In the complex world of international finance, the UAE plays a pivotal role for many multinational corporations. Its strategic location and business-friendly environment make it an attractive hub for companies looking to expand their global footprint. However, navigating transfer pricing rules in the UAE is crucial for multinational companies to ensure they comply with tax regulations and maintain transparency in their financial dealings. In this blog post, we’ll delve into the key considerations and requirements for transfer pricing in the UAE.
Introduction to Transfer Pricing
Transfer pricing (TP) legislation globally serves a fundamental purpose: to prevent the manipulation of transaction prices in a way that distorts the taxable base. At the heart of TP regulations lies the arm’s length principle, which mandates that transactions between related parties should resemble those between unrelated entities under similar circumstances.
The Arm’s Length Price
The arm’s length price (ALP) is the cornerstone of transfer pricing. It signifies the price that would exist between two unrelated parties in a comparable transaction. This concept ensures that the consideration is purely commercial, avoiding any undue influence between related entities.
Related Parties and Connected Persons
The UAE’s rules for determining related parties are quite comprehensive and encompass various scenarios, including individuals related by kinship, legal entities with shared ownership, and partnerships. Additionally, the concept of “Connected Persons” extends the framework to prevent tax base erosion by individual owners of taxable businesses.
To ensure deductibility of payments or benefits provided to Connected Persons, businesses must demonstrate that these transactions align with market values and are incurred solely for the purpose of the taxpayer’s business.
UAE’s TP Documentation Requirements
Under Article 55 of the Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses, the UAE mandates that companies maintain transfer pricing documentation. The requirement of maintaining such documents would depend on the nature of transactions of the respective companies and the revenue threshold prescribed under the law. The key Transfer Pricing documentation that may be required to be maintained are as under:
- Disclosure: A disclosure form along with the Tax Return may be required to be filed containing information regarding transaction and arrangements with the Related Parties and Connected Persons. The format and the persons required to file such disclosure form has not yet been notified.
- Master File: A comprehensive disclosure containing information about the company’s transactions and arrangements with related and connected parties.
- Local File: A document outlining the specifics of these transactions, all in a format prescribed by the regulatory authority.
Master File and Local file is required to be maintained if any of the following conditions are satisfied:
- Where a taxable person is a Constituent Entity of a Multinational Enterprise Group that has a total consolidated group revenue of AED 3,150,000,000 or more in a tax period.
- Where a taxable person’s revenue during a tax period is AED 200,000,000 or more.
- Country-by-Country Report: A detailed report providing information on the global allocation of income, taxes paid, and other key financial data. This report is essential for ensuring transparency in multinational corporations’ financial activities. (Applicable if the Ultimate Parent Entity of a Multinational Enterprise Group is a tax resident of UAE and the revenue of the group exceeds AED 3,150,000,000).
This comprehensive documentation ensures that transactions between related parties are conducted at arm’s length, preventing profit shifting and tax avoidance while complying with international standards.
Methods for Proving Arm’s Length Transactions
To ensure that your multinational corporation’s intercompany transactions adhere to the arm’s length principle, various TP methods can be employed, as outlined by the OECD TP Guidelines and the Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses:
- Comparable Uncontrolled Price Method (CUP): Used to verify if a controlled transaction’s price aligns with market prices.
- Resale Price Method (RP): Compares the gross profit margin of goods purchased and subsequently sold with the market range.
- Cost Plus Method (CP): Compares the gross margin on costs with the market range of gross margin on fees in comparable transactions.
- Transactional Net Margin Method (TNMM): Analyses profitability at the operating profit level, considering differences in transaction terms.
- Profit Split Method (PS): Compares the allocation of profit from the transaction with comparable transactions.
The Role of Transfer Pricing in Multinational Corporations
For multinational corporations, transfer pricing plays a critical role in balancing profits among various entities within the organisation. The Transfer Pricing provisions play an important role in ensuring that the transactions between Related Parties are at Arm’s Length Price and multinational corporations do not enter into transactions with group entities in other jurisdictions at unusual prices, effectively shifting profits to regions with lower tax obligations.
Risks and Challenges with Transfer Pricing
Some high-risk transfer pricing issues include mismatches between intellectual property ownership and risk control, centralised pricing models lacking substance, high-risk transactions, and discrepancies between legal agreements and pricing policies. Companies also face challenges in documenting transactions to prove their arm’s length nature.
Tackling Documentation Challenges in Transfer Pricing
Compliance with the UAE’s transfer pricing regulations has become more demanding, and companies must collaborate with tax advisors and transfer pricing specialists to develop and implement policies that adhere to UAE regulations and international best practices. While this process requires time and effort, it’s essential to reduce tax and transfer pricing risks.
In conclusion, transfer pricing is a critical aspect of multinational business operations in the UAE. Compliance with the UAE’s regulations and international standards is essential to navigate the complexities and challenges associated with transfer pricing while minimising tax risks.
It’s also important to remember that these regulations are subject to change, so staying informed and adapting to evolving tax laws is crucial for businesses operating in the UAE.
Navigating the intricacies of transfer pricing requires expertise and a deep understanding of evolving tax regulations. Our team of experts at AKW Consultants is here to guide you through the process and ensure your multinational corporation’s financial activities are compliant and efficient. Contact us today: [email protected]