UAE Transfer Pricing Guidelines

Transfer Pricing in UAE - AKW Consultants

Introduction

The Corporate Tax Law (‘CT Law’) introduced in the UAE comes with a bundled package along with the Transfer Pricing provisions also being introduced in the UAE along with the CT Law. Transfer Pricing provisions play a significant role in the tax system and have a significant impact on the tax liability of a company or a group. Transfer Pricing provisions are complex and are often litigative and debatable.

Businesses in UAE are used to conducting business in a free manner wherein they are not required to follow any rules or guidelines with respect to their business transactions especially transactions with Related Parties and Connected Persons to whom the Transfer Pricing provisions now apply. While we covered the basic Transfer Pricing provisions in our earlier blog, the FTA (Federal Tax Authority) has now released a detailed guide on Transfer Pricing in UAE which aims to provide important guidance and step by step approach to be followed for benchmarking and complying with Transfer Pricing provisions in UAE. Some of the key aspects of the guide are discussed below.

Applicability/Scope of Transfer Pricing

While the CT Law itself provides the scope and the transactions to which Transfer Pricing provisions will apply, the recent guide released by FTA provides further clarifications and guidance on identifying controlled transactions, conducting the Functional and comparability analysis, selecting comparable and establishing the Arm’s Length price for transactions between Related Parties and Connected Persons.

The guide offers further clarity on the definition of Related Parties and Connected Persons by providing a detailed explanation of kinship and also emphasizes how the substance of the transaction will play a crucial role e.g. even if a person does not have ownership of more than 50% of an entity, the guide lays down certain scenarios of how the person can still exercise significant influence/control over another person and therefore can be said to be a Related Party and accordingly, the Transfer Pricing provisions will apply.

The guide also reiterates that even if the entity is exempt from Corporate Tax, has chosen to opt for Small Business Relief, etc. it must adhere to Arm’s Length principles though it will not be required to maintain Transfer Pricing Documentation (Local and Master File).

Benchmarking

The guide provides detailed examples, guidance and clarification on benchmarking of transactions to which Transfer Pricing provisions apply. The guide provides guidance and examples on each of the prescribed methods of benchmarking.

Important aspects to be considered while benchmarking the transaction are contractual terms of the transaction, Functions performed, Assets used and Risks assumed by each person (FAR analysis), economic circumstances of the related persons, factors affective the geographical location, etc.

Further, some of the important aspects of benchmarking and determining the Arm’s Length Price (‘ALP’) which are discussed in the guide are tabulated below:

Benchmarking and Determination of ALP
Data rangeMultiple year data (3 years) to be considered. However, at least 2 years of data should be available to be accepted as a comparable.
Interquartile rangeLower quartile 25th and upper quartile of 75th are prescribed by the guide as interquartile range.
Preference of adopting comparable1. Local comparable
2. Regional (Middle East)
3. Other regions
Frequency of updating searchTo update financial data of comparable every year and to fully update the search process every 3 years.
Comparability adjustments that can be done– Working capital adjustment
– Capacity Utilisation adjustment
– Risk adjustment
– Forex adjustment
– Depreciation adjustment

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Transfer Pricing Documentation

In addition to the above, the guide also provides certain clarifications regarding the Transfer Pricing documentation to be maintained. Some of the key considerations are summarised below:

DocumentKey ConsiderationsFiling timeline
TP disclosure formThe form has not yet been released but it will contain data like the nature and value of Related Party transactions.To be filed along with the Tax Return i.e., within 9 months from the end of Tax period.
Master fileThreshold based applicability but it is clarified that not required to be maintained for a UAE headquartered group which is not an MNE group.To be maintained and filed within 30 days upon request by FTA.
Local fileThreshold based applicability, to be maintained if the threshold is breached.
CbCR (Country-by-Country Reporting)Threshold based applicability but not required to be maintained for a non-UAE headquartered group– CbCR notification to be filed before the last day of the tax period.
– CbCR to be filed within 12 months from the end of the tax period.

Conclusion

It is certain from the detailed explanatory guide issued by FTA that the UAE intends to implement Transfer Pricing provisions that align with the OECD guidelines and businesses will have to undergo a complex process and maintain extensive documentation which will surely require the right expertise to guide them in this process. The guide has provided various clarifications, however, there are still some untouched aspects for example there is still no guidance on benchmarking of remuneration paid to management and Connected Persons which are also covered under the ambit of Transfer Pricing. We will have to wait and watch for further clarifications from the FTA.

Reach out to AKW Consultants if you require any assistance in navigating through the complex UAE CT and TP provisions: info@akwconsultants.com

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