GCC Tax Theatre | UAE Transfer Pricing | The "FAR" Pavilions of Permanent Establishments

After the uprising in Kabul, Ash and Anjuli set out in search of a paradise in the Himalayas – "the far pavilions" – free of prejudice where they can live out their lives in peace and harmony. Harmony! What a paradoxical word! I am a tax practitioner, and a kaleidoscopic view on the evolution of the global tax policy makes me question if we'll ever find fiscal harmony in this ever-evolving world of digitalización-sans-fronteras. At least, the imagination of the author of that infamous novel "The Far Pavilions", M. M. Kaye, was good for contriving such hope! Perhaps, we need visionaries like Kaye at the OECD and in the higher echelons of global fiscal policy making!

This episode of the GCC Tax Theatre examines the infamous FAR principle and analyses attribution of profits to Permanent Establishments in a summary manner.

International Tax Perspective

Article 7 of the Model Tax Convention, titled “Business Profits”, states that profits of an enterprise of a Contracting State shall be taxable in that State unless earned through a PE in the other Contracting State, in which case the profits attributable to the PE may be taxed in that other State.

Profits attributable to PE in both States are the profits that the said PE would make (particularly while dealing with other parts of the enterprise) as if that PE were an independent enterprise, based on

• Functions performed,
• Assets used; and
• Risks assumed by the enterprise through the PE and through other parts of the enterprise.

The above three criteria are altogether referred to as the FAR principle.

UAE CT Perspective

Clause 3(a) of Article 12 of the UAE Corporate Tax Decree, titled Corporate Tax Base” states that a Non-Resident Person is subject to Corporate Tax on the Taxable Income that is attributable to the Permanent Establishment of the Non-Resident Person in the State. The said clause has two axis points:

1.??????Attributability of income to …

2.??????the Permanent Establishment in the State (i.e., UAE)

Income attribution to the UAE PE requires that absolutely all income transactions whether within UAE or abroad, even in the country where the enterprise owning the PE is incorporated, must be considered for being subject to UAE Corporate Tax.

The examples below use the FAR principle to demonstrate how concrete grounds may exist that a UAE PE has earned income beyond UAE but attributable to that UAE PE.

1.??????For instance, the UAE branch of a foreign enterprise may be the only shared service center providing support to the worldwide group, a Functions-performed (the “F” in the FAR principle) based ascertainment of income attributable to the UAE PE.

2.??????An example of Assets used (the “A” in the FAR principle) could be fuel storage tanks set up in Fujairah Oil Industrial Zone (FOIZ), which are owned by a Non-Resident Person (NRP) fuel logistics group headquartered in the UK, supplying fuel to its African subsidiaries. The said tanks being a fixed place of business would constitute a UAE PE for the NRP and the income charged by the NRP to its African subsidiaries for fuel storage would be the income attributable to the UAE PE even if invoiced from the global headquarters in the UK.

3.??????A Saudi firm’s HQ in Riyadh has signed a consulting contract with a Saudi client, for which most of the work needs to be done by the Saudi HQ and only a part of the work needs to be performed by the UAE branch. The performance guarantee for the engagement has been provided entirely by the UAE branch. In this case, project related Risks assumed (the “R” in the FAR principle) by the Saudi firm are negligible and majority of the risk has been assumed by the UAE PE, which is the indication that project income needs to be allocated between Saudi HQ and UAE firm. However, a careful analysis of the total project revenues and project performance risks will be needed to ascertain the part of revenue attributable to UAE PE.

This was merely touching the tip of the iceberg. There is a lot more of detailed guidance available on the subject matter in OECD Transfer Pricing Guidelines.

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