Transfer Pricing in UAE
The United Arab Emirates (UAE) joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on May 16, 2018.
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The introduction of the Corporate Tax Regime in the UAE, effective June 1, 2023, would also bring Transfer Pricing Regulation, mandating arm’s-length transactions between connected parties.
The United Arab Emirates (UAE) joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on May 16, 2018.
By accepting the Inclusive Framework, the United Arab Emirates has committed to implementing BEPS basic standards, including Transfer Pricing Documentation and Country-by-Country Reporting (“CbCR”).
What is Transfer Pricing?
“Transfer Pricing” refers to the transaction price between two connected parties. In a tax context, this type of transaction is conducted between two affiliated businesses and is frequently referred to as a “Controlled” transaction. Therefore, “Transfer Pricing” is the price at which a business transfers:
- Physical commodities
- Intangible goods or
- Provides services to affiliated businesses.
What is the Arm's Length Price?
The arm’s-length price (ALP) of a transaction between two affiliated firms is the price that would have been paid if the transaction had occurred between two equivalent independent and unconnected parties, where the primary consideration was commercial.
Transfer Pricing Documentation
Businesses are required to comply with transfer pricing standards and documentation requirements derived from the OECD Transfer Pricing Guidelines.
Transfer pricing documentation will help taxpayers demonstrate that their transactions comply with the arm’s length principle, so preventing transfer pricing problems. If the amount and complexity of a company’s international and domestic activities expand, transfer pricing concerns will arise, resulting in a considerable increase in compliance expenses for taxpayers.
In this regard, it is observed that clear and broadly approved documentation norms can reduce compliance expenses that might otherwise result from a transfer pricing disagreement. To address such challenges, a company must have the necessary resources, such as an in-house or outsourced tax expert with knowledge of transfer pricing rules and foreign transactions.
Generally, a self-declaration about conformity with TP requirements must be provided online alongside the tax return.
Why Transfer Pricing?
Transfer Pricing regulations are applicable under the following conditions:
When businesses in the same country are divided into multiple departments or divisions and
- Business Management demands the identification of value-generating company activities.
- A division of the group offers services or transfers items to another division of the same company, and it is necessary to determine the profitability of each division;
In the case of international transactions:
- When transactions involving tangible supplies, services, finances, or intellectual property occur between companies that share ownership and control.
Documentation Model Under OECD Guidelines
In accordance with OECD transfer pricing rules, authorities use a three-tiered strategy for transfer pricing paperwork, which includes:
Master file – contains standard data for all MNE group members
Local file — transactions involving local taxpayers
Country by Country Report – Global allocation of the MNE group’s income and taxes paid, indicators of the location of the MNE group’s economic activities.
Local File
In accordance with applicable laws and regulations, business entities that engage in transactions with linked parties must keep accurate records and files. The local file for OECD recommendations includes:
Regional Entity
- Description of local entity’s management structure
- A thorough overview of the firm and its strategies
- Key competitors
Controlled Transactions
- A detailed description of material-controlled transactions and their context
- Amount of intra-group payments and receipts for individually controlled transaction category.
- Identification of related businesses and their relationships.
- Copies of all significant interfirm agreements
- Comparability and functional analysis with a focus on changes relative to past years
- A description of the most appropriate transfer pricing systems and the justification for their selection.
- A summary of the underlying assumptions of the method selection
- A listing and summary of comparable uncontrolled transactions
- A description of all comparative modifications made
- A summary of the financial data used in the implementation of the chosen TP methodology.
Financial data
- Financial information and an allocation schedule are utilized for the TP approach
- A summary of financial data schedules for comparable uses and their source.
TP Methods under OECD guidelines
By selecting and implementing the most applicable transfer pricing method, the arm’s length price for a controlled transaction can be established. Five transfer pricing strategies are recognized by OECD
Traditional Transaction Method
- Comparable Uncontrolled Prices Process
- Resale Price Technique
- Cost Plus Procedure
Transactional Profit Method
- Transactional Profit Splitting Method
- Transactional Net Margin Method
Financial data
- Financial information and an allocation schedule are utilized for the TP approach
- A summary of financial data schedules for comparable uses and their source.
Companies should select an acceptable transfer pricing technique by examining a variety of variables, such as the availability of information, the strengths and weaknesses of the transfer pricing method, the method’s suitability in light of the types of the transactions, etc. Once the transfer pricing method and a credible comparative are identified, a range of arm’s length pricing can be determined.
There may also be an option in the rules to use methods other than the approved Transfer Pricing Methods listed above, provided the Taxable Person can determine a reliable measure of an Arm’s-Length price and supporting documentation and the proposed method satisfies the requirements of UAE tax law.
Advisory
We can give you advice and help with all of your TP needs and make sure that the policies are strong and aligned with value creation, designing new prices, or reviewing your current policies..
We can provide an inclusive range of services to help our clients optimize their tax planning through effective transfer pricing policies. We specialize in developing and implementing efficient transfer pricing policies that are compliant with the regulations of the countries involved in the transaction.
Documentation and Reporting
We provide comprehensive services to ensure that our clients are compliant with all the transfer pricing regulations in the UAE. Once an audit plan is approved, we begin our fieldwork by conducting walk-throughs, inquiries, and questionnaires to collect necessary information and data. Furthermore, we keep our clients updated with the progress of the audit process and its status at all times. We also make sure to use data analysis techniques to identify any discrepancies or issues, if any, and apply corrective actions accordingly.
frequently asked questions
Yes, the current announcement says that transfer pricing applies to all transactions between related parties.
No, there are no exceptions for SMEs or new businesses. Based on what we know now from MoF, TP documentation is required for transactions with related parties that meet a certain threshold.
Yes, if the business can show that the specified methods can't be used in a reasonable way to get an arm's-length result.
Why Choose ADEPTS
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At Adepts Chartered Accountants, our team consists of highly skilled professionals with extensive experience in managing complex regulatory and accounting standards. We are proficient in both local and international regulations, ensuring our services are accurate and fully compliant.
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