Transfer Pricing Compliance in the UAE

What is Transfer Pricing Compliance?

Transfer Pricing refers to the pricing of transactions between Related Parties or Connected Persons. Although these terms are specifically defined under the UAE corporate tax regulations, they broadly refer to parties linked through ownership, control, or close relationships. For example, if a parent company sells goods to its subsidiary, the parent and subsidiary are considered Related Parties. A transaction or arrangement between such Related Parties or Connected Persons is called a Controlled Transaction.

Transfer Pricing Compliance involves applying the Arm’s Length Principle to all Controlled Transactions. The Arm’s Length Principle requires that there should be an appropriate degree of independence between parties related to each other, and that transactions between them must be priced at Market Value, as if they were between unrelated parties. The necessary documentation must also be maintained to demonstrate compliance.

How the Arm’s Length Principle Applies to Controlled Transactions

The application of the Arm’s Length Principle follows three essential steps:

1. Identify and Analyse Transactions: Identify Related Parties, Connected Persons, and all Controlled Transactions such as goods, services, loans, or royalties. Perform a comparability analysis by examining relationships, functions, assets, and risks to delineate each transaction accurately. Then, compare it with similar, independent-party transactions to ensure the terms reflect open market conditions.
2. Select the Appropriate Method: Choose the Transfer Pricing method that best reflects the economic reality of the transaction. Commonly applied OECD-recognised methods include Comparable Uncontrolled Price Method (CUP), Cost-based Method (Cost Plus Method), Transactional Net Margin Method using Cost-Based PLI (TNMM), among others.
3. Determine the Arm’s Length Price: Establish the price or margin that independent parties would have agreed under comparable circumstances.

For centralised services, MNEs may use direct or indirect charge methods to determine the arm’s length charge. A simplified cost-plus 5% markup can be used for low-value-adding services, supported by proper documentation.

Transfer Pricing Documentation

Transfer Pricing documentation is mandatory for Taxable Persons meeting specific criteria and serves as evidence of compliance with the Arm’s Length Principle. The following documentation must be maintained:

• General Transfer Pricing Disclosure Form: All Taxable Persons must submit this form if the aggregate value of related party transactions (Book Value or Market Value) exceeds AED 40 million. Once this threshold is crossed, any transaction category above AED 4 million must also be disclosed. For Connected Persons, the schedule must be completed if aggregate transactions with at least one CP (including related parties) exceed AED 500,000, with individual payments or benefits over AED 500,000 per CP also disclosed. The form must be filed with the Corporate Tax Return for the relevant Tax Period.
• Master File and Local File: Required for Taxable Persons that are part of an MNE Group with consolidated revenue exceeding AED 3.15 billion, or any Taxable Person with standalone UAE revenue above AED 200 million in a Tax Period. However, if a Taxable Person is part of a UAE-headquartered group with no foreign operations, it is exempt from preparing a Master File even if it meets the revenue threshold but must still maintain a Local File if the threshold is met.

• Country-by-Country Report (CbCR): Required for MNE Groups with consolidated revenue exceeding AED 3.15 billion during the fiscal year immediately preceding the reporting fiscal year. The Ultimate Parent Entity must submit a CbCR notification by the last day of that Fiscal Year, confirming that it will file the CbCR. The CbCR must then be filed no later than 12 months after the last day of the reporting Fiscal Year. The CbCR provides aggregate information on the global allocation of income, taxes paid, and key indicators of economic activity across all jurisdictions where the MNE Group operates. It also lists all Constituent Companies, their tax jurisdictions of incorporation and residence (if different), and the nature of their main business activities.
• Additional Supporting Information: The FTA may request further documentation or evidence, which must be provided within 30 days of the request (or a later date specified by the FTA). This may include reasonable records for entities below the thresholds to demonstrate arm’s length pricing.

Challenges in Transfer Pricing

1. Complex Regulations: Interpreting and applying transfer pricing rules correctly can be challenging, especially for businesses with multiple jurisdictions.
2. Data Collection: Gathering accurate and comprehensive data on intercompany transactions, financial records, and supporting comparables is time-consuming and resource-intensive.
3. Identifying Comparables: Finding reliable comparable companies or transactions for benchmarking is particularly difficult in niche industries or regions with limited data.
4. Documentation Burden: Preparing Master Files, Local Files, and Country-by-Country Reports requires significant effort.
5. Risk of Disputes: Tax authorities may challenge transfer pricing arrangements.

How AKW Consultants Help

AKW Consultants helps businesses manage Transfer Pricing compliance under the UAE Corporate Tax regime by ensuring every Controlled Transaction meets the Arm’s Length Principle. If a transaction is not recorded at arm’s length in the Financial Statements, we assist in determining and applying the necessary Transfer Pricing adjustment to bring it into compliance.

Our team identifies Related Parties, performs detailed comparability analyses, and selects appropriate OECD-recognised pricing methods. We prepare and review Master Files, Local Files, disclosure forms, and Country-by-Country Reports. We also support clients in developing intra-group pricing policies, benchmarking transactions using global databases, and maintaining contemporaneous documentation to withstand FTA scrutiny and protect the integrity of their corporate tax position.