"Transfer pricing" is the process of determining the price of an international transaction involving two or more related parties. When a subsidiary firm sells goods or provides services to a sister company or its holding company, for example, the sum charged by the holding company is known as the Transfer Price.
The seller achieved this by negotiating a deal with a related party for less money, which reduced their taxable income (in such circumstances, the related party is often exempt from Tax). The UAE Transfer Pricing Standards, which mandate that overseas transactions involving related parties be carried out at fair market value, come into force in particular circumstances.
One of the most important areas of CT is transfer pricing (TP), which has a lengthy history of controversies and legal battles all around the world. According to TP, the arm's-length concept must be adhered to in all transactions between connected parties and related parties.
All About Transfer Pricing in UAE
The arm's-length principle and other TP-related terms are defined under UAE CT in a manner that mainly adheres to OECD standards. As a result of globalization, multinational groups have expanded and now include a variety of businesses from around the world.
The existence of several entities in various tax countries opened the door to strategies used to obtain undue tax advantages. The TP guidelines aim to stop any such damaging conduct made by businesses in connection with their dealings with connected and related parties.
From a tax standpoint, TP is a high-risk area since it might lead to tax disputes between a company and a tax authority. As some businesses might not understand the importance of TP documentation, and this results in the incurrence of penalties, this is also a focus for tax authorities in the event of a tax assessment or audit.
Multinational corporations frequently utilize transfer pricing to allocate revenue between their domestic and international businesses. Tax-wise, transfer pricing strategies might benefit a corporation; however, regulatory authorities strictly restrict manipulating transfer prices in order to lower taxes.
Also, Read About Jaxa Is Now An FTA-Approved Tax Consultant in Dubai.
Application of the Transfer Pricing in UAE According to the Corporate Tax Law
To avoid any potential prejudice in the pricing of international trade due to the intimate links between the parties, the law lays out the requirements for conducting international business. The UAE Transfer Pricing Rules apply to transactions involving Related Parties and Connected Persons.
Application of the Arm's Length Principle to Transactions under the UAE Corporate Tax Law
The agreements or transactions between Related Parties must follow the "arm's length" principle in accordance with the international standards incorporated into the Article and required by the Authority for determining Taxable Income.
Organizations Must Adhere to International Arm's Length Standards
To determine if an arrangement or transaction satisfies the arm's length requirement, it is critical to determine whether the outcome is compatible with the conclusion of a transaction between independent parties. A corresponding set of terms and conditions must also be followed during the transaction, according to the Taxable Person.
Switch Pricing Methodologies for Arm's Length Pricing
To ascertain the arm's length principle for any transactions or agreements signed between Related Parties, the following technique for transfer pricing in Dubai and the UAE should be used:
- The Comparable Uncontrolled Price Method, or CUP
- Utilizing Transactional Net Margin
- Transactional Profit Split under a Cost-Plus Approach
- Using the sale price method.
Any of the aforementioned strategies may be combined by the parties. To employ any other method: If none of the ways can be used to determine an arm's length result in a reasonable manner, the Taxable Person may use any other method besides those that are stated.
It must first show that none of the aforementioned methods can be used in the arrangement or transaction in order to justify using a different approach.
Factors to Take into Account in the UAE When Choosing and Using the Transfer Pricing Method
The following factors must be taken into consideration when choosing and implementing a transfer pricing mechanism under the Corporate Tax in the UAE:
- The terms of the transaction's or agreement's contract
- Features or components of the contract or transactions
- The financial situation at the time the deal or transaction was done
- The actions taken, risks taken, and resources used or employed by Related Parties.
Business Strategies Used by Related Parties
When determining whether the revenue and expenses resulting from the Related Parties' arrangement and transactions satisfy the arm's length standard, the Authority will take into account the transfer pricing methodology used by the parties as well as the aforementioned factors.
Different arm's length financial results or indications may be appropriate for determining the arm's length result when using the transfer pricing approach in some circumstances.
Choose JAXA Chartered Accountants to Adhere to the UAE Transfer Pricing Regulations
We at Jaxa can help your company navigate the complicated world of TP, and the following are the areas in which we can help:
- Analysis of the transactions that the UAE TP regime would cover
- Inter-company agreements for the proposed transaction are being prepared or reviewed
- Analysis of comparable transactions and selection of the compensation structure for the under-review transaction
- Switch Pricing Planning and guidance on internal group transactions, such as management fees, royalties, and other fees
- Profit apportionment to permanent establishment determination
- Assistance with creating the local file, or the Transfer Pricing Report, for the relevant year
- Assistance with disclosure form, master file, and CbC Report preparation and submission.
So, reach out to us and avail of our services for the UAE Transfer Pricing consultation.