The Transfer Pricing Guide in the UAE, released by the Federal Tax Authority (FTA) on October 23, 2023, offers valuable insights and practical guidance to taxpayers regarding the Transfer Pricing (TP) regulations outlined in the Corporate Tax Law of the United Arab Emirates.
Within this corporate tax framework, there exists a provision aimed at safeguarding transactions from undue influence based on the affiliations of the involved parties.
The corporate tax system in the UAE enforces the arm’s length principle concerning transactions and agreements involving related parties and connected persons.
In this article, we discuss the important aspects of transfer pricing rules and the Arm’s Length Principle under the proposed corporate tax in the UAE.
If you want transparency and to save the extra expenses in transfer pricing dealings, Now Consultant corporate tax advisors in the UAE help you in the transfer pricing process by meeting all the government requirements.
What is Transfer Pricing & How It Works In UAE
Transfer pricing, as defined by the OECD, relates to the pricing of transactions involving the transfer of tangible assets, goods, or the provision of services between associated businesses.
Therefore, in order to align its tax procedures with international standards, the UAE has adopted the Base Erosion and Profit Shifting (BEPS) model outlined by the OECD. The country has opted to comply with several BEPS guidelines, including those pertaining to Transfer Pricing Documentation. These Transfer Pricing regulations have corresponding implications for customs duties, withholding taxes, excise taxes, value-added taxes, and various other government levies.
Arm’s Length Principle:
The Arm’s Length Principle represents an internationally recognized standard endorsed by numerous member countries of the OECD and various other jurisdictions. It is utilized to establish transfer pricing policies for taxation purposes.
The arm’s length principle serves as a fundamental aspect of international tax law, designed to guarantee that transactions among related parties are conducted as if the parties were independent. This safeguards against the erosion of tax bases resulting from manipulations in transfer pricing.
The UAE’s adoption of this principle aligns with its dedication to adhering to global tax standards and combating tax evasion.
Article 61 of The UAE Corporate Tax law
According to Article 61 of the UAE Corporate Tax laws, the opening balance for corporate tax purposes should be a continuation of the closing balance sheet, adjusted in accordance with the arm’s length principle.
This requirement is essential to accurately depict the financial standing of companies under the new tax regime, preventing past transactions from unduly impacting future tax obligations.
Corporate tax advisors in the UAE, such as Now Consultant, can assist you in applying the Arm’s Length Principle in compliance with the UAE and international regulations.
Transfer Pricing Rules:
Section 7 of a Public Consultation Document (PCD) provides detailed information regarding the proposed TP treatment concerning transactions between related parties. The TP rules apply to adhere to the globally recognized ALP for transactions with related parties and connected persons.
According to the PCD guidelines, transactions involving related or connected parties should be consistent with the results that those expected in transactions between independent parties under similar circumstances.
Related Parties:
According to the corporate tax framework of the UAE, the following criteria decide whether two parties involved in a transaction are related parties:
- Two or more persons who are related up to the fourth degree of kinship or affiliation, including relationships through birth, marriage, adoption, or guardianship.
- When an individual, either independently or in conjunction with a related party, holds a direct or indirect ownership stake of 50% or more, or exercises control over a legal entity.
- When one company, by itself or with a related party, owns over half of another company or has control over it, those companies are considered related parties.
- A taxpayer and its branch or permanent establishment are said to be related parties.
- Individuals who are partners within the same unincorporated partnership.
- Business activities classified as exempt and non-exempt are conducted by the same individual.
Connected Persons:
Connected Persons are different from Related Parties under the corporate tax regulations in the UAE. The following categories define whether an individual is connected to a business subject to the corporate tax framework in the UAE:
- An individual who has an ownership interest in or controls the taxable person, either directly or indirectly.
- A director or officer of the taxpayer.
- Someone related to the owner, director, or officer of the taxpayer up to the fourth degree of kinship or through marriage, adoption, or guardianship.
- If the taxpayer is a partner in an unincorporated partnership, any fellow partner within that partnership.
- An entity related to any of the above parties.
Transfer Pricing Documentation:
The transfer pricing documentation standards in the UAE are set out in Ministerial Decision No. 97 of 2023 regarding the Maintenance of Transfer Pricing Documentation. These regulations are applicable to all businesses operating in the UAE, irrespective of their scale or sector.
Transfer pricing documentation encompasses records that businesses must maintain to support their transfer pricing policies. This documentation ensures that tax authorities are satisfied that the prices set for transactions among affiliated entities are aligned with arm’s length principles.
The required documentation includes:
A Transfer Pricing Policy:
This document outlines the transfer pricing policies and procedures of the business. The report needs to include details about deals the business made with related parties, how they decided on fair prices, and the documents they kept to prove those prices.
A Master File:
This document offers a broad outline and encompasses details of the business’s transfer pricing policies and procedures and ensures complies with the arm’s length principle.
A Local File:
This document includes complete details regarding the business’s transfer pricing policies and procedures for the applicable tax period. It shows the methods used to determine arm’s length prices and the supporting documentation.
Tax authorities may require businesses to provide additional documentation based on particular circumstances. Therefore it is more favorable to consult with corporate tax experts at Now Consultant.
Transfer Pricing Threshold
As per Article 55(2) of the CT Law, Taxable Persons involved in domestic transactions (under conditions specified in Ministerial Decision No. 97) or cross-border transactions with Related Parties or Connected Persons, during a Tax Period, and meeting specific thresholds, are required to maintain MF and LF:
- If, at any point during the applicable tax period, the taxpayer is part of a multinational enterprise (“MNE”) group with a total consolidated group revenue in that tax period of AED 3.15 billion or more; or
- If the taxpayer’s revenue during the relevant tax period amounts to at least AED 200 million.
The specified revenue threshold of AED 200 million provides Taxable Persons who do not meet the earlier criteria with exemption from maintaining comprehensive transfer pricing documentation, thus reducing the regulatory burden on smaller taxpayers.
How We Can Help You?
Businesses engaging in transactions with affiliated companies, whether within the UAE or internationally, as well as owners or directors receiving payments on behalf of the business, must assess their ability to adhere to transfer pricing requirements.
The complexities of transfer pricing regulations are difficult to deal with and may throw businesses into the deep valley of losses. The expert guidance of corporate tax advisors like Now Consultant in the UAE addresses individual corporate tax needs and offers customized solutions.
