The process of determining the price involved in International transactions between two or more related parties with reference to Corporate Tax UAE is referred to as "Transfer Pricing." When an associated company barters goods or supplies services to its main company or another party concerned business, the trade value charged by the principal corporation to non-affiliated groups is figured out as “transfer pricing”. Multinational Corporations use Transfer pricing as a common business method to divide revenues between their international and domestic business activities. Under the UAE Corporate Tax Law, provisions for UAE Transfer Pricing are implemented. Thus, it is advisable for taxable persons to seek the services of Tax Consultants Dubai to efficiently implement Transfer Pricing standards and to stay compliant.
Implementation of the transfer pricing system in UAE
Transactions between the following parties are required to comply with the Rules of Transfer Pricing as stated below:
- Connected Individuals;
- Associated Parties;
To avert manipulation of the Taxable Income, the UAE corporate tax law furnishes Transfer Pricing Rules.
What is the implication of the arm's length principle to transactions?
The principle of arm’s length is applied to transactions in order to determine a Taxable Person's Taxable transactions, Income, and agreements between Related Parties.
What is Transfer Pricing Methodology?
If the Related Parties' arrangement or transaction satisfies the conditions of arm's length, it is essential to confirm that the outcome is compatible with the following while applying the strategy of transfer Pricing rules as listed below:
- Cost-Plus Approach
- The Transactional Net Margin Method, or TNMM
- The CUP technique (Comparable Uncontrolled Price technique),
- Transactional Profit Split Method
- The method of Profit Split
- The Sale Price Approach
- Combinations of techniques are possible:
To determine the arm's length price, the parties are free to employ any one of the ways or a combination of methods. Whereas, the taxable person must demonstrate that no legal techniques can be applied to the transaction or arrangement under examination in a reasonable manner.
Choosing and Using Transfer Pricing
It is imperative to consider how to calculate the arm's length price when selecting and using a transfer pricing technique, there are notable considerations which include:
- The contract terms for a transaction
- Characteristics of any agreement
- Essential provisions of the contract while making a transaction, depending on the state of the economy.
- Activities undertaken, risks assumed, and resources utilized by Related Parties
- Related Parties' commercial strategies
- The Federal Tax Authority looks at expenses and revenue upholding the arm's length standard.
Read more: What is Country-by-Country Reporting in UAE?
Considerations by Tax Authorities regarding expenses and income
The Federal Tax Agency will consider the following factors when deciding whether the income and expenses resulting from the contract or transactions engaged into by parties associated with the arrangement satisfy the arm's length principle:
- The parties' decision regarding the implementation of a transfer price approach, as well as all factors examined.
- There could be instances where using the transfer pricing approach, one has reached different arm's length financial outcomes or indications that are appropriate for establishing the arm's length result.
- Any requirements put out by the Authority apply to this.
- When a transaction does not follow the arm's length rule, the tax agency will adjust the transfer pricing.
- If the conclusion of the arrangements and transaction does not meet the criteria of the arm's length principle, the Federal Tax Administration modifies the taxable income in order to achieve the right result in line with the particulars and conditions of that transaction or arrangement.
The information used to carry out Adjustments
If the Taxable Person's Income is adjusted, the Authority will give the Taxable Person the information used in that adjustment, comparable modifications to the Taxable Earnings of the Relevant Parties. In addition, the Authority will be required to make comparable modifications to the Taxable Earnings of the Relevant Party if changes occur to the Taxable Earnings of the Taxable Person. A request for equivalent changes in the taxable earnings must be filed from the Taxpayer to the Federal Tax Agency in circumstances where modifications have been made by an International Competent Authority in order to fulfil the Arm's length Standard.
Avail the services of Tax Consultants in Dubai
The objective of the transfer pricing law is to provide a framework that tax authorities can employ to stop multinational corporations from artificially shifting earnings in order to benefit from variations and discrepancies in tax laws among various countries. Therefore, it is advisable for taxable persons to seek the services of Tax Consultants in UAE to efficiently implement Transfer Pricing standards and to stay compliant. Thus, contact us and we shall be glad to assist you.
Mostafa is a qualified Tax Consultant with over 5 years of experience gained in diverse intricate tax matters, he has high expertise in conducting tax negotiations and investigations with the Federal Tax Authority and other external Tax Bodies. He has vast experience in reviewing and drafting tax documents. Mostafa has also advised on a plethora of tax matters, he draws much attention to tax filing procedures and to offering professional investigations to underlining tax complexities.