The process of figuring out the cost of an overseas transaction between two or more related parties is known as "transfer pricing." The amount charged by the holding company is known as the Transfer Price, for instance, when a subsidiary company sells items or renders services to a sister company or its holding company.
In accordance with the Corporate Tax Code, regulations for transfer pricing in UAE will be implemented as of June 1, 2023. The Transfer Price is the price that would be charged at arm's length if the transaction had been made between two independent parties rather than related parties.
Transfer pricing is a standard method used by multinational firms to divide revenues between their home and foreign operations. Transfer pricing tactics can be advantageous for a company from a tax standpoint; however, manipulating transfer prices to reduce taxes is severely forbidden by regulatory authorities.
The seller did this by engaging in a transaction with a Related Party for a lower consideration, which decreased their taxable income (generally, the related party is exempt from tax in such cases). In certain situations, the Transfer Pricing Standards take effect, which states that foreign transactions between related parties must be conducted at a fair market value.
Application of Transfer Pricing in Dubai & UAE Under the Corporate Tax Law
The law lays forth the guidelines for carrying out international transactions to prevent any potential bias in the pricing of global trade due to the close relationship between the parties. Transactions involving: Related Parties; and Connected Persons are subject to the UAE Transfer Pricing Rules.
Also, Read About: Preparation of Accounting Records for Corporate Tax in UAE.
The UAE Corporate Tax Law's Application of the Arm's Length Principle to Transactions
According to the worldwide norms integrated into the Article and mandated by the Authority for calculating Taxable Income, the agreements or transactions between Related Parties must adhere to the "arm's length" principle.
Entities Should Comply with the International Arm's Length Standards
It is crucial to check whether the outcome of the arrangement or transactions is consistent with the conclusion of a transaction between independent parties in order to establish whether they meet the arm's length standard. The Taxable Person must also make sure that the transaction is carried out under comparable terms and conditions.
Switch Pricing Techniques for Calculating Arm's Length Prices
The following methodology should be applied for transfer pricing in Dubai & UAE to determine the arm's length principle for any transactions or agreements made between Related Parties:
- The CUP technique, or Comparable Uncontrolled Price Method
- Cost-Plus Approach
- Utilizing Transactional Net Margin
- Using a Transactional Profit Split
- The Sale Price Approach.
The parties are free to combine any of the aforementioned techniques. To use any other process: The Taxable Person may use any way other than those listed if none of the methods can be used to determine an arm's length result in a reasonable manner.
To justify the use of a different way, it must first demonstrate that none of the aforementioned approaches may be justifiably used in the arrangement or transaction.
Factors to Consider When Selecting and Using the Method for Transfer Pricing in UAE
For selecting and implementing a transfer pricing mechanism, the following must be taken into account:
- The provisions of the agreement or transaction's contract
- Characteristics or elements of the agreement or transactions
- The economic state at the time when the agreement or transaction was made
- The activities carried out, the risks taken, and the resources utilized or employed by Related Parties.
Also, Read About: Corporate Tax in UAE – How Is It Changing the Business Narrative?
Business Tactics Employed by Related Parties
The Authority will take into account the transfer pricing methodology employed by the parties, as well as the aforementioned considerations when determining whether the revenue and expenses resulting from the Related Parties' arrangement and transactions fulfill the arm's length standard. There may be instances when using the transfer pricing approach when different arm's length financial results or indications are appropriate for determining the arm's length result.
The Federal Tax Authority's Adjustments to the UAE Transfer Pricing
The Authority must amend the Taxable Income to achieve the correct outcome given the facts and circumstances of the arrangement if it is determined that an international transaction did not adhere to the arm's length principle. If such an adjustment is made, the Authority will rely on the data that the Taxable Person has access to.
Furthermore, the Authority will need to make commensurate adjustments to the Related Party's Taxable Income if the adjustments are made. The Taxable Person must submit an application to the Federal Tax Authority for equivalent adjustments when the adjustments are made by a foreign competent authority.
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