Transfer Pricing Guide Under Corporate Tax In UAE
Transfer Pricing Guide Under Corporate Tax In UAE
Setting prices for products and services sold between linked businesses is known as transfer pricing. Transfer pricing has become a crucial compliance concern for multinational enterprises (MNEs) and businesses involved in related party transactions since corporate tax was implemented in the United Arab Emirates. The transfer pricing procedure and important rules under the UAE corporate tax system are discussed in this article.
Regulations for Corporate Tax Transfer Pricing in the UAE
The UAE began implementing corporate tax on June 1, 2023, in accordance with Federal Decree-Law No. 47 of 2022. Transfer pricing is covered by the nation’s tax laws, especially Article 34, which uses the arm’s length principle to control related party transactions.
Objectives of Transfer Pricing Rules
Transfer pricing regulations’ main objectives are to:
- Avoid moving profits.
- Make sure profits are taxed in the location of the economic activity.
- Conformity to OECD Guidelines
Many of the recommendations from the OECD transfer pricing guidelines have been implemented by the UAE government in order to implement a transfer pricing system.
- pertains to linked party transactions as defined by the Corporate Tax Law. This covers affiliated businesses, branches, etc.
- At arm’s length, transactions must be completed at separate prices.
- penalties ranging from 5% to 10% of adjusted profits for noncompliance.
- Transfer price documents, such as the country-by-country reporting, the local file, and the master file.
- The OECD-recognized transfer pricing techniques must be used to calculate the arm’s length price.
The Arm's Length Principle
The arm’s length principle is the cornerstone of UAE transfer pricing legislation. According to this theory, connected parties’ prices should be determined as though they were independent and dealing with comparable situations. Comparing the terms of related party transactions with those of comparable transactions between independent parties is a common way to apply this notion. Companies must be able to show that this principle is followed in their inter-company pricing.
Procedure for transfer pricing in the UA
The following stages encapsulate the standard procedure that businesses must adhere to in order to comply with UAE transfer pricing regulations:
Finding Related Party Transactions
This comprises the process of locating every transaction that takes place between a related overseas entity and the company’s UAE business. These include loans, services, imports, exports, royalties, and more.
Risk and Functional Analysis
To determine the roles of each topic, including the assets utilized and the risks taken in the transaction, functional analysis must be carried out. The comparability analysis is conducted based on this analysis.
Choosing a Transfer Pricing Approach
One of the five transfer pricing strategies accepted by the OECD—comparable uncontrolled price, resale price, cost plus, transactional net margin, or profit split method—should be selected based on the function analysis.
Benchmarks and Comparability Analysis
Data from the public domain is used to determine comparable uncontrolled transactions. These variations are taken into account, and an Arm’s Length Price range is established.
Master File and Documentation
The results of each nation’s investigation and computation of the suitably correlated total are documented in a local file. For the multinational group, an annual master file must also be created.
Compliance and Certification
As previously stated, a transfer price advisor must certify the transfer pricing study. Maintaining records and disclosing transactions involving connected parties in tax returns are other requirements of compliance.
Methods of Transfer Pricing
Comparable Uncontrolled Cost (CUP)
The price that two affiliates of the same group may pay for the same good or service in an external, arm’s length transaction is divided by the price that is utilized in an inside transaction.
Method of Resale Pricing (RPM)
The arm’s length price for a purchase from a related party cannot be found using the backward technique, which minimizes the third-party resale price by gross margin.
Cost Plus Method (CPM)
It estimates the transfer price for the transfer of goods or services by using the related party supplier’s expenses and the desired markup at arm’s length.
Transactional Net Margin Method (TNMM)
standardizes the transfer price to net margin of an arm’s length and compares the associated party’s net profit margin ratios with those of comparable businesses.
Profit Split Method (PSM)
focuses on the relative net profit sharing of supply chain participants from existing contracts and controls each participant’s financial contribution.
Compliance with Transfer Pricing
The following essential conditions must be met annually in order to comply with UAE transfer pricing regulations:
- ensuring that your documentation is current, pertinent, and fits into the three-tiered structure described.
- submitting the MNE group’s country-by-country report to the FTA within a year of the conclusion of the evaluation year.
- filing tax returns and reports with related party transactions that include the applied transfer prices.
- An independent advisor’s certification of the transfer pricing report demonstrates the validity and reliability of the techniques employed to evaluate the business’s operations.
- keeping the paperwork prepared for examination during tax audits in order to verify the relevant transfer pricing treaties mentioned in the forms.
- This includes the general obligatory disclosure laws’ requirement to record intra-group transactions totaling more than AED 3 million.