ZATCA announces Advance Pricing Agreement (APA) program

The Zakat, Tax and Customs Authority (ZATCA) announced the implementation of an Advance Pricing Agreement (APA) program for income tax and zakat payers.

An APA is a prospective agreement between a taxpayer and a tax authority regarding the appropriate transfer pricing (TP) methodology for a set of transactions over a fixed period of time. An APA is an effective tool for taxpayers to mitigate TP risks by ensuring that future profitability levels are considered reasonable and acceptable by the tax authorities.

Among others, an APA would include an overview of the covered transactions, applied TP policy, determination of the arm’s length price and the TP methodology to be applied. APAs are an effective tool for taxpayers as they provide much needed certainty regarding covered transactions, thereby eliminating or reducing TP risks.

The APA program will be implemented for financial years starting on or after 1 January 2024. More guidance on the APA program is expected to be released in the coming months.

Key takeaway

An APA provides certainty to taxpayers and tax authorities in terms of the arm’s length pricing and transfer pricing methodology to be adopted for covered transactions. This can significantly reduce tax risks for businesses and their overall costs associated with transfer pricing audits.