Transfer Pricing under the UAE Federal Corporate Tax Law

Transfer pricing in the UAE refers to how multinational companies decide on fair prices for goods, services, and intellectual property when trading with their related entities. These companies need to follow the UAE Corporate Tax Law and OECD principles, so they must comply with transfer pricing regulations. This means they need to keep detailed records, conduct transactions fairly, and provide the Federal Tax Authority with necessary information when asked. Essentially, transfer pricing is about making sure related parties trade fairly within the organization. This blog will help you know more about transfer pricing and corporate tax in Dubai, UAE.

Transfer Pricing and Corporate Tax

The UAE Ministry of Finance (MoF) introduced a new corporate tax (CT) regime through Federal Decree-Law No. 47 of 2022 on 9 December 2022. This law, also known as the Corporate Tax Law, brings changes to how corporations and businesses are taxed in the UAE.

The new CT regime will come into effect for accounting periods starting from 1 June 2023, with a tax rate of 9%. Companies with a December year-end have 12 months to prepare and understand how this new tax will affect them. However, certain rules to prevent tax avoidance and transitional arrangements apply from the date the law is published in the Official Gazette.

One important aspect of the Corporate Tax Law is the inclusion of transfer pricing (TP) rules. These rules apply to businesses in the UAE when they engage in transactions with related parties or connected persons.

Arm’s Length Principle

To calculate taxable income, transactions and agreements with related parties and connected individuals must follow the arm's-length principle under the Corporate Tax Law. Additionally, if there's a transaction or agreement between an entity's exempt activity and its non-exempt activity, it must also adhere to the arm's-length principle.

Arm’s Length Price

The arm's length price (ALP) is the price that would be agreed upon if the transaction occurred between two separate and unrelated parties, solely based on commercial factors. In the UAE, businesses need to follow this principle to ensure that prices between related parties are fair. Essentially, the arm's length price is similar to the market price of the goods or services involved in the transaction.

Applicability of Transfer Pricing under Corporate Tax in UAE

Businesses utilize transfer pricing to distribute profits among their subsidiaries and affiliates, enabling them to reduce the overall tax burden of the parent company. However, to prevent any possible favoritism or unfair practices, regulations have been put in place to provide guidance for cross-border transactions. These guidelines ensure that related parties trade goods and services at a fair and impartial price.

Related Parties

• Two or more Natural Persons who are related through adoption, kinship, or guardianship.
• Either a natural person or an indirect legal entity owns at least 50% of a legal entity, the natural person is the owner.
• There are two or more legal entities where at least 50% of one legal entity is owned directly or indirectly by the other legal entity.
• A person who owns or manages two or more juridical entities directly or indirectly
• Related parties to a trust or foundation, including its founder, beneficiaries, and administrators.

Connected Person

• Owner of the Taxable Person
• Official or Director of the Taxpaying Individual
• Related Party to any of the aforesaid Connected Persons

Transfer Pricing Methods

• The Comparable Uncontrolled Price (CUP) Method: Through the CUP technique, prices are calculated based on comparable third-party transactions.

• The Transactional Profit Split Method: When two parties work closely together on a project or product, the profit split method is a fair way to divide profits. In this system, everyone gets a fair share based on their contribution and potential profitability.

• The Cost-Plus Method: In cases, there are no market prices to use as a benchmark, the cost-plus method is used. After determining the standard cost of the goods, the standard profit margin is added. In this case, the figure can be used as TP.

• The Transactional Net Margin Method (TNMM): Transactions between related parties can be determined to be at arm's length using the TNMM. In TNMM, transactions are quickly analyzed by comparing companies' operating and net margins.

• The Resale Price Method: In this method, the price at which related parties will resell products to unrelated parties is determined before adding markup for the transfer price.

TP Documentation Requirements

In the future, certain businesses in the UAE will need to meet specific conditions (to be determined by a Ministerial Decision) and maintain transfer pricing (TP) documentation, which includes a master file and a local file. If requested by the Federal Tax Authority (FTA), this documentation must be submitted within 30 days. Additionally, the FTA (Federal Tax Authority) has the right to ask taxpayers for additional supporting information within the same timeframe.

The Law doesn't provide detailed information about what should be included in the master file and local file. However, based on the information previously shared by the Ministry of Finance (MoF) during the UAE CT Public Consultation Document, it is expected that the requirements will generally align with the standards set by the Organization for Economic Co-operation and Development (OECD).

Impacts of Non-Compliance with TP Requirements

If UAE businesses fail to comply with the TP requirements, they may be at risk of:

• A possible adjustment in the TP by the FTA could increase the UAE's tax base
• There is a potential loss of 0% CT rate applicable to QFZP businesses
• Penalties can be imposed in the event of non-compliance, partial compliance, or inaccurate compliance (details of the applicable penalties will be announced in due course).

Transfer pricing in the UAE helps ensure fair taxation assuring that related party transactions are conducted at arm's length prices. Being a leading corporate tax consultant in Dubai, Reyson Badger specializes in providing tailored solutions that optimize compliance with laws and regulations while meeting all of your accounting, auditing, and tax requirements. Our team of experienced corporate tax consultants in UAE understands the complexities of the tax landscape and can assist your business in creating tax-efficient agreements.