Transfer Pricing in UAE

The employment of transfer pricing procedures has lately drawn considerable global attention due to the rising significance of transfer pricing on corporate income taxation in UAE. HLB HAMT can assist you in developing tax-efficient arrangements that maximize compliance with laws and regulations while meeting all of your transfer pricing requirements, as tax authorities scrutinize transfer pricing activities around the world.

Businesses that engage in cross-border transactions are realizing the value of transfer pricing. Large, medium, and small groups now face a heightened risk due to monitoring by the tax department and regulatory standards. Several global corporations are increasingly thinking about the possible cost management options provided by a well-designed transfer pricing model.

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    Transfer Pricing Regulations in UAE

    Transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. We will assist you in having an initial understanding of transfer pricing regulations.

    What is Arm’s Length Price?

    The arm’s length price (ALP) of a transaction between two associated enterprises is the price that would be paid if the transactions had taken place between two comparable independent and unrelated parties, where the consideration is only commercial.

    What will be the impact of Transfer Pricing Rules on Corporate Tax in UAE?

    As per the current information from MOF (Ministry of Finance), transfer pricing rules seek to ensure that transactions between related parties are conducted in arm’s length terms (i.e as if the transaction were conducted between independent parties). UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.

    Taxpayers should apply the arm’s length principle to ensure that the transactions between related parties reflect independent pricing. Such arm’s length price is fairly a market price of such commodity or service in the market.

    We expect that TP regulation will be part of UAE Corporate Tax Law and it may contain various methods of transfer pricing, vast annual transfer pricing documentation, and harsh penalties for non-compliance.

    As a general practice, Federal Tax Authority (FTA) shall make an assessment and scrutinize the transfer pricing policies, documentation, inter-company and inter-group transactions, etc whether transactions are consistent with TP regulations. Business entities are subject to huge penalties for non-compliance with Transfer Pricing regulations.

    Transfer Pricing Documentation

    Businesses will have to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.

    Proper Transfer pricing documentation will assist the taxpayers to show that their transactions satisfy the arm’s length principle and hence eliminate transfer pricing disputes. If a business entity has increased volume and complexity of international as well as domestic transactions, it will lead to transfer pricing issues, so it will result in a significant increase in compliance costs for taxpayers.

    In this respect, it is noted that clear and widely adopted documentation rules can reduce compliance costs that could otherwise arise in a transfer pricing dispute. To address such issues entity should have resources including an in-house or outsourced tax specialist who has expertise and knowledge about transfer pricing rules and international transactions.

    Generally, a self-declaration regarding TP rules compliances shall be submitted along with the tax return electronically.

    Why Transfer Pricing Documentation?

    • Ensures that taxpayers consider transfer pricing requirements in establishing the prices and other conditions and in reporting income from such transactions in the returns.
    • To provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment.

    Documentation Model under OECD Guidelines

    As per the OECD guidelines on transfer pricing, authorities adopt a three-tier approach for transfer pricing documentation consisting of:

    • Master file – containing standardized information for all MNE group members
    • Local file – material transactions of local taxpayers
    • Country by Country Report – Global allocation of the MNE groups’ income and tax paid, indicators of the location of economic activity within the MNE group.

      Local File

      Business entities having related party transactions should maintain information and documents as per the laws and regulations. The OECD guidelines local file includes:

        Local entity

        • Description of management structure of local entity
        • Detailed description of business and strategy
        • Key competitors

        Controlled transactions

        • Description of material-controlled transactions and context of such transactions
        • Amount of intra-group payments and receipts for each category of controlled transactions
        • Identification of associated enterprises and relationships among them
        • Copies of all Material intercompany agreements
        • Detailed comparability and functional analysis including changes compared to prior years
        • An indication of the most appropriate transfer pricing methods and reason for selecting the method
        • Summary of assumptions in the selection of methods
        • A list and description of selected comparable uncontrolled transactions
        • A description of any comparability adjustments performed
        • Summary of financial information used in the application of selected TP methodology

        Financial information

        • Annual financial accounts of local entity
        • Information and allocation schedule showing financial data is used for TP methodology
        • Summary of schedules of financial data for comparable used and their source

      Country by Country Report (CbCR)

      • The parent company of an international group must submit the report to the prescribed authority in its country of residence
      • The CbCR legislation only applies to the parent companies of multinationals whose consolidated turnover exceeded USD 857 million(equal to or more than AED 3.15 billion) in the previous financial year
      • The report is based on a consolidated financial statement group
      • CbCR Report should provide a breakdown of the Multinational Group’s global revenue, profit before tax, income tax accrued, and some other indicators of economic activities for each jurisdiction in which the MNE operates

    TP Methods under OECD guidelines

    The arm’s length price for a controlled transaction can be determined by selecting and applying the most appropriate transfer pricing method. OECD recognizes five main transfer pricing methods:

      Traditional transaction method

      • Comparable Uncontrolled Price Method
      • Resale Price Method
      • Cost Plus Method

      Transactional profit method

      • Transactional Profit Split Method
      • Transactional Net Margin Method

    Companies should select an appropriate transfer pricing method by considering several factors like availability of information, strength, and weakness of the transfer pricing method appropriateness of the method in giving nature of transactions, etc. Once the transfer pricing method and reliable comparable are found, an arm’s length range can be calculated.

    The regulations may also provide an option to use methods other than approved Transfer Pricing Methods as above, provided that the Taxable Person can demonstrate a reliable measure of an Arm’s-Length price and documentation, and the suggested method satisfies the required provisions under UAE CT law.

    Illustration

    A general example of the application of the Comparable Uncontrollable Price Method

    • ABC Ltd and XYZ Ltd are related persons who form part of the same multinational national entity.
    • ABC Ltd sells goods to XYZ Ltd at AED 10,000/MT
    • ABC Ltd sells the same type of goods to LMN Ltd (independent party) and charges AED 12,000/MT (inclusive of transport charges of AED 1000).

    1. In this case, AED 12000 per MT charged for the sale of goods doesn’t satisfy the arm’s length principle, so comparability adjustments should be made
    2. When a potential comparable transaction is identified and if one or more material differences are affecting the price then, comparability adjustments can possibly neutralize the effect.
    3. Comparability adjustments may include the effect of quantity discounts, delivery terms, contractual terms, and minor product difference
    4. In this case, controlled transactions can be adjusted based on internal comparables. So, transfer price can be treated as AED 11,000 per MT (12,000-1,000). As a result, the profit of ABC Ltd will be increased by AED 1000, and the same will be considered during the computation of tax liability.

    Frequently Asked Questions

    1. Whether TP documentation is applicable to entities having minimal related party transactions?

      A business will have to maintain a master and local file (with format and content consistent with the requirements prescribed under OECD BEPS Action 13) where the arm’s length value of their Related Party transactions exceeds a certain threshold in the relevant tax period. Threshold will be part of UAE transfer pricing regulations.

    2. Are the UAE Transfer pricing regulations requirements applying to all domestic as well as international transactions?

      Yes, as per the current announcement transfer pricing is applicable to all related party transactions.

    3. Is it true that TP documentation in UAE is not required for small and medium enterprises or start-ups?

      No, there is no such exclusions for SMEs or start-ups. As per the current information from MoF, TP documentation applies based on threshold-related party transactions. Any specific exemptions will be stated in the CT Law yet to be published.

    4. What are documentation requirements under corporate tax regime?

      Business needs to maintain 3-tier documentation with the format and content consistent with OECD BEPS Action 13. It includes:

      1. Master File
      2. Local File and
      3. Country by Country Report (CbCR)
    5. What all are the internationally recognised transfer pricing methods?

        Traditional transaction methods

        1. Comparable uncontrolled price method (CUPM)
        2. Resale price method (RPM)
        3. Cost-plus method (CPM)

        Transactional profit method

        1. Transactional profit split method (TPSM)
        2. Transactional net margin method (TNMM)
    6. Whether the entity can apply any other method other than internationally recognised methods?

      Yes, different method where the business can demonstrate that the specified methods cannot be reasonably applied to determine an arm’s length result.

    7. Is it necessary to prepare Transfer pricing documentation if engaged only in domestic related party transactions?

      Yes, TP documentation is applicable for all related party transaction if it exceeds the threshold (yet to be announced) irrespective of domestic or cross border transactions

    8. When the UAE transfer pricing regulation become effective?

      The UAE CT regime will become effective for financial years starting on or after 1 June 2023. So, transfer pricing regulation also applicable from this date.

    9. Will submitting disclosure information requirement be applicable to all entities?

      Yes, every business entity will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons irrespective of volume of such transactions.

    10. What are the compliance requirements for the payments or benefits to connected person?

      Payments or benefits to connected persons by business should demonstrate that payments or benefits:

      • Corresponds with the market value of the service provided; and
      • Is incurred wholly and exclusively for the purposes of the taxpayer’s business.

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