Transfer pricing

What factors determine TP?

• Contractual agreements: The specific terms outlined in contracts that define the scope, responsibilities and expectations within a business partnership.
• Specialised expertise: Distinctive knowledge and skills that set individuals or entities apart, highlighting their unique capabilities.
• Market dynamics: Various elements and situations impacting the overall economy and influencing market behaviour.
• Operational roles: The specific tasks and responsibilities undertaken within a professional or business context.
• Intangible assets: The value added through non-physical assets such as patents, trademarks and intellectual property.
• Risk acceptance: Acknowledging and managing potential uncertainties and adverse outcomes in business operations.

Who are related parties and connected persons?

• Related parties: An individual or entity subjected to the Corporate Tax regime through a business, due to ownership or control.
• Connected persons: An individual or entity who controls the taxable person.

What are the impacts of transfer pricing on UAE Corporate Tax?

All businesses in the UAE must now follow the rules of transfer pricing and documentation in the OECD guidelines.

Transfer pricing may have an affect on one’s corporate tax returns, especially their amount of taxable income. However, if transfer pricing reduces the taxable income of a company, adjustments may be made by the FTA to a company’s tax liability.
Transfer pricing documentation, such as the CbC report, must be given, along with a company’s tax returns.

Importance of transfer pricing documentation

In the UAE, adherence to transfer pricing regulations necessitates comprehensive documentation for cross-border transactions.
This documentation includes:

• Analysis of the transfer pricing policy
• Transaction descriptions
• Employed transfer pricing methodology
• Economic backdrop

Benefits of transfer pricing documentation

• Ensures compliance with transfer pricing regulations for appropriate prices and conditions
• Provides tax authorities with detailed insights for risk assessments

Requirements for transfer pricing documentation in UAE Corporate Tax

The UAE government has highlighted specific conditions for taxable persons regarding the maintenance of transfer pricing documentation (including master file and local file) for Corporate Tax purposes. The conditions include:

• Threshold for related party transactions: Taxable persons engaged in transactions with related parties and connected persons, whose total consolidated group revenue amounts to AED 3,150 million, are mandated to prepare transfer pricing documents.
• Revenue threshold for individual entities: Taxable persons with an individual revenue of AED 200 million within the relevant tax period are also required to prepare transfer pricing documentation.

The local file must encompass dealings involving the following related parties and connected persons when the taxable entity is:

• A non-resident
• Exempt
• A resident opting for small business relief as per Corporate Tax law.
• A resident with a different Corporate Tax rate.

Conversely, the local file should exclude transactions or arrangements if the taxable entity falls under the following categories:

• A resident that is not a natural person and a legal entity.
• A natural person conducting independent transactions and arrangements.
• A legal entity engaging in autonomous transactions from unincorporated partnerships.
• A non-resident entity subjected to the identical Corporate Tax rate as applicable to the taxable entity’s income.

How to document transfer pricing?

In line with OECD guidelines on transfer pricing, a structured three-tiered approach to documentation is recommended, encompassing:

• Master file: standardised data concerning all entities within a group
• Local file: Focused on local taxpayers
• Country-by-Country report: Global income allocation and tax payments across jurisdictions.

Local File:

Mandatory under UAE transfer pricing regulations, the local file furnishes insights into a company’s transfer pricing strategies and transactions. It encompasses:

• Summary of transfer pricing policies
• Detailed transaction descriptions
• Methodological analysis
• Pricing explanation
• Description of market condition
• Risk assessment breakdown
• Any supporting documentation

Country-by-Country report:

Mandated by the Federal Tax Authority (FTA) for eligible companies, the CbC report provides information of a multinational’s global operations. It includes:

• Consolidated revenue breakdown
• Pre-tax profit or loss
• Income tax payments
• Capital structure details
• Earnings and number of workforce
• Asset distribution
• Business activities

Transfer pricing methods:

To ensure an arm’s length outcome for your transactions, various techniques are available:

• Cost Plus Method (CPM)
• Resale Price Method (RPM)
• Transactional Net Margin Method (TNMM)
• Transactional Profit Split Method (TPSM)
• Comparable Uncontrolled Price Method (CUPM)

Companies should select the appropriate method for them, considering factors like data availability and the nature of the transaction. Once a suitable method is chosen, an Arm’s Length range can be decided upon.