INSIGHTS

Transfer Pricing – UAE Corporate Tax Law

Transfer Pricing – UAE Corporate Tax Law – Alert on Transfer Pricing Regulations.

The United Arab Emirates (“UAE”) Ministry of Finance (MoF) issued the Federal Law on the Taxation of Corporations and Businesses by enacting the Federal Decree Law No.47 of 2022 on December 09, 2022 (herein after referred to as the “Decree Law”).

The Decree Law serves as the legislative basis for the introduction and implementation of Federal Corporate Tax (“CT”) in UAE and comes into force with effect from the Financial Year commencing on or after June 01, 2023.

We have presented a detailed alert focussing on the transfer pricing regulation embedded in the UAECTLaw. The alert covers:

Applicability – Applies irrespective of whether related parties, connected persons are in UAE mainland, a Free Zone or in a Foreign Jurisdiction. TP not applicable for transactions between entities forming part of the same Tax Group.
RelatedParty – established through Ownership, control or kinship
Connected person – Ownership/controls, director or officer
5 Methods of arriving at arms’ length price (ALP). Option of Sixth method also available
Option of correspondingadjustment , even for adjustment effected for foreign related parties by Foreign tax authorities
Introduction of disclosureform (to be filed), localfile and Masterfile (to be maintained)
Option of APA filing
Reference to ALP/market value in other CT sections- Freezone entities (TP provisions to be satisfied and maintaining Documentation as one of the conditions to claim 0% tax), transitional provisions, general anti abuse rules, investment manager exemption , Foreign PE, Interest.

Open Attachment…

UAE introduces Corporate Tax Law

An insight into Transfer Pricing Regulations

December 2022 Alert 01/2022

Summary

This alert focuses on the transfer pricing regulation embedded in the UAE CT Law. As mentioned by the MoF earlier, that there would be an alignment of the TP rules with the Organization of Economic Cooperation and Development (OECD) Transfer Pricing Guidelines (OECD Guidelines), we have also sought to include certain guidance from the same to make it more comprehensive.

Scope of Taxation

CT will be applicable to juridical person incorporated in UAE and juridical persons effectively managed and controlled in the UAE as well as to foreign juridical persons that have permanent establishment (“PE”) in UAE. There are certain categories of entities (Article 4) exempt from UAE CT.
Individuals will be subject to CT only if they are engaged in a business or business activity in UAE, either directly or through an unincorporated partnership or sole proprietorship. A Cabinet decision is expected to be issued providing further information on applicability to natural person. Individuals engaged in other activities will fall outside the scope of CT.
CT shall be imposed on the Taxable income at the following rates as per the Decree Law (Amount pending Cabinet Confirmation):

Taxable Person	Applicable CT Rate
Individuals and Juridical Persons	0% for taxable income upto AED 375,000 9% for taxable income exceeding AED 375,000
Qualifying Free Zone Persons	0% on qualifying income 9% on taxable income that does not meet the qualifying income definition

Transfer Pricing Regulations

Introduction

The Decree Law has introduced a separate Chapter, “Chapter 10- Transactions with Related Parties and Connected Persons” containing comprehensive transfer pricing regime to ensure that the transactions between related parties are carried out on arm’s length terms¹. Further in order to prevent manipulation of taxable income, the various Articles in the Decree law require the consideration for transactions with Related Parties and Connected Persons to be determined by reference to the “Market Value.”

Applicability

The Transfer Pricing Provisions apply to UAE businesses that have transactions with Related Parties and Connected Persons, irrespective of whether the Related Parties or Connected Persons are located in UAE mainland, a Free Zone or in a Foreign Jurisdiction. Transfer pricing provisions are not applicable for transactions between entities forming part of the same Tax Group².

Related Party

Article 35 of the Decree Law defines the terms “Related Party” and “Control”.
Accordingly a related party is an individual or entity who has a pre-existing relationship with a business that is within the scope of the UAE CT regime through Ownership, Control or Kinship (in the case of natural persons). The Decree Law has specified the following situations, where the parties involved would be treated as Related Parties.

Two or more individuals related to the fourth degree of kinship (parents, spouse, children, grandchildren, uncles/aunts and cousins) or affiliation, including adoption or guardianship	An individual and a legal entity where alone, or together with a related party, the individual directly or indirectly owns >= 50%, or controls, the legal entity
Two or more legal entities where one legal entity alone, or together with a related party, directly or indirectly owns >=50%, or controls, the other legal entity	Two or more legal entities if a person alone, or with a related party, directly or indirectly owns a 50% share of each or controls them
A person and its Permanent Establishment (PE) or Foreign PE. Partners in the same unincorporate partnership	Trustee, founder, settlor or beneficiary of trust/foundation and its related parties

¹ A transaction or arrangement between Related Parties meets the arm’s length standard if the results of the transaction or arrangement are consistent with the results that would have been realised if Persons who were not Related Parties had engaged in a similar transaction or arrangement under similar circumstances.

² UAE companies can apply to form a Tax Group and be treated as a single taxable person if the UAE parent company (directly or indirectly) holds at least 95% of the share capital and voting rights of each of the companies

Control

“Control” for determining Related Party is as follows:

The ability to:

Exercise 50% or more of the voting rights of another Person.
Determine the composition of 50% or more of the Board of directors of another Person.
Receive 50% or more of the profits of another Person.
Determine, or exercise significant influence over, the conduct of the Business and affairs of another Person.

Connected Persons

The concept of Connected Person is very new and specific to UAE.
In the absence of personal income tax in the UAE, excessive payments to individual owners of Taxable Business either to themselves or person connected to them are likely to erode the tax base for UAE CT
Article 36 of the Decree Law defines the terms Connected Person. The term is different from Related party and means:

An individual who directly or indirectly has an ownership interest in, or controls, the taxable person

A director or officer of the taxable person

Where the taxable person is a partner in an unincorporated partnership, any other partner in the same partnership

A Related Party of any of the three

Tax deductibility criteria

Payments or benefits by businesses to Connected Persons tax deductible only if
It corresponds to the “market” value** of the service	AND
It is incurred wholly and exclusively for the taxpayers business.

* Market value of services shall be determined having regard to the arm’s length principle as defined in Article 34 of the Decree law.*

From the above it looks like one needs to evaluate only the expense transactions with connected person and not all transactions from a TP perspective.

The above tax deductibility criteria however does not apply to:

Listed Entity;
Taxable person subject to the regulatory oversight of a competent authority;
Any other person determined by a decision of the cabinet.

Transfer Pricing Methods

All transactions and arrangements with Related Parties or with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle
For determination of the arm’s length result of a transaction or arrangement between Related Parties the Decree law prescribes the application of one or combination of the following methods which are in line with the OECD TP Guidelines:
- Traditional Transactional Methods
- Transactional Profit Methods

Comparable Uncontrolled Price Method	Resale Price Method	Cost-Plus Method	Transactional Profit Split Method	Transactional Net Margin Method

The Decree law also allows a Taxable person to apply a different method where the business can demonstrate that the specified methods cannot be reasonably applied to determine an arm’s length result. This is akin to the ‘Other method’ concept present in the OECD guidelines.
Hence there is no priority of methods and one can select the most appropriate method(s) even a combination of methods can be adopted to prove arm’s length.
Choice of methods to be decided having regard to the factors of comparability being – contractual terms, characteristics of the transaction, economic circumstances, functions, assets and risks, business strategies.
The application of one or more transfer pricing methods may result in an arm’s length range of financial results, subject to any conditions specified in a decision issued by the Authority. The arm’ length range is yet to be notified by the MoF. Most of the countries follow the interquartile range (or its variation) or any point in the range (minimum to maximum).
In case if the transfer price falls outside the arm’s length price then an adjustment would be carried out by the tax authority to the taxable income.
Whenever there is an adjustment to the taxpayer’s taxable income the benefit of corresponding adjustment is granted to the other related party(includes foreign entities)

Documentation Requirements

With the introduction of local file and Masterfile, UAE is aligning itself with the 3 tier documentation approach of the OECD as Country by Country reporting(ChC) regulations are already implemented in UAE.
There is also a Disclosure form which is prescribed which contains information regarding their transactions with Related Parties and Connected Persons, and this needs to be filed along with their tax return (due date is 9 months from the end of the year)
Businesses that claim small business relief are not required to comply with the transfer pricing documentation rules.
There is a requirement to maintain master file and local file, the thresholds and the conditions for applicability are yet to be prescribed.
Though the contents of the Master File and the Local File are yet to be specified by the MoF but is expected to be consistent with the requirement prescribed under OECD guidelines. The contents of the Master File and Local File as per OECD guidelines is as below:

Master File Contents	Local File Contents
As per the OECD guidelines, a Master file should provide an overview of the MNE Group business, including nature of its global business operations, its overall transfer pricing policies etc.	The Local file provides more detailed information relating to specific intercompany transactions pertaining to a particular jurisdiction.
The information to be documented in the Master file can categorized into the following groups: Organisation Structure Description of MNE group’s business(es) MNE group’s intangibles MNE group’s intercompany financial activities MNE group’s financial and tax positions	The important information to be included in the Local file are: Details of Related Party Transactions Group Overview Industry Overview Functional, Assets and Risk Analysis Economic Analysis

Master File Contents

Local File Contents

As per the OECD guidelines, a Master file should provide an overview of the MNE Group business, including nature of its global business operations, its overall transfer pricing policies etc.

The Local file provides more detailed information relating to specific intercompany transactions pertaining to a particular jurisdiction.

The information to be documented in the Master file can categorized into the following groups:

Organisation Structure
Description of MNE group’s business(es)
MNE group’s intangibles
MNE group’s intercompany financial activities
MNE group’s financial and tax positions

The important information to be included in the Local file are:

Details of Related Party Transactions
Group Overview
Industry Overview
Functional, Assets and Risk Analysis
Economic Analysis

Taxable Person need to submit the Documentation within 30 days from the date of request from the tax authority or such other later date as may be directed by the Authority.

Advance Pricing Agreement (APA)

There is a reference to APAs in Article 59 where it states that the person can make an application for conclusion of APA with respect to a transaction/arrangement entered or proposed to be entered by the person and hence it appears that UAE is bringing in the APA regime as well for tax certainty.

Applicability of arm’s length principle in other CT sections

Article 18- Free Zones – For a Free zone to be treated as a Qualifying Free Zone Person apart from other conditions, the entity must comply with transfer pricing rules and maintain the relevant transfer pricing documentation. Hence compliance with transfer pricing rules is a precursor for Qualifying free zones to claim 0% CT.
Article 61- Transitional Provisions Opening balance sheet shall be the closing balance sheet prepared for financial reporting purposes on the day immediately before the first tax period. The Opening balance sheet so prepared shall be after considering the arm’s length principle. In essence, though the Decree Law specifies that the CT law will be effective from June 01, 2023, it appears that the businesses will however need to ensure transactions are at arm’s length in order to draw up the opening balance sheet appropriately.
Article 50: General Anti abuse rules For the purpose of invoking GAAR one of the provisions includes evaluating whether the transaction or arrangement has created rights or obligations which would not normally be created between Persons dealing with each other at arm’s length in respect of the relevant transaction or arrangement. Further this provision comes into force with immediate effect.
Article 15- Investment Manager Exemption Article 15 provides certain preconditions for an Investment Manager acting on behalf of a Non- Resident Person to be treated as an independent agent. One of the conditions is that the Investment manager should transact on an arm’s length basis with the Non-Resident Person and receive due compensation for the provision of services.
Article 24- Foreign PE Any transfer of assets or liabilities between a Resident Person and its Foreign Permanent Establishment shall be treated as having taken place at “Market Value” at the date of the transfer. Market value as per the Decree is equivalent to arm’s length.
Article 31- Interest Deduction Interest expense incurred on a loan obtained directly or indirectly from a related party will not be allowed if it is for the following transactions:
1. Dividend or profit distribution to related party;
2. Redemption, repurchase, reduction or return of share capital to a Related Party;
3. Capital contribution to a Related Party;
4. Acquisition of an ownership interest in a Person who is or becomes a Related party following the acquisition.

The taxable person needs to demonstrate that main purpose of obtaining the loan and carrying out the above transaction(s) is not to gain a corporate tax advantage. Where the interest expense is subject to corporate tax in UAE or taxed in foreign jurisdiction at a rate not less than UAE tax rate, no Corporate Tax advantage shall be deemed to arise.

Conclusion

The transfer pricing provisions provided are more or less aligned to the generally global accepted practices laid down in the OECD Guidelines. There are areas where the MoF may need to clarify and provide guidance for application of the provisions in its true sense.

How Can We Support

Transfer Pricing Compliances

Identification of Related parties and Connected persons
Analysis of transactions that would be covered under the UAE TP regime
Undertake TP benchmarking analysis for the covered transactions to be in line with the arm’s length principle.
Assist with regular TP compliances – Disclosure form, Master file, Local file, CbC report

Transfer Pricing Advisory

Price Setting: Advice on suitable pricing model and transfer pricing policy
Assistance in implementation of TP policy and periodic review of margins earned
Review/Drafting of intercompany agreements for the covered transactions
Supply chain Re-Structuring
Possible Advance Pricing Agreement assistance, once rules are notified
Advice on Intra-Group Services, Management Charges, royalty, Cost Contribution Arrangements and financing transactions
Support on estimating the profit attribution to Permanent Establishments

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), 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 four 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:

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Transfer Pricing – Union Budget 2024

UnionBudget2024 – TransferPricing Takeaways

The full year Union Budget for 2024-25 was presented by the finance minister on 23 July 2024. VSTN alert summarizes the Transfer pricing updates viz.,

Power given to Transfer pricing Officer (TPO) to scrutinize Specified Domestic transactions not referred by the Assessing Officer (AO)
Announcement in the Budget speech on widening the scope of Safe Harbour and to update arm’s length conditions prescribed therein to make it more attractive for taxpayers. Safe Harbour rules are to be extended to foreign mining companies selling raw diamonds in India. These, however are not mentioned in the Finance (No.2) Bill 2024 or the memorandum to the said Bill.
Finance Companies in IFSC are exempt from the purview of Section 94B – Limitation on interest deduction.
Reduction of Corporate Tax rates to 35% for foreign companies.
Rationalization of time limits for filing appeal before Income Tax Appellate Tribunal (ITAT) to 2 months from the end of the month in which the order sought to be appealed is communicated.
Vivad Se Vishwas Scheme announced for 2024.
Streamlining of Transfer pricing assessment proceedings.
Withdrawal of Equalization levy, marking implementation of Pillar One and Pillar Two in India in the near term.

The finance minister in her Budget speech announced that the monetary limits for filing appeals by the revenue would be increased to INR 60 lakhs before Tax Tribunals, INR 2 crores before High Court and INR 5 crores before Supreme Court.

As a follow-up to the Budget, it is expected that draft regulations of Pillar One and Pillar Two and the revised rules for Safe Harbour Rules will be issued in the near term.

Open Attachment…

Full Year Union Budget 2024-25

Transfer Pricing Perspective

July 2024

Background

The Finance Minister presented the full year Union Budget for 2024-25 on 23 July 2024. This budget was centered around the theme of employment, skilling and MSMEs and had 9 priorities including productivity and resilience in Agriculture, employment & Skilling, Innovation, Research & Development and Next Generation Reforms.

The alert covers the Transfer Pricing related proposals in the Finance (No.2) Bill 2024.

Transfer Pricing Updates

1. Determination of Arm’s Length Price in respect of specified domestic transactions in proceedings before Transfer Pricing Officer

The existing provisions of Section 92CA provides that the Assessing Officer (AO) during the course of assessment, may refer the computation of arm’s length price in relation to an international transaction or specified domestic transaction (SDT) entered by an Assessee to the Transfer Pricing Officer.

Further sub section (2A) & (2B) of Section 92CA provide that if during the course of assessment, any other international transaction:

which has not been referred to him by the AO or
which has not been reported in Form 3CEB (i.e report under Section 92E)

comes to the notice of the TPO, then the TPO shall have the powers to determine arm’s length price of such international transactions as well. However, the provisions of sub section (2A) & (2B) of Section 92CA did not cover SDTs.

Budget 2024 has amended sub section (2A) & (2B) of Section 92CA to bring SDTs also within the ambit.

This amendment will be applicable from 1 April 2024.

2. Safe Harbour Rules

The Finance Minister in the budget speech mentioned that the scope of Safe Harbour rules would be expanded and would be revised to make it more attractive.

Safe Harbour is a dispute resolution mechanism wherein the tax authorities of a jurisdiction prescribe the arm’s length terms and conditions for certain routine / non-complex transactions. On complying with these terms and conditions, the said transactions entered by the taxpayers are deemed to be at arm’s length in the respective jurisdiction and obtain immunity from litigation.

The Safe Harbour regime was first issued by the CBDT in 2013 and amended in 2017. Thereon, these rules have been extended year on year. Taxpayers at large have viewed Safe Harbour program critically, and have not witnessed any major participation, because of which rules were revised in 2017. Despite the amendment, adoption of dispute resolution mechanism have been largely skewed towards Advance Pricing (APA) and Mutual agreement procedure (MAP).

With a view to provide greater tax certainty and aiming at reducing transfer pricing litigation, the Finance Minister has announced that the scope of Safe Harbour Rules will be widened and would make them more attractive. Further the Finance Minister also stated that Safe Harbour rates would be announced for foreign mining companies selling raw diamonds in India.

The Safe Harbour rules are operational through Income Tax Rules -10TA to 10THD, and the amendment to these rules are expected to be announced separately vide Notification.

3. Section 94B – Exclusion of Finance Companies in IFSC

Section 94B was introduced to limit base erosion and profit shifting w.r.t. interest deductions by Indian taxpayers, in line with the BEPS Action Plan 4. The section limits the quantum of deduction on interest to associated enterprises up to 30% of the earnings before interest, taxes, depreciation and amortization. The limitation also extends to loans from third party lenders but the associated enterprise provides guarantee to such lender.

Exceptions are provided for Indian company or a permanent establishment of a foreign company that are engaged in business of banking or insurance. The Finance (No.2) Bill 2024 now extends the exception to finance companies, located in International Financial Services Centre (IFSC).

The Section is to be amended to exclude ‘Finance Company located in any International Financial Services Centre’. The definitions of Finance Company and International Financial Services Centre are to be included through insertion of two new clauses – (iv) and (v) to the sub section 5 of section 94B.

This amendment will take effect from 1st April 2024.

4. Reduction in Corporate Tax Rate for Foreign Companies:

With an intention to boost foreign investment in India by providing a level playing field for both domestic and foreign companies, the rates of tax of foreign companies has been reduced from 40% to 35%, on income other than income chargeable at special rates (specified in respective sections of Chapter XII of the Act).

The existing surcharge of 2% (on income greater than INR 1 crores and less than INR 10 crores) and 5% (for income greater than INR 10 Crores) shall continue to be levied.

Thus, this amendment comes as an incentive to foreign companies who have a permanent establishment and a taxable presence in India.

This amendment will be applicable from 1st April 2024.

5. Income Tax Appellate Tribunal (ITAT) Time limit – Rationalization

In connection with appellate proceedings, currently aggrieved taxpayers will have to file an appeal before the ITAT within a period of 60 days from the date of order which is sought to be appealed. The orders of Commissioner of Income Tax (Appeals) used to be pronounced in batches – monthly or fortnightly.

With the onset of the faceless assessment, these orders are said to be issued on a day-to-day basis. To ensure easier tracking of cases by the Assessing Officer, the time limit for filing the appeal before the Tribunal is proposed to be amended to ‘2 months from the end of the month in which order sought to be appealed is communicated’.

This will be effective from 01 October 2024.

6. Introduction of Direct Tax Vivaq Se Vishwas Scheme 2024.

As a measure to address the rising number of pending litigation cases at various levels, it has been now proposed to introduce Vivaq Se Vishwas Scheme, 2024 with an objective of providing a mechanism for dispute resolution, which shall also apply to pending TP Appeals. The Taxpayer can now settle pending appeals by paying the disputed tax amount without interest and penalty, as per the scheme.

However, as the Scheme requires upfront payment of the disputed demand, taxpayers may still opt to go through the regular channels as relief is generally granted at higher levels in case of TP appeals.

It is proposed that this Scheme shall come into force from the date to be notified by the Central Government. The last date for the Scheme is also proposed to be notified.

7. Streamlining of Transfer Pricing Assessment

As part of efforts to rationalize litigation and appeals, the Finance Minister announced that Transfer pricing assessment proceedings would be streamlined. Currently, the timeline of regular assessment is extended by 12 months to provide for the Transfer Pricing audit to be conducted by Transfer Pricing Officer under Section 92CA.

Revision to the existing Income Tax Act sections to align Transfer pricing assessment proceedings are expected to be announced vide a separate notification.

8. Withdrawal of Equalization Levy

The withdrawal of equalization levy was announced by the Finance Minister in the budget speech. During the post budget conference the Finance Minister rationalized the withdrawal of equalization levy owing to the introduction of Pillar One and Pillar Two rules in India in the near future.

The formulation and implementation of the two-pillar solution is undertaken by the OECD/G20 Inclusive Framework, of which India is a member. In one of its statements, in October 2021, the OECD/G20 Inclusive Framework provided a detailed implementation plan of Pillar One and Pillar Two. The statement provided for member countries to remove Digital Services Taxes and other relevant similar measures in connection with implementation of Pillar One. Equalization levy in India is unilateral measure, similar to the digital services taxes.

As per the Finance Minister, during the post budget conference, India is said to be finalizing the implementation of Pillar One and Pillar Two in its Tax legislations. As part of these efforts, the equalization levy has been withdrawn.

It is expected that the draft legislations on Pillar One and Pillar Two would be announced in the near future.

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, Global Documentation, BEPS related compliances (including advisory, Masterfile, Country by Country report), 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.

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Transfer Pricing – FTA directive on APA- UAE (2)

FTA directive on Advance Pricing Agreements

Recently, the Federal Tax Authority (FTA) issued Decision No.4 of 2024, effective from July 01, 2024, which enunciates FTA’s policy on issuing clarifications & directives relating to federal taxes. While policy outlines the general framework for procedures of clarifications & directives, the processes & details shall be specified by FTA.

Article 59 of the Federal Decree law no 47 of 2022 provides that a person may make an application to FTA for entering into an APA with respect to an existing/proposed transaction with related parties. The FTA shall prescribe the form & manner in which application for APA should be made.

The said Decision now clarifies that start date for receiving APA applications, the procedures relating to submission & issuance of agreements will be announced by FTA during the fourth quarter of 2024.

As UAE TP Guidelines largely follows the OECD TP Guidelines, it is expected that UAE APA programme will also be in line with Chapter IV of the OECD TP Guidelines. A general overview of an APA program is as below:-

ELIGIBILITY CRITERIA- Generally APA program provides an eligibility criteria for both the time limit within which such an application may be made for a financial year as well as defining a minimum threshold of the value of related party transactions undertaken / proposed to be undertaken
TYPES OF APA- Can be Unilateral, Bilateral or Multilateral
TIME PERIOD- Generally an APA would cover a specified period ranging from 3 to 5 years & would also provide for a rollback provision for prior years (3-5 years).
APA PROCESS:- The APA process generally includes the following steps:-
- Pre-filing consultation
- APA Application
- Preliminary processing of application
- Procedure
- Negotiation
- Signing of Agreement
- Post APA Compliances

Thus FTA’s directive, to be issued in last quarter of 2024, is expected to address not only the above aspects but also cover procedural aspects relating to format of application, filing fees etc.

The APA programme will no doubt serve as a powerful mechanism for dispute resolution fostering an environment of tax certainty & unanimity in the approach relating to related party transactions. However decision to opt for APA lies with the businesses which needs to evaluate considering the nature, criticality & value of the related party transactions vis-à-vis the time & cost that would be involved in that process. Once 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 TP Policy
Deciding on information, documents & agreements to be shared with APA authorities.

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Transfer Pricing – OECD Pillar 1 Guidelines on Amount B

Transfer Pricing – OECD Pillar 1 Supplementary Guidelines on Amount B

Further to the report published on Amount B- a simplified & streamlined approach for application of arm’s length principle to baseline marketing & distribution activities, OECD on Jun 17, 2024 issued supplementary Guidance on “Qualifying Jurisdiction“ & “Covered Jurisdictions”. Access VSTN alert published earlier on Amount B in comments.

QUALIFYING JURISDICTION – SECTION 5.2 – OPERATING EXPENSES CROSSCHECK
In Feb 2024 Report, a guardrail in the form of operating expenses cross-check mechanism, through a cap-and-collar, was included to determine whether the return on sales arrived using Amount B global pricing matrix is appropriate or requires adjustment. The mechanism provides for application of default cap rates & alternative cap rates (qualifying jurisdiction). Now Qualifying Jurisdiction are those classified by World Bank Group (WBG) as low income, lower-middle income, & upper-middle income based on the latest available ‘WBG country classifications by income level’. The current list of Qualifying Jurisdictions includes 132 countries, which also features India, China, Turkey, Malaysia & Mexico.
QUALIFYING JURISDICTION FOR SECTION 5.3 – DATA AVAILABILITY MECHANISM.
The February 2024 report, included a data availability mechanism which provides for an upward country risk adjustment to the returns derived from the pricing matrix in respect of qualifying jurisdictions that do not have/insufficient data points in the global dataset. For this now qualifying jurisdiction for the purposes of Section 5.3 is a jurisdiction with sovereign credit rating of BBB+ or lower & has less than 5 comparables in the global dataset.
COVERED JURISDICTIONS
The February 2024 report provided for an agreed political commitment under which the IF members commit to respect the Amount B outcome where the approach is adopted by a Low-capacity jurisdiction (LCJ) & relieve potential double taxation. Now LCJ is replaced with “Covered Jurisdiction” and includes :-
- Low & middle-income IF jurisdictions, based on WBG classifications, excluding EU, OECD & G20 member jurisdictions; or
- Low & middle-income OECD or G20 IF jurisdictions that expressed willingness to apply Amount B by Mar 2024; or
- Any low- & middle-income jurisdiction, not in the inclusive framework, but otherwise meeting criterion & expresses willingness to apply Amount B.

Argentina, Brazil, Costa Rica, Mexico, & South Africa have expressed interest to IF. On a bilateral basis, Jurisdictions may extend their political commitment to other jurisdictions.

The list of qualifying jurisdictions & covered jurisdictions will be published & updated every 5 years on the OECD website.

With expected implementation of Amount B from Jan 1, 2025, all business should evaluate impact of Amount B as there are no thresholds for applicability.

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Transfer Pricing – APA Considerations with comments

Considerations before opting for Advance Pricing agreement ( APA)

Taxpayers, before deciding on APA, sometimes miss out on certain aspects which has to evaluated in advance through a feasibility study, on the pros & cons. Key areas warranting consideration:

Safe Harbour Rules: ~30% of UAPAs concluded in FY 22-23 was by IT sector, indicative of APA inventory. Taxpayer in IT sector, with international transactions < INR 200 crs should consider option of Safeharbour (17/18%), as arbitrage in outcomes under APA is almost Nil/reducing (>17%).
Free of Cost Assets (FoC): Different position / strategy can be adopted by business on FoC, but one has the opportunity to defend the position in normal litigation route. In APA, mark-up on FoC is required to be received by Indian business, i.e., suo-moto acceptance of FoC in its operations when signed off. Implications of such acceptance from GST perspective include 18% GST & interest (approx. 6-8%, if APA concludes in 3-4 years) to be paid – effectively ~28% on FoC per annum (without rollback). This is an immediate outflow post APA sign-off. If APA is concluded in 3rd year, availing input credit for GST on FoC for past years may be challenged hence can be a sunk cost. APA authorities generally attribute 2-5% of cost base as FoC.
Business Uncertainty: In case of commencement of new business line/ramping of operations, unless the business is able to estimate the changes with certainty, preferable to wait for it to stabilise & then opt for APA. This is because business environment is dynamic & business’s response to economic climate can impact transfer pricing aspects & can render APA outcome inoperable / futile.
Tenure: APA has a 5-year covered period, & if one decides for a shorter covered period say 3-years, there would be additional costs -filing, consultant fees, immediate renewal. Where APA is decided as the best dispute resolution route, there should be a very valid reason & detailed analysis documented for a shorter term. For a 10-year period, there would be 2 APA filings if full 5-year period opted, but 3 APA filings if 3-year is chosen as the covered period. This would result in artificial increase in the inventory of cases in APA and unnecessary burden on the government’ s APA resources.
Post APA compliances: When a cost benefit analysis is undertaken, one needs to factor the post APA compliances for every covered year as it involves additional effort & resources including filing ACR & compliance audit.

Therefore, businesses should diligently test the waters before taking the plunge for APA. The credibility and efficiency of the Indian APA programme would improve if businesses saved only non-routine or complex transfer pricing issues for APA authorities.

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Transfer Pricing – OECD update guidance on CbCR

Transfer Pricing – OECD ‘s updated Guidance on Country-by-Country reporting

Recently, the OECD had issued its updated guidance on Country-by-Country reporting. The May 2024 update is on treatment of dividend in Table 1 of the Country-by-Country (CbC) report.

The BEPS Action 13 report prescribes the format for CbC report as well as the definitions for each of the line item such as Revenue, profit (loss) before Income tax (PBT), Income Tax Paid (on Cash Basis), etc. For ‘Revenue’, the definition specifically excludes dividend income from constituent entities. However, there was no parallel exclusion in the definition of Profit (Loss) before Income Tax, resulting various approaches being adopted.

The updated guidance now clarifies that payments received from other Constituent Entities that are treated as dividends in the payer’s tax jurisdiction will have to be excluded from PBT as well.

The guidance also clarifies on the expression “payments received from other Constituent Entities that are treated as dividends in the payer’s tax jurisdiction”. In this regard the guidance clarifies that there should be consistency in the treatment of payments between the payer and the recipient viz.,

Where the payer treats the payment as the dividend, the recipient to treat it as dividend and exclude from the revenue and PBT.
Whereas, when the payer treats the payment other than dividend – such as interest, the recipient to retain the receipts in the revenue and PBT

The guidance also clarifies that where applicable accounting standards requires an entity to include an amount from the profit of another constituent entity in its PBT, then such amount will be treated as dividend and should be excluded from revenue and PBT for the recipient. This guidance shall not apply where the entity from whom such amounts are received is a transparent entity for tax purposes.

This guidance applies to reporting fiscal years commencing on or after 01 January 2025.

This update to guidance aligns the definition of ‘revenue’ and ‘profit (loss) before income tax’.

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Transfer Pricing – ICAP

Recent updates – OECD International Compliance Assurance Programme (ICAP)

OECD has recently published an updated document (FAQ) in respect of International Compliance Assurance Programme (ICAP/Programme), which commenced on September 2021.

What is ICAP?

ICAP is a voluntary risk assessment & assurance process designed to be an efficient and effective tool to facilitate MNE Groups achieve increased tax certainty with respect to their activities/transactions concerning transfer pricing and other international tax matters(hybrid mis match arrangements, withholding taxes, treaty benefits).

At present only 23 tax administrations have participated in ICAP. To benefit MNCs Headquartered in jurisdictions which are currently not a participant of the ICAP process, the FAQ addresses this critical issue and provides an alternative in terms of another tax administration to act as a Surrogate Lead Tax Administration.

For e.g Take a case of a MNC headquartered in India having subsidiaries across the world. As India is not a participating jurisdiction, those MNCs were not able to opt for the ICAP process. Given this clarification in FAQ for a Surrogate Lead Tax Administration, these MNCs are now eligible to approach alternative tax administration where it has significance presence to be a surrogate Lead tax administration. Considering that there is no filing fees, shorter timeline (24-28 weeks) for an outcome letter, submission of documentation already maintained by the Group (CbC, masterfile, local file etc), it can be as an effective tool for increasing tax certainty.

In the attached newsletter we have captured the background of ICAP , process, the recent clarifications in the FAQ, difference between APA and ICAP and the way forward.

OECD has also released a document of information on the participating tax administrations and their contact details so that MNC desirous of entering into this process can reach out before the application deadline of 30 September 2024. Generally applications are accepted at one of the two annual application deadlines –31 March and 30 September

Open Attachment…

International Compliance Assurance Programme

Walk through and Updates

June 2024

Background

In the era of globalization and increased cross border transactions, transfer pricing disputes are often viewed as a top concern of Multi National Enterprises (MNE). As transfer pricing disputes can be time consuming and expensive, MNEs seek to adopt various tools in order to achieve tax certainty. With an intention to support MNEs with their tax risk assessment, the Organisation for Economic Co-operation and Development (OECD) had introduced a voluntary programme named International Compliance Assurance Programme (ICAP)

ICAP programme was launched by OECD 3 years ago and over 23 tax administrations have participated in the said programme. ICAP may gain momentum due to the FAQ published by OECD in June 2024. The FAQ has several pointers, a key update being a possibility of involving a Surrogate Tax Administration in case where the HQ jurisdiction is not part of the ICAP program.

The ensuing paragraphs will provide a detailed understanding of ICAP including the procedural aspects, the importance of FAQ released in June 2024 and a high level comparison of ICAP with Advance Pricing Arrangement (APA).

ICAP – All we need to know

1. Introduction

ICAP is a voluntary risk assessment and assurance process designed to be an efficient and effective tool to facilitate MNE Groups achieve increased tax certainty with respect to their activities/transactions concerning transfer pricing and other international tax matters. The first rollout of ICAP was announced in 2020 following the release of two pilots by OECD in 2018 and 2019. In the year 2021, OECD has released a handbook for tax administrations and MNE Groups providing complete information about the programme (OECD Handbook)¹. Currently 23 countries are participants of this programme including US, UK, France, Australia, Japan, Netherlands, Denmark, Singapore.

ICAP involves a review of selected transfer pricing issues and other international tax matters i.e., hybrid mismatches, withholding taxes, permanent establishment issues. Even though ICAP does not provide legal certainty like APA, it provides a degree of comfort and assurance to the tax administrations participating in MNE Group’s risk assessment process.

The MNE Group and tax administrations [Lead Tax Administration (LTA) and Covered Tax Administrations (CTA)] participate in the ICAP risk assessment (RA) process, in order to provide pathway to improved tax certainty for the MNE Groups. It uses Country by Country (CbC) reports and other relevant information to facilitate the risk assessment process offering bouquet of benefits such as short timeframes, enabling MNE Groups to engage simultaneously with several tax administrations through LTA or multilateral engagements and does not require Double Tax conventions and is operated through exchange of information between tax administrations and therefore provides unique opportunity to address issues involving non-treaty partners

2. ICAP process

The ICAP-RA process comprises of three stages wherein initial phase deals with MNEs discussion about tax administrations’ willingness to participate in ICAP, determining the scope of risk assessment by review of transactions by LTA, risk assessment and related issue resolution, the probable outcome they may expect and their suitability to participate in the programme.

Stage I – Selection

Evaluating willingness of TA to take part in ICAP-RA process
Review of high level summary of MNE Group transactions to determine ICAP risk assessment scope
MNEs to prepare and submit main documentation package to LTA (Eg., CBCR & MF)

Stage II – Risk assessment & Issue resolution

Multilateral risk assessment & assurance of covered risks by LTA/CTA
Multilateral calls/meetings between MNE Group, LTA & CTAs to discuss findings and to conclude that a covered risk is low risk or not
Impossibility of concluding – may involve ‘Issue resolution process’

Stage III – Outcomes

LTA issues completion letter confirming conclusion of ICAP-RA process
Outcome letter – Results of TA’s risk assessment/assurance of covered risks for covered period
Impossibility of concluding covered risk to be low risk – reflected in outcome letter
ICAP process may facilitate further bilateral/multilateral action, if any (i.e., APA)

3. Scope

The process of determining the scope of ICAP-RA process involves the identification of:

Lead Tax Administration

The LTA will be in the jurisdiction of the Ultimate Parent Entity (UPE) of an MNE Group and is also a CTA in the ICAP-RA process. In case the tax administration in which is UPE is resident is not willing to participate in the ICAP-RA process, the MNE Group may approach another tax administration as a Surrogate LTA. The recent FAQ released by OECD specifically clarifies about the concept of Surrogate LTA which is dealt with in detail in the ensuing section.

Covered Tax Administration

Once the suitability of an MNE Group to participate in the ICAP-RA process is evaluated, the respective tax administrations will decide its willingness to be a CTA in such process. CTA should be in jurisdictions where international agreements are in place allowing exchange of information with LTA.

Covered risks and Covered transactions

ICAP will be best suited to cover international and cross border risks such as Transfer pricing risk, Permanent establishment risk and Other international tax risks (i.e., hybrid mismatch, WHT, treaty benefits, etc.). It can cover all transactions/risks or partial coverage subject to acceptance of CTA and MNE Group

Covered period(s)

Eligible period for review in ICAP process is an MNE Group’s tax filing periods for which they have been required to file CbC report (including filing under surrogacy rules)
Period(s) to be covered will be agreed between the MNE Group, LTA and other CTAs;
In general, either single or two consecutive covered period may be focused by ICAP process

Roll forward period

Tax administrations may aim to provide tax assurance for a two tax filing period immediately following the covered period (Roll forward period), provided no material changes are present;
Roll forward period may be specified in the outcome letter;
The ability to provide comfort in respect of Roll forward period depends on each TA (tax administration) domestic legal framework

Key takeaways from recent FAQ

OECD has recently released an updated document comprising of Frequently Asked Questions (FAQ)² in respect of ICAP process and its corresponding clarifications. Some of the new pointers in FAQ which are significant are provided below:

Surrogate LTA

a. When UPE’s TA is not participating in ICAP

On a plain reading of the Handbook released by OECD on ICAP process, one may observe that an MNE Group can take part in the ICAP process only if the tax administration where the UPE of the MNE Group is a resident is participating in ICAP. This raises a concern on the eligibility of MNE Group to apply for ICAP if its UPE jurisdiction is not participating in ICAP. This FAQ clarifies the following:

Where an MNE Group is a resident in jurisdiction which is not participating in the ICAP process, a suitable TA may act as a Surrogate LTA for the said MNE Group’s risk assessment, wherein the Surrogate LTA takes up the role of a LTA
MNE Group to identify the jurisdiction where it has significant operations and establish the same as a Surrogate LTA
MNE Group to inform the TA of UPE about its desire to participate in the ICAP process and evaluate the suitability of the potential Surrogate LTA
The potential Surrogate LTA is provided with 3 options i.e., either to agree to act as a Surrogate LTA, or decline or suggest an alternative Surrogate LTA

b. When UPE’s TA is participating in ICAP

If the TA in the jurisdiction where UPE of MNE Group is a resident declines to act as a LTA, then the MNE Group may approach any other jurisdiction participating in ICAP to be its Surrogate LTA. The reason for declining by the TA should only be on account of lack of capacity or that the MNE Group has very limited operations in that jurisdiction. Such option of resorting to a Surrogate LTA needs to be consulted with the TA of the UPE. If the UPE jurisdiction is not in appreciative of involving Surrogate LTA, then ICAP-RA process may not be conducted for the said period

Requesting additional ICAP-RA process

No restriction on MNE Group in submitting additional ICAP-RA requests for later periods, even if it has already participated in an ICAP-RA process. Further there is no time limit that must be elapsed before applying for a new request.

Eligibility in case of no mandate to file ObCR

MNE Groups exempt from filing ObCR in their jurisdiction can apply for ICAP-RA process even though furnishing ObC report along with documentation package is necessary at the selection stage. However MNE Groups may be expected to prepare and submit a similar report as part of the main documentation package.

Assistance by external advisors

MNE Group may seek assistance from its external/legal advisors in the ICAP-RA process. Since the intention of ICAP is to promote transparency between TA and MNE Group, advisors should only support the MNE Group and not be used as a replacement for the personnel from MNE Group.

ICAP and APA

OECD in its Handbook on ICAP has specifically recognizes APA as one of the best tools available for achieving tax certainty between jurisdictions and it has discussed the similarities and differences between these two i.e., ICAP and APA. For some MNEs, APA may provide a better approach on the other hand for certain MNEs, ICAP may work better and in few cases a combination of both may be beneficial.

The two programmes are different in many respects which is discussed below:

Particulars	APA	ICAP
Level of certainty	Legal certainty to the MNE Group in the form of a binding written agreement between MNE and Government	TA gains comfort over the covered risks in the form of an ‘Outcome letter’
Covered period	Prospective agreements which may cover forward looking period of upto 5 years and rollback period for certain years	Roll-forward period covering one or two consecutive tax filing periods
Covered transactions	MNE Groups may cover all or few transactions entered into with its affiliates	Allows extensive coverage of transactions. Best suited not only in respect of TP issues but also extends to other international tax matters (hybrid mismatch, PE issues, etc..)
Resources involved	Involves huge cost and demands significant amount of time to complete the process. The cost involves Government fee, consultant fee, and involvement of Company resources	The cost and involvement of resources is way too limited in comparison to APA wherein there is no user fee charged
Documentation requirement	APA calls for mammoth amounts of information and submissions in respect of the covered transactions and the requirement will get multifold in case of bilateral or multilateral APAs	Documentation package comprises of basic documentation any MNE Group would already possess (i.e., CbCR, MF, TP studies, etc..) and basic information such as list of proposed CTA, covered periods, list of transactions falling within proposed covered risks, etc.
Time Frame	Time taken to conclude an APA is a critical issue faced by MNEs. APA process may take several months to conclude which will be even more in case of bilateral/multilateral APAs.	ICAP has targeted time frame to complete the RA process in a span of 24 to 28 weeks from the time of submission of documentation package by MNE Groups. However, it may vary depending on complexity of transactions involved

Even though the process of ICAP and APA have various similarities, ICAP cannot act as a replacement to APA whereas the same can complement in certain cases of risk mitigation. Also ICAP may be instrumental in identifying the suitable transactions to be covered under an APA.

Conclusion

The intention behind formulating ICAP-RA process is to offer a voluntary, transparent and cost effective outcomes to the MNE Group at a very quicker timeframe. Even though it is quite sometime since the ICAP process is rolled out, not much of information is available about the programme except a recent statistics published by OECD in January 2024³ and a publicly available information about a marquee MNE Group who has been appreciative of the ICAP process and the corresponding impact it had on its company’s reputation⁴. Further the statistics report indicate that the ICAP is faster than APA / MAP processes and also offers a possibility of informal dispute resolution. Therefore one must carefully consider the probability of obtaining desired outcomes by resorting to ICAP process.

The recent clarification provided by OECD through the FAQ in respect of adopting a Surrogate LTA is a welcome move which will facilitate many MNEs to come forward to participate in the risk assessment process. It is remarkable to note that even though ICAP cannot offer legal certainty as obtained through APAs, it can best be used as a tool to achieve effective domestic audit process which may be completed more quickly and with less additional documentation needed. While the benefits outweigh the shortcomings of the process, it is expected that ICAP may be embraced by many TA thereby paving way for quicker resolution of APA cases.

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, Global Documentation, BEPS related compliances (including advisory, Masterfile, Country by Country report), 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.

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Transfer Pricing – KSA APA

KSA – APA Program

The introduction of the APA program comes as a silver lining to the KSA Transfer Pricing tax regime. This welcome move demonstrates the proactiveness of the KSA Government in fostering a non- adversarial transfer pricing environment and providing tax certainty to MNEs in relation to their related party transactions. On May 19, 2024, ZATCA commenced receiving applications for Unilateral Advance Pricing Agreements from taxpayers and Zakat payers. While the comprehensive guidelines in this regard is yet to be rolled out by ZATCA, some of the key aspects of the KSA APA program as laid down in the amended TP Bylaws and the recent notification inviting applications for Unilateral APAs are brought here below-

A. Applicability

Applicable to Taxpayers and Zakat Payers
Applicable from Financial year beginning on or after January 01, 2024

B. Eligibility

Transaction Threshold
- In order to apply for APA, the value of transactions with related parties shall not be less than SAR 100 million.(~26.66 million USD).
Timing of Application
- The taxpayer/ zakat payer would be required to submit the completed application at least 12 months before the start of the first financial year covered by the agreement.

C. Type of APA

As of now only applications for Unilateral APA are received by ZATCA. Further guidelines from ZATCA on the APA program is expected to provide more clarity on Bilateral and Multilateral APAs.

This alert summarises the critical aspects of the KSA APA program and also provides an overview of the general APA process with an intent to familiarize businesses and keep them abreast of the upcoming changes.

Open Attachment…

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

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 APA – One Country

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 APA – Two Countries

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 APA – More than Two Countries

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.

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Transfer Pricing – Management charges

Decoding Intra-group services

MNEs around the world endeavour to achieve economies of scale by centralising certain activities among the Group (i.e., IT, legal, payroll, back office, marketing, R&D, etc.,). Considering the very terminology of intra-group services (IGS), it becomes an easy target for tax authorities to impose transferpricing adjustments. As benefit received from IGS are often auxiliary, taxpayers are encountered with satisfying ‘Need-benefit test’.

More often than not, focus is more on mark-up charged on IGS, leaving behind big picture i.e., cost base/cost pool. Determining accurate cost base is essential to arrive at an arm’s length cross-charge, and accordingly, directly identifiable costs, pass through costs, etc., ought to be identified for cost pool. Selection of reasonable allocation keys for indirect costs allocation is another key point. IGS cross charge is arrived at by adding an arm’s length mark-up to such costs. For defending such mark-up, countries who have adopted OECD TPG such as EU, UAE may resort to mark-up of 5% on LVS (Low Value adding services) while others may undertake independent benchmarking using Global databases from a service provider perspective.

Having said that, not all IGS warrant a compensation i.e., shareholder activities, duplicative services, incidental benefits, etc., One may need to evaluate nature of services before categorizing them as chargeable IGS.
In spite of offering varied services to the benefit of affiliates, taxpayers customarily term them as “ Managementcharges ”, without emphasising the technicality of services, which might mislead tax authorities to categorise them as LVS. Instead, one may look at adopting apt nomenclature, e.g production support, technical support, marketing support etc., thereby demarcating from LVS.

Since IGS attracts tax authority’s attention, one may make note of the following:

Clear identification of category of services (Technical or LVS) to be done.
Data justifying ‘Rendition test, ‘Need-benefit’ test to be sourced on a contemporaneous basis to handle litigation seamlessly.
Consistency in Group policy to be evaluated– eg., Regulatory requirements in few countries like China may restrict IGS charge resulting in disparity.
IGS < INR 10 cr. – Indian taxpayers may resort to Safe harbour rules to ring-fence it from tax litigation where certificate of cost pool workings is required.
IGS > INR 10 cr.- May opt normal litigation / APA – Critical to note, there is a dual requirement in APA– a) cost plus which is agreed and b) cap on overall quantum i.e., as a % on sales.
Can opt for MAP, in case of TP adjustment. Relief may be provided based on factual pattern.

Depending on the factual circumstances, one may take a calculated call in determining the approach to be adopted.

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Transfer Pricing – Aggregation of Transactions

Aggregation of Transactions – “When to” & “When not to”

Aggregation of transactions during benchmarking analysis has seen wide adoption without appreciating the nuances of transactional analysis. Though various country regulations and OECD guidelines lay down various criteria to determine if the transactions are so closely linked to warrant aggregation, one should not consider commencing TP pricing/benchmarking with this as a default approach.

In this post, we highlight certain instances wherein a Transactional Analysis approach should be adopted as against the aggregation approach.

Setting up of Pricing PolicyIn case when a TP policy is to be established for various new transactions, the FAR analysis should be carried out for every distinctive activity/service/ transaction that it proposes to undertake with related parties (RPs). Every transaction needs to be clearly delineated since the FAR qua the transaction vary, and the return which an entity is expected to earn is correlated to its key value adding activities / risks. Thus, determining the arm’s length margin to be earned by an entity at net level by aggregating all transactions may not be appropriate. This is more relevant for jurisdictions which have recently commenced TP regime in their tax law (e.g UAE). Transaction level analysis is critical for price setting for the first year, for such cases.
Payment of royaltiesPayment for intangibles has always been a litigated area and hence the arm’s length price for such IP transactions (right to use/ transfer of IP) is to be built on a robust DEMPE analysis considering the IP arrangement between the RPs & their relative contributions to the Intangibles. Aggregation of these transactions under TNMM are finding less favour with the Tax authorities and adoption of standalone testing using CUP method is required, though taxpayers contest that these are inextricably linked to the major activity.
Payments to Key Managerial Personnel (KMP)Countries such as UAE, Qatar cover payment to KMP as a related party transaction. Generally, taxpayers aggregate KMP payments with other transactions to substantiate arm’s length pricing. This however is not a fool proof approach. For Ex., where an entity incurs losses, question arises if there will be no payment allowed to KMP. This transaction should be evaluated on a standalone basis, & the price should be arrived at having regard to roles & responsibilities of KMP, proof that services were rendered, need benefit test analysis etc.
Financial TransactionsFinancial transactions cannot be clubbed with other transactions & will have to be tested on a standalone basis by evaluating various terms & conditions of underlying loan, credit rating of borrower, currency of loan and other factors.

Hence, one should consider evaluating the facts / specificity and all the parameters before deciding aggregation approach.

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

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm