As of 1st June 2023, the United Arab Emirates has implemented transfer pricing laws under its new Corporate Tax legislation. With our quick overview, we’ll help you clear up any confusion on what transfer pricing is and how it could affect you and your business.
What is transfer pricing?
Transfer pricing refers to the rules and methods for pricing transactions, and setting certain prices for goods and services, within and between different enterprises of a multinational corporation.
Transfer pricing regulations ensure that transactions between related parties are conducted at Arm’s Length, meaning that the prices are consistent with those that would be agreed upon by independent entities in the open market. These regulations provide methods for valuation and compliance, preventing distortion of profit and the avoiding of tax.
Understanding Arm’s Length price
An Arm’s Length price is the price at which transactions between two independent parties are conducted in the open market. It reflects the conditions that would prevail if the parties were not related and were from the supply and demand of normal competitive markets, ensuring that the transaction terms are fair and unbiased.
The UAE Corporate Tax law has approved methods for determining arm’s length value. These methods include:
· Comparable Uncontrolled Price Method
· Transactional Net Margin Method
· Transactional Profit Split Method
· Resale Price Method
· Cost-Plus Method
However, if these methods are impractical, alternative techniques may be used.
What are related parties and connected persons?
The UAE corporate tax decree-law defines related parties and connected persons for transfer pricing.
Related parties include family members and businesses where an individual holds a controlling interest (typically 50% or more of the shares). Connected persons include business owners, directors, officers and their related parties who are connected to the owner. Both definitions ensure that transactions between these entities are fair and follow all regulations.
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
The decree-law outlines the transfer pricing documentation that taxpayers must maintain. Typically, this includes two OECD-standard documents: a master file and a local file.
Master File: Provides details about the global operations of the organisation, including group structure, business description, intercompany financing and financial positions.
Local File: Contains details about the taxable person and significant local transaction records and risk assessment breakdown.
These documents must be kept in a format determined by the FTA and provided within 30 days upon request. There may also be a requirement to file a transfer pricing disclosure with the tax return.
Benefits of transfer pricing documentation:
Compliance Assurance: Ensures compliance with transfer pricing regulations for appropriate prices and conditions, and accurate income reporting from transactions.
Facilitates Risk Assessment: Provides tax authorities with detailed insights for risk assessments, aiding informed decision-making and regulatory compliance.
Transfer pricing in free zones
Free zone companies must comply with transfer pricing regulations to maintain their eligibility status. Non-compliance can affect their corporate tax obligations.
The implementation of transfer pricing laws in the UAE might introduce new challenges for businesses, but with strategic planning and guidance, you will be able to navigate the new rules in no time.
