Corporate Tax: How to prepare for a transfer pricing documentation campaign? (1/4)

Article 69 of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (hereinafter – “Corporate Tax Law”) application of the Corporate Tax Law, including transfer pricing regulations (hereinafter – “TP”), shall apply to Tax Periods starting 1 June 2023. Based on Art.?57 of Corporate Tax Law the Tax Period is either (1) the Gregorian calendar year, or (2) a financial year (12-month period) of a taxpayer.

Article 55 of the Corporate Tax Law specifies the TP documentation obligations. In particular, the TP documentation includes:

• General TP disclosure form;
• Master File;
• Local File;
• Country-by-Country Reporting (“CbCR”)
• CbCR Notification.

On 23 October 2023, the Federal Tax Authority (FTA) issued the Transfer Pricing Guide (TP Guide), hereinafter – “FTA TP Guide”). According to point 6.5 of FTA TP Guide the TP disclosure form is to be submitted alongside the Tax return within 9 months from the end of the relevant Tax Period. According to point 6.7 of FTA, the CbCR Notification is to be submitted no later than 12 months after the last day of each reporting year of the MNE Group in the UAE.

In particular, the earliest date when the first TP compliance documents should be submitted, i.e. the TP disclosure form, is 1 March 2025. The Master File and Local File should be provided within 30 days upon the tax authorities’ request. At the same time, the first reporting period (from 1 June 2023 to 31 May 2024) is already underway. Therefore, we believe that it is a good time to plan the work on the justification of prices applied in the controlled transactions and develop a methodology for TP documentation for the first reporting period subject to TP control.

To ensure that it is effective and does not take too long, it is important to prepare in time:

• to define the list of controlled transactions,
• to provide a complete package of documents and
• to assign duties to responsible personnel.

In this article, we will discuss 4 steps to start preparing now.

Step 1. Diagnostics of controlled transactions taking into account the new legislation

Know your counterparty

It is important for the employee responsible for controlling tax risks to have complete and accurate information on persons recognized as related and/or connected with your company and to keep this information up to date.

Related parties

According to Article 35 of the Corporate Tax Law Related parties are:

1. Two or more natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship.
2. An individual and a legal entity where alone, or together with a related party, the individual directly or indirectly owns a 50% or greater share in, or controls, the legal entity.
3. Two or more legal entities where one legal entity alone, or together with a related party, directly or indirectly owns a 50% or greater share in, or controls, the other legal;

OR two or more legal entities if a taxpayer alone, or with a related party, directly or indirectly owns a 50% share of each or controls them.

1. A Person and its Permanent Establishment or Foreign Permanent Establishment.
2. Two or more Persons that are partners in the same Unincorporated Partnership.
3. A Person who is the trustee, founder, settlor or beneficiary of a trust or foundation, and its Related Parties.

Connected parties

According to Article 35 of the Corporate Tax Law “Control” means the ability of a Person, whether in their own right or by agreement or otherwise to influence another Person, including:

1. The ability to exercise 50% or more of the voting rights of another Person.
2. The ability to determine the composition of 50% or more of the Board of Directors of another Person.
3. The ability to receive 50% or more of the profits of another Person.
4. The ability to determine, or exercise significant influence over, the conduct of the Business and affairs of another Person.

Step 2. Collection of available data on controlled transactions - check yourself against the checklist

Ensure that with respect to the controlled transactions identified in Step 1, you can answer the following questions:

• Do you maintain the archive of contracts, primary and any other related documents for the controlled transactions? (according to Art. 55 of the Corporate Tax Law a taxpayer should provide the tax authorities with any information to support the arm’s length nature of the controlled transactions or arrangements within 30 thirty days following the request).

• Are employees with information about controlled transactions available for interview? In particular, the subject matter of the transactions, their purpose, their pricing and the circumstances of the actual interaction between the parties.
• Is contact with the counterparty well-established and can additional transaction documents be requested from the counterparty?
• For intragroup transactions: does the Group have a unified TP policy? Do its provisions apply to your deals?

Step 3. Risk diagnosis - prioritizing the analysis

As part of this step, it is necessary to determine whether all transactions identified as controlled at the diagnostics stage are material to the entity and require the preparation of TP documentation. If the amount of transaction risk does not exceed the cost of preparing TP documentation, it may be possible to dispense with some of the procedures (e.g. by setting a 'materiality threshold').

Important: Pay attention to exceptions when the transaction itself is not significant in terms of the turnover amount, but acts as a "concomitant" to a larger transaction and should be analyzed together with it (for example, a transaction on royalty payment in favor of an interdependent supplier may complement the main transaction on intra-group imports).

Once material transactions have been identified, divide them into groups to facilitate further decision-making and organization:

• Unique – deals that require special analysis and have a specific subject matter, and
• Homogeneous – a group of transactions with a common subject matter that can be analyzed using a common approach.

Step 4. Work planning

Determine what information should be prepared and presented by your company's employees. Divide the blocks of information between the services of different competencies.

Important: the position in TP documentation is based on an integrated approach and involves various functions of the company: accounting, financial, legal, commercial, production and others. The preparation of TP documentation by the finance and accounting department alone may entail several risks.

Timely fulfillment of the steps described above will become a reliable foundation for effective work on the preparation of TP documentation both by the company's resources and in case of a referral to an external consultant.

Join us in person for an informative session on Transfer Pricing and more at our Kons?lid?n Finance Professionals Community Event on Friday, 19th January 2024.

Register at: lu.ma/konsalidonfinance

Contact us and we will be happy to answer your questions and assist you in preparing TP reporting or regulating relevant business processes in the Company.