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
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.
The primary goals of transfer pricing rules are to:
To establish a transfer pricing system in the UAE, the government has adopted many of the recommendations from the OECD transfer pricing guidelines.
The arm’s length price must be determined by applying the transfer pricing methods that have been recognized by the OECD.
The typical process that needs to be followed by companies to comply with UAE transfer pricing regulations can be summarized in the following steps:
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 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.
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.
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.
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.
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?
Some of the five recognized transfer pricing methods that can be applied in the UAE include the following:
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.
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.
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.
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.
Focuses on relative supply chain member’s net profit sharing from contracts that exist and governs the economic contribution of each participant.
Compliance with UAE transfer pricing regulations involves the following key requirements on an annual basis:
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.
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.