Transfer pricing involves setting prices for goods and services sold between affiliated companies. With the introduction of corporate tax in the UAE, transfer pricing has become an essential compliance issue for multinational enterprises (MNEs) and companies engaged in related party transactions. This article provides insights into the transfer pricing process and key regulations under the UAE corporate tax system
UAE Corporate Tax Transfer Pricing Regulations
According to the Federal Decree-Law No. 47 of 2022, corporate tax was implemented in the UAE starting from June 1, 2023. The country's taxation laws, particularly Article 34, address transfer pricing and regulate related party transactions by applying the arm’s length principle.
Objectives of Transfer Pricing Rules
The primary goals of transfer pricing rules are to:
- Prevent profit shifting.
- Ensure that profits are taxed where the economic activity occurs.
- Alignment with OECD Guidelines
To establish a transfer pricing system in the UAE, the government has adopted many of the recommendations from the OECD transfer pricing guidelines.
- Relates to related party transactions as contemplated in the Corporate Tax Law. This includes associated enterprises, branches, etc.
- Transactions must be done at independent prices; this is at arm's length.
- Fines for non-compliance that are between 5 percent and 10 percent of adjusted profits.
- Transfer pricing documentation that includes the master file, the local file, and the country-by-country reporting.
The arm’s length price must be determined by applying the transfer pricing methods that have been recognized by the OECD.
Transfer pricing UAE Process
The typical process that needs to be followed by companies to comply with UAE transfer pricing regulations can be summarized in the following steps:
- Identification of Related Party Transactions
This entails the process of identifying all the transactions that exist between the Company’s UAE entity and a related foreign entity. These are imports, exports, services, loans, and such things as royalties, and so on.
- Functional and Risk Analysis
Functional analysis has to be conducted to identify functions of every subject; the assets used as well as risks assumed in the transaction. It is from this analysis that the comparability analysis is done.
- Selection of Transfer Pricing Method
According to the analysis of the function, one of the five transfer pricing methods recognized by the OECD should be chosen – comparable uncontrolled price, resale price, cost plus, transactional net margin, or profit split method.
- Comparability Analysis and Benchmarks
Comparable uncontrolled transactions are determined with data from the public domain. Concessions are made for these differences and an Arm’s Length Price range is set.
- Documentation and Master File
This is recorded on a local file with the report of each country succeeding in the analysis and calculations of the appropriately correlated total. An annual master file has to be come up with for the multinational group as well.
- Certification and Compliance
The transfer pricing study needs to be certified by a transfer pricing advisor, as mentioned earlier. Compliance also entails retention of the documents and reporting of related parties’ transactions in the tax returns.
Read more: What expenses are deductible under UAE corporate tax?
Transfer Pricing Methods
Some of the five recognized transfer pricing methods that can be applied in the UAE include the following:
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Comparable Uncontrolled Price (CUP)
Divide the price used in an internal transaction between two affiliates of the same group by the price that might be charged for the same product or service in an external, arm’s length transaction.
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Resale Price Method (RPM)
The backward method with third-party resale price minimized by gross margin is not suitable for determining the arm’s length price for purchase from the related party.
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Cost Plus Method (CPM)
It employs the costs of the related party supplier, the desirable markup at an arm’s length, to estimate the transfer price for the good or service transfer.
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Transactional Net Margin Method (TNMM)
Examines net profit margin ratios of the related party with similar companies and standardizes the transfer price to net margin of an arm’s length.
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Profit Split Method (PSM)
Focuses on relative supply chain member’s net profit sharing from contracts that exist and governs the economic contribution of each participant.
Transfer Pricing Compliance
Compliance with UAE transfer pricing regulations involves the following key requirements on an annual basis:
- Ensuring that you have relevant, real-time documentation that fits into the mentioned three-tiered structure.
- Submitting the country-by-country report to FTA for MNE groups within 12 months of the end of the company’s assessment year.
- Submitting related party transactions including the applied transfer prices in the tax returns and reports.
- The certification of the transfer pricing report by an independent advisor shows that the methods used to analyze the company’s operations are credible and valid.
- Maintaining the documentation ready for review when audited for taxes so that appropriate treaties on transfer pricing detailed in the returns are confirmed.
- This includes the criteria of reporting intra-group transactions amounting to above AED 3 million under the general mandatory disclosure rules.
Failure to do so may lead to penalty, adjustment of profit and imposition of withholding tax in the case of dealings with non-resident related parties. It is therefore important to address this issue through proper planning and documenting procedures.
FAQs
What is transfer pricing?
Transfer pricing therefore can be defined as pricing of goods and services produced by one business affiliate and then sold to another affiliate in a different business establishment.
What is the arm's length principle?
This principle implies the transfer prices established for relations between related parties should be competitive to those of unrelated parties dealing in equal commodities under equal or comparable conditions.
What are the TP methods allowed?
The five OECD-approved transfer pricing methods are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Transactional Profit Split Method
Seek the Expert Services of Top Tax Consultants in UAE
Therefore, transfer pricing becomes an essential factor to consider for every organization with operations in the UAE regarding corporate tax to be effective from 2023. To thrive in today’s complex global economy, it is essential that companies have adequate knowledge in transfer pricing regulations, relationship with related parties and necessary documentation. Due to the recent development of the Transfer pricing regulations UAE, transfer pricing compliance requires seeking help from corporate tax consultants in UAE.