The United Arab Emirates Corporate Tax Law establishes the corporate tax regime that is imposed on juridical persons and business income in the UAE. In accordance with the Corporate Tax Law, the standard corporate tax rate of 9% has been imposed on the taxable income. The UAE seeks to align its domestic transfer pricing rules with international standards established by the Organization for Economic Co-operation and Development (OECD) and as reflected in the OECD Transfer Pricing Guidelines. In particular, the UAE framework is designed to comply with BEPS Action 13 Project, which relates to transfer pricing documentation and country-by-country reporting.
The UAE also draws from Ministerial Decision No. 97 of 2023, which was issued by the UAE Cabinet and provides detailed transfer pricing guidelines and documentation standards for related party transactions. The guidelines propose governing transactions between related parties from a tax perspective and recommend documentation standards to demonstrate compliance with the arm's length transactions principle.
Impact on Corporate Taxation of Multinational Groups
The transfer pricing rules have important implications for the corporate tax positions of multinational enterprise (MNE) groups operating in the UAE. An MNE's transfer pricing policies for intercompany transactions can influence the allocation of profits between its constituent entities located in different tax jurisdictions.
For example, consider an MNE group with consolidated group revenues of AED 3.15 billion for the most recent financial year. The group has a UAE-based subsidiary that earned profits of AED 200 million from related party transactions. If the prices applied to these intercompany deals were found to be non-arms length by the Federal Tax Authority (FTA), the FTA could adjust to increase the UAE entity's taxable profits. This would lead to higher corporate tax liability in the UAE of up to AED 18 million (9% of the additional AED 200 million in profits).
On the other hand, an MNE could also seek to minimize its overall global tax burden by implementing transfer prices that shift profits from higher tax jurisdictions like the UAE to territories with lower or zero rates of corporate income tax. However, aggressive tax planning of this nature increases the risk of penalties from tax authorities for non-compliance with the arm's length transactions principle.
Organizational Structure and Business Activities Affect Analysis
The FTA will consider an MNE group's overall organizational structure, business activities, and financial performance when evaluating transfer pricing arrangements between related parties. Key factors that could influence the FTA's transfer pricing analysis include:
- The functions performed, assets employed, and risks assumed by entities involved in intercompany transactions
- The terms and conditions of contractual agreements between related parties
- The economic circumstances of the markets in which the group operates
- Industry benchmarks and comparable from uncontrolled transactions
MNEs must therefore maintain thorough documentation of these organizational realities and the commercial rationales underpinning their transfer pricing policies and methods. Failure to do so could result in the FTA disregarding non-arm length arrangements and imposing tax adjustments based on alternative assumptions.
Compliance Requirements for Transfer Pricing Documentation
To demonstrate compliance with the arm's length transactions principle, taxpayers meeting certain criteria must file a transfer pricing disclosure form with the FTA annually. This form requires disclosure of:
- Basic group information like consolidated revenues, related party dealings, etc.
- A description of the taxpayer's business activities and industry
- Details of related party transactions during the year
- The transfer pricing policies and methods applied
- Comparability and functional analyses supporting the arm's length nature of prices
The first reporting deadline is for financial years beginning on or after June 1, 2023. Taxpayers who do not submit the required documentation on time may face penalties of up to AED 20,000 per month of delay.
Impact of Free Zone Tax Regime
The transfer pricing rules also affect corporate tax planning for groups with a presence in UAE free zones. Entities licensed as "qualifying free-zone persons" benefit from a 0% corporate tax rate on qualifying profits and activities.
By carefully structuring intercompany dealings, an MNE could shift profits from taxable UAE entities to free zone subsidiaries through strategic transfer pricing. However, the FTA actively monitors for such arrangements and may disregard any that lack commercial substance or do not meet the arm's length standard. Non-compliant free zone entities also risk losing their preferential tax status.
Penalties for Non-Compliance
Failure to comply with the transfer pricing rules may result in penalties. The penalties can be significant and may include:
- Fines: The FTA may impose fines on MNEs that fail to comply with the transfer pricing rules.
- Adjustments to taxable income: The FTA may adjust the taxable income of MNEs that have not applied the arm's length principle to their transactions with related parties.
- Additional tax: The FTA may impose additional tax on MNEs that have underpaid tax as a result of not applying the arm's length principle.
In summary, careful adherence to the transfer pricing framework is essential for MNE groups to manage their UAE corporate tax profile and avoid disputes and penalties. Proper documentation demonstrating arm's length dealings is the best practice for reducing compliance risks.
Conclusion
The corporation tax implications of the UAE's transfer pricing rules are significant for multinational enterprises conducting related party transactions. By aligning its domestic standards with international norms, the UAE aims to prevent BEPS risks while providing certainty for compliant businesses. MNE groups must understand how their transfer pricing policies impact the allocation of profits and taxes between constituent entities. Maintaining robust transfer pricing documentation is also crucial to demonstrate adherence to the arm's length transactions principle and avoid disputes and penalties.
Read More: Transfer pricing rules in UAE