What does UAE Transfer Pricing mean?
- Transfer Pricing describes the process of figuring out how much a certain entity inside a multinational group will pay for the exchange of products, services, or intellectual property.
- The pricing of goods and services that are traded between businesses that share management is referred to as transfer pricing. The amount charged, for for example, when a subsidiary firm sells products or provides services to its sister company or holding company is known as the transfer price.
- Explaining transfer pricing. The process of determining prices for the transfer of products, services, and intellectual property between related parties is known as transfer pricing. A multinational enterprise group’s branches and subsidiary enterprises are examples of related parties.
The Ministry of Finance has made a decision about the documentation requirements for transfer pricing for corporate tax purposes.
- In an effort to enhance equity and openness in the UAE tax system, the Ministry of Finance has released Ministerial Decision No (97) of 2023 on the Requirements for Maintaining Transfer Pricing Documentation.
- To guarantee that the pricing of transactions between related parties and connected persons, such as businesses that are a part of the same multinational enterprise (MNE) group, is not influenced by their relationships, Federal Decree Law No. (47) of 2023 on the Taxation of Corporations and Businesses enforces transfer pricing rules and documentation requirements.
- His Excellency “The transfer pricing documentation requirements aim to ensure taxpayers can prove the arm’s length basis for pricing their transactions with related parties and connected persons using standardized files,” stated Younis Haji Al Khouri, deputy secretary of the Ministry of Finance. The Decision also establishes the threshold for creating master files and local files as well as the exclusions for disclosing specific transactions in order to lessen the burden of compliance on taxpayers.
- His Excellency also stated that by offering small and medium-sized enterprises clear direction and reducing their compliance obligations, the transfer pricing paperwork requirements will support equity and transparency in the UAE tax system. The ruling confirms the UAE’s dedication to creating a climate that is conducive to business, promotes economic diversification, fosters growth, and increases the competitiveness of the country on the global stage
- The Decision outlines the conditions under which taxpayers must keep transfer pricing records, namely a master file and a local file. These conditions include having revenues of at least AED 200 million in the relevant tax period or being a member of an MNE group that had a total consolidated group revenue of at least AED 3.15 billion in the relevant tax period. The Decision also describes the agreements or transactions that will be recorded in the local file.
Applicability of Domestic Transfer Pricing & (TRESH HOLD)
Is there a threshold that relates to whether the TP applies to domestic transactions?
- The UAE guidelines and the UAE TRANSFER PRICING law specifically mention that all the transaction related parties or the connected persons. This is in contrast to the expectations of all the industrialists, clients, and industry participants, who were hoping for some relief or either a material threshold for domestic transfer pricing regulation.
- All transactions, whether domestic or international, must be carried out at arm’s length; taxpayers are not granted any relief in regards to TRANSFER PRICING, and as of right now, no threshold has been established.
- For example, I have to follow by the TRANSFER PRICING rules, which means there is no threshold, if I transfer 10 or 100 dirhams with linked parties.
A Tax Group (When supplies within the group, you do not need to maintain any type of TP or pay VAT, does this apply within the Corporate Tax from a TP perspective as well)?
- The law states that transactions between members of a tax group will be removed under article 42 of the UAE TRANSFER PRICING law CORPORATE TAX law, but it makes no mention of or clear statement that they are exempt from adhering to the principles. Therefore, even if a business plans to form a tax group, it is imperative that they make sure that any intercompany transactions between members of the group will be conducted on an arm’s length basis.
- According to Ministerial Decision 97, even domestic transactions carried out by taxable people in the United Arab Emirates are subject to the same 9% tax rate. However, the transactions must be conducted on an arm’s length basis and need not be disclosed in local files for documentation purposes. It’s advised, suggested, and recommended that all businesses make sure they have TRANSFER PRICING policies in place (assuming that in the future, if any member wishes to leave the tax group, they must undertake the TRANSFER PRICING policy arm’s length).
- Members forming tax groups also need to make sure they are adhering to TRANSFER PRICING within the tax group.
Documentation Need to maintain for Transfer Pricing?
- Every taxable person is required to keep three different kinds of documentation.
1. local file
2. Master data
3. Disclosure of Transfer Pricing Form - Taxpayers who are taxable in the United Arab Emirates are granted relief in that they are only required to maintain a local file or master file if their revenue exceeds AED 200 million DIRHAMS. If their revenue is less than 200 million DIRHAMS but they are a part of an MNE group whose console group revenue exceeds AED 3.15 billion DIRHAMS, they must also prepare a local file or master file.
- It is also advised to have an internal memo if creating a local file or master file is not necessary. This is because the FTA may request any supporting documentation for all of the pricing for grouping transactions when the audit evaluation is underway.
- The law states that paperwork and regulations pertaining to transfer pricing become applicable only when the threshold surpasses 200 million DIRHAMS, at which point only local and master files need to be kept up to date.
Why the benchmarking is so critical in Arms Length Pricing?
- The first step is to engage in a related party transaction. The second is to establish an arms-length price between group entities. The third step is to justify the arms-length price. To do this, you must first establish that the price between the related parties of the group is at fair market value or that an arms-length basis benchmark is the only criterion or tool that can be used to demonstrate why the price is at arms-length.
- There are numerous databases available for the proof benchmarking exercise, which identifies third-party independent compatibles operating in comparable industries (such as local entities in the UAE performing comparable functions & activities). By applying both qualitative and quantitative filters, we are able to identify some compatibles and determine their arms-length range by taking financial information into account. Regarding benchmarking, however, the TRANSFER PRICING guide has given the taxpayer an additional peace of mind. It states that benchmarking need not be done annually; if it is done once, it can be repeated every three years as long as the financial figures are updated. This is a very helpful UAE transfer pricing guide.
Disclaimer: Above all information is for general reference only and sourced from internet, before making any kind of decision please visit the authorized websites of authorities and service providers.