UAE and Transfer Pricing – The Way Forward
The terms and procedures for pricing transfers within and between businesses that share ownership or control are referred to as transfer pricing. We will help you gain a basic comprehension of transfer pricing laws.
What is an arm's length price?
The price that would have been paid in a transaction between two similarly situated independent, unrelated parties, when the consideration is solely commercial, is known as the arm's length price (ALP).
What effect will the UAE's corporate tax have under the transfer pricing rules?
According to the most recent information from MOF (Ministry of Finance), transfer pricing rules aim to ensure that related party transactions are carried out on an arm's length basis (i.e as if the transaction were conducted between independent parties). Businesses operating in the UAE must abide by the documentation standards and transfer pricing regulations established in accordance with the OECD Transfer Pricing Guidelines.
To make sure that related party transactions show independent pricing, taxpayers should use the arm's length concept. This price is fairly representative of the market cost of the good or service in question.
We anticipate that the UAE Corporate Tax Law would include TP regulation, which might include a variety of transfer pricing techniques, extensive annual transfer pricing documentation, and severe penalties for failing to comply.
Typically, the Federal Tax Authority (FTA) will analyse and carefully review the transfer pricing policies, paperwork, inter-company, and inter-group transactions, among other things, to see if they are compliant with TP requirements. Large fines are imposed on business companies that violate the Transfer Pricing laws.
Transfer Pricing Records:
Businesses must abide by the transfer pricing regulations and documentation specifications established in accordance with the OECD Transfer Pricing Guidelines.
The taxpayers will be helped by proper transfer pricing documentation to demonstrate that their transactions adhere to the arm's length principle, which will put an end to transfer pricing arguments. A business entity's growing number and complexity of domestic and foreign transactions will result in transfer pricing problems, which will drive up compliance costs for taxpayers.
In this regard, it is highlighted that well-established documentation norms might cut down on compliance expenses that might otherwise be associated with a transfer pricing dispute. An internal or external tax professional is one of the resources that the company should have to deal with these problems and is knowledgeable and skilled in international trade and transfer pricing regulations.
In general,?a self-declaration of transfer pricing rules compliances must be electronically provided with the tax return
Why Document Transfer Pricing?
When deciding on prices and other terms as well as when reporting income from such transactions in returns, taxpayers take transfer pricing rules into account to give tax administrations the knowledge needed to properly analyse the risk posed by transfer pricing.
Model of Documentation for OECD Guidelines:?
According to the OECD transfer pricing rules, authorities use a three-tiered method for transfer pricing paperwork, which consists of
Master file: which includes standardised data for each MNE group member
Local file: Significant Taxpayer Transactions
Country by Country Report- Indicators indicate the location of economic activity within the MNE group, including the global distribution of income and taxes paid by the MNE groups.
Local File Business entities that engage in related party transactions should keep records and paperwork up to date in accordance with the law. The local file for the OECD guidelines contains
Local Company
A description of the local entity's management structure
A detailed explanation of the company and its strategy
Important rivals
Regulated transactions
Details of material-controlled transactions and their environment
The monetary value of intra-group receipts and payments for each type of controlled transaction
Identification of related businesses and their connections
A copy of every relevant intercompany agreement
A thorough functional and comparability analysis that takes changes from previous years into account.
An explanation of the best transfer pricing techniques and the rationale for the choice of techniques
A list of the assumptions used in the method selection
A list of selected, comparable uncontrolled transactions, along with descriptions of any modifications made to the comparison
An overview of the financial data used in the implementation of the chosen TP approach.
Global Report by Country (CbCR):
A multinational group's parent business is required to submit the report to the appropriate regulator in its home country.
Only the parent firms of multinationals whose consolidated revenue surpassed USD 857 million (equivalent to or greater than AED 3.15 billion) in the preceding fiscal year are subject to the CbCR regulations.
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The report's foundation is a series of consolidated financial statements. According to OECD criteria, the CbCR Report shall detail the global revenue, profit before tax, income tax accrued, and various other economic activity metrics for each country where the MNE conducts TP Methods.
The OECD acknowledges five primary transfer pricing techniques:
Companies should choose an acceptable transfer pricing method by taking into account a number of criteria, including the information that is available, the method's strengths and weaknesses, the method's suitability for the type of transactions involved, etc. An arm's length range can be estimated after the transfer pricing mechanism and a trustworthy comparator are identified.
The regulations may also provide an option to use methods other than approved Transfer Pricing Methods as above, provided that the Taxable Person can demonstrate a reliable measure of an Arm’s-Length price and documentation, and that the suggested method satisfies the required provisions under UAE CT LAW.
Illustration:
An illustration of how to use the Comparable Uncontrollable Price Method in general
Related individuals that are a part of the same multinational national body are ABC Ltd. and XYZ Ltd.
XYZ Ltd purchases items from ABC Ltd for AED 10,000/MT.
The identical kind of items is sold by ABC Ltd to LMN Ltd (an independent party) for AED 12,000/MT (inclusive of transport charges of AED 1000).
Comparability adjustments should be made because the AED 12000 per MT charged for the sale of the items in this instance does not adhere to the arm's length standard.
Comparability adjustments may be able to offset the effect when a prospective comparable transaction is found and one or more major variances are affecting the pricing.
Quantity discounts, delivery restrictions, contractual provisions, and small product differences are just a few examples of comparison adjustments that may be made.
Controlled transactions can be modified in this situation depending on internal comparables. In this case, the transfer price will be AED 11,000 per MT (12,000-1,000). As a result, ABC Ltd will see an increase in profit of AED 1000, which will be taken into account when determining tax liability.
Frequently Asked Questions:
Where the arm's length value of their Related Party transactions reaches a specific threshold in the relevant tax period, a business will be required to maintain a master and local file (with structure and content commensurate with the requirements prescribed under OECD BEPS Action 13). The threshold will be covered by the UAE's transfer pricing laws.
2. Are all domestic and foreign transactions subject to the UAE Transfer Pricing Regulations requirements?
Yes, according to the most recent notification, transfer pricing applies to all deals involving related parties.
3. Is it accurate to say that small and medium businesses and startups in the UAE are exempt from the need for TP documentation?
No, there are no such exceptions for startups or SMEs. According to the most recent information from the MoF, TP paperwork is applicable depending on transactions with threshold-related parties. Any precise exemptions will be spelt out in the CT Law, which has not yet been released.
4. What are the corporation tax regime's documentation requirements?
Businesses must keep three-tier documentation that is compliant with OECD BEPS Action 13 in terms of both format and substance. It contains:
5. What are the several transfer pricing techniques that are accepted globally?
Typical transactional techniques
6. Can the entity use any other method other than those that are accepted globally?
Yes, if the company can show that the prescribed methodologies cannot be used in a way that would fairly produce an arm's length result.
7. If only domestic-related party transactions are being conducted, is transfer pricing documentation still required?
Yes, regardless of whether a transaction is domestic or international, TP paperwork is required if it exceeds the threshold (yet to be declared).
8. When does the UAE regulation on transfer pricing go into effect?
For fiscal years beginning on or after June 1, 2023, the UAE CT regime will go into force. Therefore, as of this date, the transfer pricing regulation also applies.
9. Does the duty for disclosing information apply to all entities?
Yes, regardless of the magnitude of such transactions, every corporate entity will be required to provide a disclosure comprising information about their dealings with Related Parties and Connected Persons.