Transfer Pricing Rules under Tax

Hello These regulations are designed to prevent tax evasion by ensuring that transactions between related entities are conducted at arm's length, mirroring the terms that would be agreed upon by independent parties in a similar transaction.

This article delves into the intricacies of these regulations, explaining their purpose, key principles – the arm's length principle, and practical applications focusing on transactions between related parties of businesses operating in the UAE.

Identifying related parties is crucial to understand when transfer pricing rules apply. These include entities with shared ownership, control, or common management (to understand further check our blog). Transactions covered, range from the sale of goods and services to intangible asset transfers and financing arrangements.

Any two parties are “acting as if they were independent of each other” if:

· The transaction or arrangement takes place as part of the ordinary course of their business operation

· The parties are not exclusively or almost exclusively transacting only with each other.

The Federal Tax Authority considers all relevant facts and circumstances to determine whether the parties are acting as if they were independent of each other. The arm’s length principle is a general principle, and it applies to all transactions and arrangements between a Taxable Person and its Related Parties or Connected Persons regardless of the Taxable Person’s Revenue figure for a Tax Period.

Transfer pricing rests on the key concept of the arm's length principle. It mandates that transactions between related parties should be priced as if they were conducted between independent entities operating under normal market conditions. This prevents companies from manipulating prices to evade, ensuring a level playing field for all taxpayers.

Transfer pricing rules apply to the UAE businesses that have transactions with Related Parties and Connected Persons, irrespective of their location - in the UAE mainland, a Free Zone or in a foreign jurisdiction.

The UAE Corporate Tax Law allows taxpayers five recognized methods to determine arm's length prices:

1. Comparable Uncontrolled Price (CUP) Method: Comparing the transaction to similar transactions between independent parties

2. Resale Price Method: Analyzing the price at which a related party resells the acquired goods or services.

3. Cost Plus Method: Calculating the cost of providing the goods or services, plus a mark-up reflecting an arm's length profit.

4. Transactional Net Margin Method: Comparing the net profit margin of the controlled transaction to that of comparable uncontrolled transactions.

5. Transactional Profit Split Method: This method calculates the total profit from controlled transactions and splits it among related businesses based upon an economically valid method.

Businesses will be required to maintain information regarding their transactions with Related Parties and Connected Persons, and certain businesses will be required to submit this information along with their Tax Return. Businesses that claim Small Business Relief will not have to comply with the transfer pricing documentation rules.

Maintaining proper documentation is essential for demonstrating compliance with transfer pricing rules. This includes:

• Nature of transactions with related parties.

• Chosen method for determining arm's length prices.

• Justification for the chosen method and applied adjustments.

• Comparable data supporting the arm's length price.

Companies exceeding a revenue threshold of AED 200 million or belonging to an MNE group are required to maintain a master file and a local file.

Master file: Provides an overview of the MNE group's global transfer pricing policies and strategies.

Local file: Offers detailed information on specific transactions with related parties within the UAE.

The documents can also be used to support the transfer price method used by a Taxable Person that have been determined in accordance with the Arm’s Length Principle and provide the Federal Tax Authority and other tax administrations with useful information to understand and assess a Taxable Person’s transfer pricing risks.

Generally, transactions between members of a Tax Group are eliminated in the consolidation of the Tax Group’s financial statements and hence do not need to comply with the transfer pricing rules.

However, where a member of a Tax Group has pre-Grouping Tax Losses or in other specific cases where there is a need to calculate the Taxable Income of an individual member of the Tax Group, transfer pricing will be applied and adequate transfer pricing documentation will need to be maintained in respect of transactions and arrangements between members of the Tax Group.

While adhering to transfer pricing rules is mandatory for most UAE businesses, exceptions exist. Small businesses claiming relief are exempted from documentation requirements. Additionally, transactions within consolidated tax groups are generally excluded, except in specific cases.

Transfer pricing regulations play a vital role in safeguarding fair and transparent Corporate Tax practices within the UAE. By understanding the Arm's Length Principle, identifying Related Parties, and applying approved methods, businesses can confidently navigate this crucial aspect of tax compliance.

Maintaining proper documentation and adhering to master file and local file requirements further enhance transparency and mitigate potential tax risks. As the UAE's Corporate Tax landscape evolves, staying informed about transfer pricing rules will be essential for responsible business practices.