Everything You Need to Know About UAE Transfer Pricing

If you run a multinational enterprise (MNE) in the UAE and license your business activities both at home and abroad, you might wonder: “Why should transfer pricing matter if I own the parent company and all its subsidiaries?” And understandably so. But the truth is that tax authorities do not treat group companies as a single entity. 

Transfer pricing regulations mandate that transactions between related companies are priced as if they were between independent, unrelated parties—this is known as the arm’s length principle. Even if two entities are part of the same corporate group, each one must report transactions based on fair market values.

What Is Transfer Pricing?

Transfer pricing is an essential concept in accounting and taxation. It refers to the pricing of goods, services, or intellectual property exchanged between different divisions, subsidiaries, or affiliates within the same corporate structure. 

‍

Transfer pricing is important because it ensures that when a subsidiary provides goods or services to its parent company or another subsidiary, the price charged reflects the market conditions accurately and is not influenced by the buyer and seller’s relationship. 

‍

While transfer pricing streamlines internal operations, it also provides multinational enterprises (MNEs) the opportunity to optimize their financial structures. For example, you can use compliant transfer pricing to allocate profits strategically and manage cash flows across different jurisdictions. This will enhance your company’s financial stability and support long-term growth.

‍

However, when misused, it can lead to unfair profit shifting and reduced tax obligations. This aspect has prompted tax regulatory authorities worldwide to regulate transfer pricing and ensure compliance with fair taxation principles. 

Major Transfer Pricing Challenges for MNEs

1. Cross-Border Transaction Pricing

Regardless of their size, all businesses operating in two countries must ensure the proper pricing of their intercompany transactions. If these transactions are priced incorrectly, discrepancies might arise between the company’s reported income and expenses, potentially causing profits to be overstated in one location and losses understated in another.

2. Increased Compliance Burden

Transfer pricing compliance requires businesses to maintain detailed documentation with descriptions of intercompany transactions and justifications for the chosen pricing method. MNEs now need to prepare master files and local files that demonstrate that their pricing aligns with the arm’s length principle. The extensive reporting requirements can be overwhelming for smaller businesses that lack in-house expertise in taxation and transfer pricing. 

3. Double Taxation Risks

One of the biggest risks associated with transfer pricing is double taxation. If the tax authorities in one country adjust the taxable income of a business due to non-compliance with transfer pricing rules, the corresponding entity in another jurisdiction may not automatically make a corresponding adjustment. This difference may result in the taxation of the same income twice.

4. Intra-Group Loan Management

Many MNEs rely on shared services such as IT support, HR, or administrative functions across multiple entities. Properly pricing these intra-group services is essential to avoid transfer pricing issues. For example, low-value services are typically priced with a 5% markup on relevant costs, but higher-value services may require detailed benchmarking and documentation to justify higher fees.

Similarly, intercompany loans, whereby one entity provides financing to another, must be priced with interest rates comparable to those offered by third-party lenders. Failing to set appropriate terms can attract scrutiny from tax authorities and lead to unfavorable tax adjustments.

5. Intangible Asset Management

Today, a company’s intangible assets are key determinants of its financial performance and market valuation. Whether through patents, trademarks, brand reputation, customer trust, or employee expertise, these non-physical resources contribute to a company’s sustainable growth, innovation, and a lasting competitive edge in the market. 

In the UAE, where many local brands are expanding internationally, MNEs must conduct a DEMPE analysis to properly value and price the use of these intangibles. DEMPE stands for Development, Enhancement, Maintenance, Protection, and Exploitation and is designed to help MNEs allocate their costs and returns from the creation and exploitation of intangibles based on the value creation by each entity. 

How Transfer Pricing Works

Here’s a rundown of the processes MNEs in the UAE must follow to avoid disputes related to transfer pricing. 

1. Setting Transfer Prices

There are several ways UAE businesses can determine appropriate transfer prices. 

• Comparable Uncontrolled Price (CUP) Method: Compares prices with similar transactions between unrelated entities.
• Resale Price Method: Sets the transfer price based on the resale price charged to a third party, minus an appropriate margin.
• Cost-Plus Method: Adds a markup to the production cost of goods or services to determine the transfer price.
• Profit Split Method: Divides the profit from intercompany transactions based on the relative contributions of each entity involved.
• Transactional Net Margin Method (TNMM): Compares the profit margins in intercompany transactions with those from similar independent dealings.

Which method is right for an MNE will mainly depend on the type of transaction and the nature of the relationship between its entities.

2. Documentation and Reporting Requirements

The UAE has introduced new transfer pricing rules as part of its Corporate Tax Law, aligning with OECD standards. Until 2022, local companies were not required to maintain transfer pricing documentation, but with the adoption of the OECD’s Base Erosion and Profit Shifting (BEPS) Action 13 guidelines, UAE businesses must now prepare a local file and master file.

According to Ministerial Decision No. 97 of 2023, these requirements apply to MNEs with annual consolidated group revenues over AED 3.15 billion and local revenues exceeding AED 200 million. Companies must submit documentation within 30 days upon request from the Federal Tax Authority (FTA).

This documentation usually includes:

• A description of the company’s structure, intercompany transactions, and the nature of relationships between entities;
• The methods used to determine the transfer prices; followed by
• An explanation of why a particular pricing method was chosen.

This detailed reporting provides tax authorities with the necessary information to verify whether the prices align with market standards. Again, inaccurate or incomplete documentation can trigger unnecessary audits and, hence, additional taxes and fines.

Businesses in free zones with a 0% tax rate must also maintain extensive documentation to justify their transfer pricing strategies. Failure to comply will result in penalties ranging from AED 10,000 to AED 100,000. These rules take effect for financial years starting June 1, 2023, with FY 2024 being the first affected period for most companies.

3. Mutual Agreement Procedures

It’s not uncommon for MNEs to enter into a dispute with tax authorities if the latter find the former’s transfer prices do not adhere to the arm’s length principle.

In such cases, the aggrieved MNE can request a mutual agreement procedure (MAP) to resolve these conflicts under international tax treaties. The MNE initiates the process by submitting a formal MAP request to the competent authority (CA) of the home country or the country where the issue originated. 

An MNE can request MAP when:

• Double taxation occurs due to transfer pricing adjustments (e.g., the tax authorities of two countries increase profits on the same transaction).
• Tax residency conflicts arise, with more than one country claiming that the MNE or its subsidiaries are residents for tax purposes.
• Withholding taxes are applied inconsistently, such as on dividends, royalties, or interest payments, contrary to treaty provisions. 

If accepted, the CA contacts the counterpart CA in the other jurisdiction to initiate the negotiation process.

Both CAs engage in bilateral discussions to find a mutually agreeable solution involving: 

• Adjustments to taxable income in one or both countries
• Refunds or relief from double taxation (e.g., one country reduces its assessment)

If the MNE accepts the outcome of MAP, both tax authorities implement the agreed changes. If not, it can reject the resolution and pursue other legal options if necessary. 

For such unresolved disputes, some modern tax treaties (and instruments like the OECD’s Multilateral Instrument) now have an arbitration clause by default. So, if the CAs cannot reach an agreement within a set period, the issue is referred to an independent arbitration panel for a binding decision. Compared to traditional MAP processes, this is a relatively faster way to resolve cross-border tax disputes. 

Conclusion

If you run a multinational company in the UAE, don’t assume transfer pricing concerns only big conglomerates. All MNEs operating in the UAE, however big or small, must abide by transfer pricing regulations to avoid financial losses, double taxation, and reputational risks.

Sure, transfer pricing makes your cross-border operations a tad bit complex. But it also paves the way for streamlined workflows and guarantees tax compliance across the board. Plus, with the right support, you can implement transfer pricing best practices that minimize your tax risks considerably. 

Contact Oblique Consult today. We’ll handle your MNE’s transfer pricing proactively, so you can avoid costly surprises and keep your focus where it belongs: giving your undivided attention to your company’s success. 

‍