Transfer Pricing Demystified: Pros and Cons of APAs

The UAE is a major trading hub and home to a large number of Multinational Enterprises (MNEs) having subsidiaries in different tax jurisdictions. When a product, service or Intellectual Property (IP) is exchanged between an MNE’s divisions, the price of that transaction needs to be at arm’s length.

This process is called transfer pricing and arm’s length means the MNE needs to treat the transaction between their associated enterprises the same way they would between unrelated companies in comparable circumstances. The MNEs must keep the documents and working of the pricing and be ready to submit to the tax administration if they demand.

However, the tax authorities may not always agree with an MNE’s transfer pricing arrangement and policies, leading to audits and adjustments.  This can also lead to double taxation but using an Advance Pricing Arrangement (APA) is the best way to avoid such pitfalls.

An APA is a formal agreement between a taxpayer and one or more tax authorities, which is used to determine and set transfer prices for transactions between the taxpayer and its related parties.

An APA determines, in advance of controlled transactions, an appropriate set of criteria or methodology for the determination of the transfer pricing for those transactions over a fixed period of time. Transfer pricing consultants in Dubai can help you learn more about APAs.

In this blog, you can learn the key pros and cons of APAs in transfer pricing. Read ahead for more insights:

What are the pros of APAs in transfer pricing?

An APA is a highly useful mechanism for resolving transfer pricing issues by properly determining the arm’s length range. An APA in transfer pricing has the following benefits:

1. APAs provide certainty in terms of the tax outcome of the taxpayer’s international transactions by agreeing in advance on the arm’s length pricing or pricing methodology to be applied to the taxpayer’s international transactions covered by the APA
2. APAs minimise the rigours of audit and deliver a particular tax outcome based on the terms of the agreement
3. Reduce the risk of transfer pricing adjustments
4. Reduce the risk of double taxation
5. Tax authorities can benefit from reduced cost of administration
6. For tax authorities, an APA frees scarce resources
7. Tax administrations and taxpayers can consult and cooperate in a non-adversarial environment

What are the cons of APAS in transfer pricing?

Despite its benefits, an APA is suitable for every entity. Transfer pricing consultants in Dubai can guide you on how to tackle the cons of an APA. You can assess the following disadvantages of an APA to determine its suitability for your business:

1. Requires full disclosure of information
2. It may take two to five years from application to approval
3. APAs may become void or need to renegotiate if transaction value or profit varies substantially from critical assumptions
4. Unexpected economic events (e.g. COVID-19) can make an APA void

Hire the Best Transfer Pricing Consultants in Dubai, UAE

Transfer pricing compliance in the UAE can be complex for MNEs but it can be made simple by consulting with transfer pricing experts. When it comes to availing transfer pricing advisers in Dubai, MNEs need to be cautious. Hiring the best transfer pricing consultants in Dubai such as Tax Gian can make transfer pricing compliance seamless.

Tax Gian is the flagship brand of Jitendra Tax Consultants (JTC), consisting of a team of highly experienced tax experts. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. We can help you navigate the complex provisions of transfer pricing. Call us today to avail yourself of comprehensive corporate tax advisory services in Dubai, UAE.