Transfer pricing is a tax planning strategy whereby businesses that operate across different tax jurisdictions pay inflated prices to a subsidiary or connected business in a lower tax area, to appear less profitable and therefore subject to less tax.
UAE corporate tax regime is expected to introduce transfer pricing (TP) rules and TP documentation requirements in line with the OECD TP guidelines. The introduction of the new CT regime would be a ‘game changer’ as intercompany transactions would need to be undertaken at arm’s length and supported by appropriate documentation.
Accordingly, businesses will need to evaluate their current arrangements and consider the implications of the CT regime on both cross-border as well as domestic transactions undertaken with the related parties. As illustrated below, transactions between related parties or with connected parties should be consistent with the results that would be achieved for transactions between independent parties in the same or similar cases.
Transfer Pricing Rules with CIT being introduced
- All transactions with related parties and connected persons have to beat arm’s length (market price as referred to in the UAE Tax Law).
- Master file and local file to be maintained and submitted within 30 days when requested by the tax authorities
- Advanced pricing arrangements will be available as well, through the regular clarification process already in place.
- Disclosure Form on transactions with Related Parties and Connected Persons will have to be submitted along with the Tax Return.
- TP regulations will apply to domestic or cross border transactions.
- TP methods are broadly in line with OECD TP Guidelines
- Any adjustment imposed by a foreign tax authority that impacts a UAE entity is made, then - an application must be made to the FTA for a corresponding adjustment to provide the UAE company with relief from double taxation.
Who will beaffected?
The principal burden of the TP rules is likely to fall on multinational enterprises that transfer goods or services between group entities.
It is also expected to affect one-off transactions, such as corporate sales or major asset sales. Such transactions may need to be scrutinized for transfer pricing implications even if the business does not normally undertake transactions that fall within the scope of the transfer pricing rules.
Family businesses, which have outsized importance in the region and make up majority of private sector businesses, may need to change some of their practices to comply with the transfer pricing regulations.
How can we help?
We have undertaken transfer pricing documentation and benchmarking engagements for a number of clients operating in vast industries and jurisdictions. We help companies evaluate the best methods and ascertain whether their current frameworks are appropriate and in line with local as well OECD regulations. Reach out to us today for more.
