in controlled transactions. These guidelines, aim to minimize any ambiguities for Taxpayers on the implementation and application of the APA.

The alert covers the nuances of the APA guidelines which was released by ZATCA in 2025.

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Key Features of the APA Guidelines

1. Introduction

ZATCA has introduced Advance Pricing Agreement (APA) regime to prevent future Transfer Pricing (TP) disputes, which can be complex, time-consuming, and costly. The APA framework allows Taxpayers to agree on an Arm’s Length pricing methodology for their Transactions with Related Persons. As APAs are new in the Kingdom, ZATCA acknowledges that Taxpayers need time to familiarize themselves with the process. The Guideline outlines the key concepts, procedures, and steps for obtaining APA with ZATCA.

An APA is a formal arrangement between ZATCA and a taxpayer, specifying the Transfer pricing (TP) method applicable to transactions with related persons. It confirms in advance the pricing approach for controlled transactions, covering a specified number of zakat/tax years. The APA provides clarity on applicable TP methods and ensures consistency with the arm’s length principle. The APA aims to proactively resolve TP issues and prevent disputes, providing tax certainty.

Scope of APA

• Identification of all involved parties
• Establishing critical assumptions for the agreement
• Specification of covered transactions
• Deferring the APA period (typically three years)
• Selection and application of appropriate TP methods for covered transactions
• Any other agreed upon terms and conditions

2. Eligibility Criteria

A taxpayer seeking an APA must meet the following conditions as per Article 23(a) of the TP Bylaws,

• Covered transactions should exceed SAR 100 million annually, unless exempted for complex transactions. The Governor of the Authority may grant exemptions for complex transactions Complex transactions involve significant challenges in determining an appropriate transfer price. These may include
  • Uncertainty in Transfer Pricing Method: Difficulty in selecting the appropriate method to apply the arm’s length principle.
  • Complex Calculations: Methods such as the profit split method requiring sophisticated computations.
  • Lack of Reliable Comparable: Difficulty in finding comparable data, requiring extensive adjustments.
• The APA request must be initiated at least 12 months before the start of the first fiscal year covered by the agreement.
• Transactions involving profit attribution to a permanent establishment are not eligible.

Taxpayers must fully cooperate, including submitting a complete APA application with full disclosure of relevant facts across all involved jurisdictions, providing requested information within specified deadlines and proactively updating the Authority with relevant developments. Failure to meet these requirements may lead to the termination of negotiations, with the Authority notifying the taxpayer of the rejection.

3. Types of APAs

The guidelines categorize APAs into three types:

• Unilateral APA: Agreement between the taxpayer and ZATCA
• Bilateral APA: Agreement between ZATCA and a foreign tax authority where the Kingdom has a tax treaty.
• Multilateral APA: Agreement involving multiple tax authorities to ensure TP compliance across jurisdictions.

Currently, ZATCA only allows unilateral APAs, with bilateral and multilateral agreements to be introduced in the future. The authorized representatives of both the applicant Taxpayer and the Authority’s will officially sign the unilateral APA

4. Duration of APA

An APA is binding on both the Authority and the Taxpayer, subject to the terms outlined in the agreement As per Article 23(2)(c) of the TP Bylaws, the standard APA duration is three years, provided the Taxpayer submits an Annual Compliance Report (ACR) to confirm adherence to the Arm’s Length Principle.

APAs apply only to future transactions and cannot be applied retrospectively. Upon mutual agreement, the APA may be renewed for an additional three years. subject to conditions. Currently no roll backs are provided in the guideline.

The timeline is slightly shorter as compared to other countries which are typically of 5 years.

5. Critical assumptions

An APA establishes critical assumptions that are fundamental to its validity. These assumptions may relate to the Taxpayer, Related Persons, industry conditions, or overall economic factors. Any significant changes to these assumptions during the APA period could impact its effectiveness. Critical assumptions must be tailored to the Taxpayer’s specific circumstances, business environment, chosen methodology, and the nature of the Controlled Transactions.

The critical assumptions may vary depending on the APA and can include:

• Tax and Zakat Regulations: Compliance with tax laws and applicable agreements.
• Trade and Regulatory Factors: Changes in tariffs, duties, import restrictions, or government policies.
• Economic and Market Conditions: Variations in market share, sales volume, pricing, or economic trends.
• Functional and Risk Profiles: Shifts in the functions and risks associated with the involved entities.
• Financial Factors: Changes in exchange rates, interest rates, credit ratings, or capital structure.
• Accounting Considerations: Modifications in financial reporting, including income and expense classification.
• Related Persons: Operational and structural changes affecting related entities across jurisdictions.

If a critical assumption is not met during the APA term or if changes materially affecting the suitability of the selected Transfer Pricing Methodology (TPM), the Taxpayer must notify the Authority. Depending on the circumstances, the APA may require revision or cancellation

6. APA Procedure

• Pre-File Meeting: Taxpayers may request a pre-file meeting (on a named basis) with the APA team before submitting their formal application. It appears to be Optional from the language and not mandatory before submitting the application. The purpose of this meeting is to provide a clear understanding of the APA process, clarify procedural requirements, and address any preliminary concerns.

Stages of the APA:

Submission of the APA Application

Introductory Meeting

Processing the APA Application

Signing of the Agreement

Submit an Annual compliance report

I. Submission of APA application

Taxpayers must submit unilateral APA applications electronically via the Electronic registration system (ERAD) portal. However, Complex transactions that may be exempted by the governor from the minimal amount requirement must be submitted through the assigned relationship manager/APA team and not via online portal. Applications must be submitted at least 12 months before the first financial year covered in the APA. Failure to submit a complete application by this deadline will result in automatic rejection through the e-portal, requiring the taxpayer to adjust the effective starting year to proceed. A comprehensive application is required before scheduling an Introductory Meeting. It must include details on Covered Transactions, tax/Zakat years, involved parties, the proposed Transfer Pricing Methodology (TPM), and its impact on tax/Zakat filings. The application must provide a detailed analysis supporting the chosen TPM, including:

• Functional analysis of all entities involved.
• Compliance with Tax Law, Zakat Regulations, TP Bylaws, and Guidelines.
• Historical application of the TPM to past tax/Zakat years or the latest business cycle.
• Comparison with previously applied TPMs, explaining any deviations and justifying why the proposed TPM better reflects the Arm’s Length Principle.

The Authority assesses the suitability of the TPM based on factual data and projections. Upon submission, the Authority will acknowledge receipt and review the application for completeness. If incomplete, the taxpayer will be notified with a request for additional information. All documents must be in Arabic or English, as appropriate.

II. Introductory Meeting

The Introductory Meeting must be held within 60 days of submitting a complete application.The meeting allows the Taxpayer to present key details from the application,which includes Business operations, structure, business activities, Covered Transactions, proposed TPM, and its impact on zakat/tax filings in the Kingdom. The Authority may seek clarifications on the Taxpayer’s past, current, and proposed tax positions, ensuring transparency and resolving potential misunderstandings.The objective is to assess the suitability of the APA request and streamline the review process. Further,routine APA terms and conditions may be discussed, but the Authority will not commit at this stage. Additional information requests may be made before, during, or after the meeting. Based on the discussions, the Authority will decide on the next steps in the APA process.

III. Application Review and Evaluation

The Authority will assess the APA application to ensure:

• Compliance with the Arm’s Length Principle for covered Controlled Transactions.
• Availability of sufficient supporting information for a comprehensive evaluation.
• Alignment with factual circumstances and outcomes of introductory meetings.

The Authority may conduct site visits(from the language it looks to be optional) and functional interviews to gain deeper insights into the Taxpayer’s business and industry, clarify issues, and verify submitted information. The Authority may, if necessary, visit the premises of the Related Persons involved in the APA to gain a clear understanding of the factual context.After site visits and interviews, the Authority may send written follow-up questions and inform the Taxpayer of the next steps.The Authority may request additional information during evaluation, with mutually agreed deadlines. Failure to provide requested details may result in discontinuation. Upon completing the review, the Authority will discuss findings with the Taxpayer through negotiations.

IV. APA Negotiation & Drafting and signing the agreement

Once consensus is reached, the Authority will draft the APA for Taxpayer approval, covering Related Persons’ details, Covered Transactions and tax/zakat years, Comparable transactions, TPM, and financial projections. Critical assumptions and Taxpayer obligations (e.g., reporting, record-keeping). Legal validity, confidentiality, and mutual responsibilities, Effective date and other relevant terms. The Authority will aim to finalize its position within 12 months of receiving the complete application. An APA can only be completed once all parties confirm and agree on the terms and conditions. The authorized representatives from both the Authority and the Taxpayer will formally sign the unilateral APA once an agreement is reached.

V. Annual compliance report(ACR)

Once an APA is in place, taxpayers must submit an ACR within 120 days after the end of the financial year. The taxpayers must implement Compensating Adjustments if actual results deviate from the agreed arm’s length price. APA authorities may also undertake compliance audit to ensure that the critical assumptions, terms and conditions of the Agreement are complied with.

Summary of APA Timelines

• Submission of application
  The applicant must submit an application to the Authority at least twelve (12) months before the start of the first financial year specified in the Agreement
• Introductory meeting
  The introductory meeting which should be held within sixty (60) days of submitting the application, will only be scheduled once the application is deemed complete
• APA request processing
  The expected timeframe for concluding the unilateral APA application submission phase is ninety (60) days
• Evaluation phase
  The Authority will endeavor to conclude the evaluation phase within nine (9) months
• Finalisation of Position
  The Authority will aim to finalize its position within twelve (12) months of receiving the complete application
• Rejection of application
  The Taxpayer will then have thirty (30) days from the date of receiving the rejection notice to respond

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7. APA Revisions, Cancellations, and Renewals

An APA may require revisions due to changes in:

• Critical assumptions
• Tax laws and zakat regulations
• Business operations impacting transfer pricing

If a taxpayer fails to meet APA conditions, the authorities may cancel or revoke the agreement. Taxpayers can apply for APA renewal at least 12 months before expiration, provided there are no significant changes in business operations. In case of changes in the business, the Taxpayer during the renewal submit the proposed changes along with an updated analysis and supporting documentation. The renewal process will include revising Critical Assumptions and facts from the initial APA and modifying the related analysis as necessary.

8. Withdrawal from the APA Request

The tax payer can withdraw the application. Any prior agreements or understandings concerning the APA request will cease to be effective.

9. APA Application form

The Unilateral application form is provided in Appendix 1 of the APA guidelines.The form is subdivided into 4 sections namely A,B,C &D.

• Section A covers the Details of the applicant along with address ,details of counter party along with country of residence, details of immediate parent company, Ultimate parent company ,Name and designation of authorised signatory, Introductory meeting dates.
• Section B: This section includes details of covered transactions ,type, nature,description, amount, justification and period for which application is made.
• Section C: Declaration and signature
• Section D: Disclosure requirement which includes General information, functional analysis Transfer pricing background and proposed transfer pricing method analysis for each covered transaction.

10. Conclusion

The KSA APA Guidelines mark a significant step towards enhancing tax transparency and compliance for multinational enterprises operating in Saudi Arabia. By allowing businesses to pre-agree on transfer pricing methods, the APA framework fosters a cooperative relationship between taxpayers and ZATCA. As the APA program evolves, the introduction of bilateral and multilateral agreements will further strengthen Saudi Arabia’s tax environment and reduce litigation.

Our Comments

KSA APA’s streamlined processing time and clear compliance requirements align well with international best practices. Adoption of online modes for submission of application and even rejection of application via online mode if information is not submitted by the tax payer is a good step.

Saudi Arabia’s APA program, primarily focuses on unilateral agreements, whereas global standards emphasize bilateral and multilateral APAs. Generally, coverage of Permanent Establishment (PE) in APA framework is present in other countries. While KSA adheres to global best practices in compliance reporting, the absence of rollback provisions distinguishes it from more advanced APA programs. The guidelines covers even domestic transaction in the framework which is different from most of the other countries. As the APA framework evolves, incorporating bilateral APAs would enhance certainty for multinational businesses operating in KSA.

How we can support

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

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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

Income Tax Bill 2025

Key Transfer Pricing changes

February 2025

Overview

The Hon’ble Finance Minister tabled the Income-tax Bill, 2025 (“New Bill”) on February 13, 2025 in the Lok Sabha. The New Bill has been built with an intent to make the Income Tax Act concise, lucid, easy to read and understand, with a conscious attempt to reduce the scope for tax disputes and thereby increase tax certainty. The New Bill comes into force from April 01, 2026.

Our alert focusses on the key changes brought out by the New Bill in relation to Transfer Pricing.

Key distinguishing features – Old Vs New

	Income Tax Act, 1961 (Current Act)	Income Tax Bill 2025 (New Bill)
Sections	• 819 effective sections	• 536 sections
others	• Reference to Assessment year and Previous year	• Introduces “Tax Year” i.e. twelve months period of the financial year commencing on 1 April, by replacing Assessment year and Previous Year
Language	• Intricate complex language, detailed provisions, heavy structure	• Simplified legal Language which is straightforward and clear for e.g. “shall not be less than” replaced with “at Least”, use of more formulas, tables and structures and numeric to enhance quality
	• Removal of redundant /obsolete provisions. Provisos (more than 1200) and Explanations (more than 900) have been removed, with their simplified content placed as sub-sections or clauses.
	• Definitions at multiple places have been consolidated.

Transfer Pricing

New Section references

• In the current Act, the provisions governing the Transfer Pricing regulations were embodied in Sections 92 to 92F which have now been replaced with Section 161 to 174 in the New Bill.

Computation Vs Determination

• The deeming provision Section 92 of the current Act states that the income arising from international transaction shall be computed having regard to the arm’s length price.
• Section 161 of the New Bill replaces the word “computation” with “determination”.
• While the above change is only to align the intent of law, conscious effort has been made to replace the term “computation” with “determination” to mean that the arm’s length price has to be determined as per the provision of the act by application of the most appropriate method and does not involve mere arithmetic computation.
• The term computation still finds references where only arithmetical computations are involved. For e.g. Section 165 (6) (erstwhile Section 92C(4)) where Assessing Officer computes the total income of the assessee having regard to the arm’s length price determined by the Transfer Pricing Officer.

Definition of Associate Enterprise

• The ambiguity surrounding the interpretation of Sections 92A(1) and 92A(2) of the Current Act, in determining Associated Enterprises (AE), has always been a longstanding issue.
• Even though the Finance bill 2002 amended sub-section(2) of Section 92A to be read as “For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year;”, to clarify that Section 92A(1) and 92A(2) will have to be read together. This subject has been an evergreen matter of tax dispute though certain supreme court decisions have held that both 92A(1) and (2) have to be read in conjunction.
• However, the New Bill has made both the clauses mutually exclusively and independent, intensifying the definition of Associated Enterprise (Section 162(1) and 162(2)) to mean that two enterprises will not only be regarded as AE’s on the basis of control, capital or management criteria but also if one of the 13 clauses under Section 162(2) are fulfilled.
• Further the New Bill also brings clarity to the definition of AE in relation to Specified Domestic Transactions (SDT) by providing that the above definition (Section 162(1) and Section 162 (2)) shall also be applied for determination of AE in relation to SDT in addition to Section 162(3) which defines AE for SDT.
• With this change in the definition of AE under the New Bill, the various landmark Supreme Court decisions on the matter where the Courts had ruled that these Sections will have to be read together under the current Act will be nullified, for e.g.
  • Supreme Court Decision in the case of Principal Commissioner of Income Tax Vs Veer Gems [2018] 95 taxmann.com 16 (SC)/[2018] 256 Taxman 298 (SC)[05-01-2018]
  • Page Industries Ltd. v. Dy. CIT [2016] 71 taxmann.com 172/159 ITD 680 (Bang. – Trib.), [2021] 124 taxmann.com 605 (Karnataka)/[2021] 431 ITR 409 (Karnataka)[08-01-2021]
  • Orchid Pharma Ltd. v. Dy. CIT [2016] 76 taxmann.com 63/162 ITD 303 (Chennai – Trib.)
• In light of these changes in the New Bill, it is now imperative for companies to revisit the definition of AEs and ensure compliance from TP perspective with respect to the transactions with such entities.

International Transaction

• International Transaction which was previously outlined in the Explanation to Section 92B, has been brought into the main provisions of the newly introduced Section 163.
• This revision ensures that the definition is clearly stated within the primary text of the law, rather than being limited to an explanatory note.
• Section 92B(1) of the current Act had a reference that the transaction should impact the company’s profits, income, losses or assets. This had led to a confusion, especially for financial transactions like guarantees which had no immediate impact and then the explanation was inserted including guarantees. To simplify this, Section 163(1) now provides a clear list of international transactions and includes a broad category under Section 163(1)(g) for others affecting profits, income, losses, or assets. This makes it clear that only transactions which are in the residuary clause will need further assessment on impact on profits, income, assets, losses.

Determination of Arm’s Length Price (ALP)

Use of +/- 3% Range

• Taxpayers rely on comparables to establish ALP, but disputes arose when tax authorities challenged the application of the +/- 3% range for cases with a single comparable, arguing that it was only meant for multiple comparables.
• The new bill provides clarity by explicitly stating that the +/- 3% range benefit applies even in cases with only one comparable. This change is a significant relief for taxpayers.
• Further since it states +/-3% for all tax payers, the 1% tolerance limit which was applicable for wholesalers may no longer apply and a wider band of 3% will apply.

Use of Arithmetic Mean

• The current Act provided that where the count of comparables were lesser than 6, the Arithmetic mean of the Comparables shall be regarded as the ALP.
• However, the New Bill excludes the use of Arithmetic Mean (AM) and provides that where there are more than one comparable the ALP shall be determined in such manner as may be prescribed.
• However, it’s a wait and watch if CBDT would fall back to the existing methodology for determination of ALP (i.e. if less than 6 comparables- AM and 6 or more- 35th percentile to 65th Percentile) or align the determination methodology in line with global best practises (adoption of interquartile range)

Introduction of multi-year ALP determination

• To ease the burden of taxpayers and tax authorities, the TP audit is intended to be rationalized through the introduction of multi-year arm’s length price (‘ALP’) determination. Taxpayers will be given an option to elect before the TPO to determine the ALP for multi-year period i.e., applying ALP for year under consideration for the two consecutive years.

For more details, please refer to our earlier post on Budget Update 2025.

Advance Pricing Agreement (APA) Implications

• The Current Act as well as the New Bill provides that an APA shall not be binding if there is a change in law or facts having a bearing on the agreement.
• Thus the introduction of the New Bill may challenge the validity of the existing APA’s in light of the changes proposed.
• For example, this clause assumes significant importance with respect to existing APA’s where an agreement has been reached with regard to the AE definition as per the Current Act. Now with the New Bill deeming Section 162(1) and Section 162 (2) (erstwhile Sections 92A(1) and Section 92A (2)) to be mutually exclusive and independent, the validity of these APA’s will need to be evaluated.
• Further, the New Bill clarifies under section 168(11) that APA proceedings shall be deemed pending until either the APA is finalized or the proceedings are closed as per prescribed rules, addressing the previous absence of a defined time limit.

Way forward

The New Bill is indeed a significant step towards streamlining the provision of the existing Income Tax Act and is built on three core principles namely:

1. Textual and structural simplification for improved clarity and coherence.
2. No major tax policy changes to ensure continuity and certainty.
3. No modifications of tax rates, preserving predictability for taxpayers.

The New Bill reflects the Government’s commitment to enhancing ease of doing business by providing a tax framework that is simple & clear, reducing the scope for ambiguity and promising tax certainty.

As next steps, it is expected that the New Bill after, addressing the anomalies which are being raised by stakeholders , would be referred to the Parliamentary committee, for its assent which will then become an Act. Further it is also expected that the CBDT would issue Rules and Regulations to ensure smooth transition from April 01, 2026.

Businesses, during this interim period, may need to evaluate their existing Transfer Pricing Policies to ensure they are aligned with the provision of the New Bill and be compliant ready.

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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

VSTN Consultancy

Union Budget 2025-26

Transfer Pricing Perspective

February 2025

Background

The Finance Minister presented the Union Budget for 2025-26 on 01 February 2025. To power the growth of the economy, the budget laid four engines viz., Agriculture, MSME, Investment & exports, fueled by reforms. The budget speech featured a major transfer pricing update on introduction of Transfer pricing audit / assessment of arm’s length price for multi-year period.

The alert covers the detailed Transfer Pricing related proposals in the Finance Bill, 2025.

Transfer Pricing Updates

A. Rationalisation of TP audit: Introduction of multi year arm’s length price determination

Currently, transfer pricing assessment / audit is undertaken by the Transfer Pricing Officer (TPO) (u/s 92CA of the Income-tax Act, 1961) on the reference from Assessing Officer (AO). The tax department has observed that in several transfer pricing assessments, the nature of international transactions or specified transactions are similar for various years, with the same associated enterprises (‘AE’), quantum of transactions etc. For these very similar international transactions / specified domestic transactions, the same arm’s length price determination takes place during each of the assessments.

To ease the burden of taxpayers and tax authorities, the TP audit is intended to be rationalized through the introduction of multi-year arm’s length price (‘ALP’) determination. Taxpayers will be given an option to elect for the TPO to determine the ALP for multi-year period i.e., applying ALP for year under consideration for the two consecutive years. The following amendments are considered for implementation of multi-year period TP assessment:

1. Taxpayer would be required to exercise the option for multi-year period TP assessment before the TPO.
2. Within one-month period, TPO to pass an order to determine if exercise of the option is valid, as per the prescribed conditions.
3. Where the exercise of the option is deemed valid by the TPO:

1. ALP determined for the said year will be applicable for next two consecutive years as well.
2. TPO shall pass the order for the two following consecutive years for the similar transactions

4. AO shall recompute the income for the taxpayer through amending the Assessment Order in conformity with the TP order passed by the TPO or after taking into account the directions by Dispute resolution panel (‘DRP’), as the case may be.
5. For the consecutive years, re-computation timeline is within 3 months from the end of the month in which assessment for the year under consideration is completed.
6. Where the Assessment Order / intimation as per 143(1) is not made within the above 3-month period, for the two consecutive years, the re-computation will have to be undertaken within a period of three months from the end of the month in which such Assessment order / intimation is made for the respective year.
7. After the TPO passes the order for said two consecutive years, no reference for determination of arm’s length price shall be made for the said transactions.

The following existing provisions will be applicable where taxpayer opts for multi-year period:

• Where the TPO enhances the income in the TP order, deduction u/s 10A or 10AA or 10B or under Chapter VI-A will be disallowed.
• The TP order of the taxpayer has resulted in a decrease in the income for AEs, and the said income of AE shall not be recomputed.

CBDT is conferred with powers to make guidelines in connection with the above multi-year period TP assessment, subject to approval of Central Government.

Chapter XIV-B of the Income-tax Act, 1961 covers the procedural aspects w.r.t. search proceedings and assessment, which covers the concept of block-assessment for 6 years. The proposed amendment provides that the aforementioned multi-year TP assessment would not apply to the proceedings under chapter XIV-B of the Income-tax Act.

This above amendment would be applicable for financial years commencing FY 2025-26 (AY 2026-27).

B. Expansion of ‘Safe harbour rules’

Safe harbor rules (‘SHR’) are the provisions in Indian transfer pricing regulations that allow the taxpayers to adopt simplified methods for determining the ALP for the international transactions undertaken by the taxpayer with its AEs.

In the Budget speech, it was proposed that the SHR will be expanded with an intention:

• To provide greater tax certainty in relation to the international transactions; and
• To minimise protracted tax litigation

The notification from the CBDT on the revised SHR is awaited.

C. Faceless scheme

The last date for notifying faceless schemes by the Central Government (i.e., 31 March 2025) for TP assessment proceedings before the TPO, DRP and Income-tax Appellate Tribunal is proposed to be omitted.

Our views

With regard to multi-year ALP determination, at this juncture the finance bill provides only a broader framework and there exists ambiguity on the procedural mechanics. Hence we may expect some clarity from the CBDT in the rules. Some areas which require more clarification are:

• The Budget speech mentions determination of ALP for “block period” of three years, the concept of which is prevalent in some of the developed countries including TP regulations of USA and Singapore¹. However, the concept discussed in the developed countries is akin to ‘term test’, where the determination of the arm’s length price is done in a consolidated manner for the said 3 years, rather than testing the arm’s length price for each year individually. In certain cyclical phases, the business might earn profits in excess of normal profits for two years and lesser than arm’s length profit for one year. During regular TP audit, adjustment would be done for year of loss, and the excess profits of the other years cannot be considered / adjusted. However, when the three year is considered in aggregate / in toto, the profits earned for all the three years would be considered to be at arm’s length.
• Though the budget speech intended to align with global best practices of “block period” for ALP determination for 3 year period, the current proposal provides for leveraging the arm’s length price of one year for the following two years, where the facts and circumstances are similar for the next two years. The benefit of the proposal is limited to reduction of assessment proceedings before the TPO for the next two years, and does not provide complete / wholistic benefit of conducting of TP audit for three years – through considering it as one time period. Though the detailed rules for implementation of the multi-year assessment is awaited, the current proposal in the budget is not in alignment with global practices of “term testing” approach.
• The sections and rules relating to maintenance of contemporaneous documentation i.e., Section 92D and Rule 10D have not been amended to provide that documentation need not be maintained for the subsequent two years. Therefore, current annual compliances will apply for the subsequent two years as well.
• The amendment to Section 92CA emphasises on arm’s length price determination of “similar transactions” (i.e., international transactions undertaken by the Assessee in the previous year and two consecutive years following the previous year), whereas there is no specific mention about the international transactions for which the taxpayer has not opted for the multi-year ALP assessment. For instance, when the taxpayer has multiple international transactions and has not opted for all of them under the multi-year assessment procedure, whether separate reference will be made by the AO for ALP determination of those transactions or will it escape the TP assessment process?
• The due date / deadline for filing the form for opting the multi-year ALP determination by the taxpayer is not specified. It is expected that the form and time period will be notified by the CBDT in this regard
• While the bill specifies the timeline for the TPO to analyse and declare the validity of the option exercised by the taxpayer (i.e., within one month from the end of the month in which such option is exercised by the taxpayer), the timeline for determination of the ALP for the three year is not prescribed. Hence it is not clear if the ALP determination for the consecutive two years would also need to be completed within the timeline for completion of TP assessment of the relevant previous year itself.
• Whether the taxpayer will be provided sufficient opportunity to position itself better considering the determination of ALP by the TPO for the previous year will have an impact not only on that specific year but also on subsequent two years

Nevertheless, considering instances of repetitive annual audits that results in the prolonged disputes, the multi-year ALP determination is a welcome move as this is expected to reduce the administrative and compliance burden for taxpayers and revenue. However, taxpayers would reap complete benefit / avail holistic relief where the concept of ‘block period’ or ‘term testing’ is implemented, similar to countries where TP practice is more developed / matured.

Having said that, before exercising this option one needs to pay attention to certain critical aspects such as nature of its business, probable international transactions to be entered into with its AE in the near future, the magnitude of information which might be called for, etc.,

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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