The corporate tax era in the United Arab Emirates (UAE) has significantly altered the tax landscape of the nation. Compliance with transfer pricing (TP) regulations now stands as a pivotal aspect of the corporate tax framework. This not only influences businesses’ effective tax rates but also dictates how they distribute, report, and validate income within their corporate groups in a sustainable and defensible manner.
The UAE tax authorities are emphasizing the importance of adhering to transfer pricing regulations to ensure accurate calculation of the tax base, particularly in situations where transaction prices could be manipulated by involved parties. This practice has already been adopted by over 60 countries globally, with the United States pioneering these regulations as early as 1994. The OECD (Organization for Economic Co-operation and Development) issued its initial transfer pricing guidelines in 1996, which have since been expanded in subsequent years, gaining adoption from many European Union nations, 19 out of 20 G20 members, and numerous other countries.
The implementation of these regulations has brought distinct changes across the businesses in the UAE irrespective of Mainland or Free Zones. Notably free zones are an integral part of the United Arab Emirates (UAE) economy and play a critical role in driving economic growth and transformation in the country. This has been a widespread discussion among the premier International Financial Centres (IFCs) in the UAE including the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC) recently. Despite a flat tax rate structure, exemptions within free zones, relief provisions for small businesses, or income falls below the taxable threshold can yield tax benefits through adept management of transfer pricing.

What is Transfer Pricing?

Transfer pricing (TP) regulations worldwide aim to ensure accurate tax calculations by preventing manipulation of transaction prices, particularly by related parties seeking to avoid taxes by shifting profits to lower-tax jurisdictions. These rules establish guidelines, with the arm’s length principle at their core, ensuring transactions reflect those that would occur between unrelated parties under similar circumstances.

Violation of TP regulations can result in additional taxes and penalties for tax underpayment. Tax authorities have the authority to adjust prices in controlled transactions, calculating taxable income as if parties had adhered to the arm’s length principle. The potential additional tax liabilities are substantial, and TP audits and discussions with tax authorities are complex and time-consuming, given the nuances of each case.

Consequently, it’s advisable to proactively prepare documentation justifying prices and complying with TP regulations. Ideally, TP planning and oversight should be integrated into a company’s business processes.

Calculating the arm’s length value

The fundamental principle of an arm’s length value is that a transaction should be evaluated as if it were conducted between unrelated parties, each acting in their own self-interest, without one party unduly influencing the other. The Corporate Tax decree law confirms the acceptability of certain transfer pricing practices for determining the arm’s length value, including:

• The Transactional Net Margin Method
• The Transactional Profit Split Method
• The Cost-Plus Method
• The Comparable Uncontrolled Price Method
• The Resale Price Method

These methods are established and align with OECD transfer pricing guidelines. Typically, the standard method is employed when applying these techniques, although taxpayers may benefit from the guidance of a transfer pricing specialist. Additionally, the decree-law permits the use of alternative practices if it can be demonstrated that none of the listed methods are reasonably applicable.

What transfer pricing documentation should the UAE companies maintain and what are the contents of the TP documentation?

UAE companies are required to maintain transfer pricing documentation as per Article 55 of Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses. This documentation encompasses a master file and a local file, both outlined by the tax authority.

The master file should include comprehensive information relevant to the entire multinational enterprise group. This includes details on the group’s organizational structure, business operations, transfer pricing policies, allocation of income, and other key aspects. It serves as a blueprint for the MNE group, following guidelines outlined in Clause 5.19 of the OECD Transfer Pricing Guidelines.

The local file, on the other hand, focuses on specific transactions of the local taxpayer. It comprises three main sections:

• Information about the local entity, such as its management structure, business strategy, and key competitors.
• Details of controlled transactions, including descriptions, related companies involved, transaction values, intercompany agreements, comparability analysis, TP method selection, financial information, and any existing APAs or tax rulings.
• Financial information, including local entity financial accounts, allocation schedules, and summary schedules of relevant financial data for comparison.

In essence, transfer pricing documentation for UAE companies should provide a thorough overview of both the multinational enterprise group and the local entity’s transactions, ensuring compliance with regulatory requirements.

Why MS for Transfer Pricing Regulations compliance in the UAE

The successful financial destiny of your company with strategic tax services is what MS guarantees you in the UAE. The evolving tax landscapes and their complexities in a globally connected market can be tough to deal with, but Team MS drafts tax strategies that fulfill the unique needs of each client providing a roadmap for sustainable financial growth. Regulatory adherence, optimization of deductions, and fostering competitiveness are all guaranteed here without compromise. Accurate and precise TP advisory can make your business excel in the ever-changing tax landscape of the UAE.