Transfer Pricing in UAE- What does it mean?

Transfer pricing refers to the pricing of goods, services, or intangible assets transferred between related entities within a multinational company or across different jurisdictions. It involves determining the appropriate prices or charges for such transactions to ensure they are conducted on an arm’s length basis, meaning that they are priced as if the entities involved were independent and unrelated parties.

In the context of the UAE, transfer pricing regulations aim to prevent the manipulation of prices in transactions between related parties for tax purposes. The United Arab Emirates has introduced transfer pricing regulations to align with international standards and combat base erosion and profit shifting (BEPS) practices.

These regulations require businesses operating in the UAE to maintain and provide transfer pricing documentation, demonstrating that their cross-border transactions with related parties are conducted at arm’s length prices. The documentation should include details of the transfer pricing methodologies used, comparable analysis, and supporting evidence.

Complying with transfer pricing regulations in the UAE is essential for businesses to ensure they are in line with local tax requirements and to minimize the risk of transfer pricing adjustments, penalties, and potential disputes with tax authorities. Seeking the assistance of experts in transfer pricing can help businesses navigate the complexities of these regulations and ensure compliance.

What Is an Arm’s Length Transaction?

A transaction conducted at arm’s length refers to a scenario where buyers and sellers engage in a transaction independently and autonomously, without any undue influence or interference from either party.

 In such transactions, both parties are motivated solely by their own self-interest, without succumbing to external pressures, and make decisions independently, minimizing any collaboration or collusion between the buyer and seller.

What Are Transfer Pricing Implications?

As previously stated, with the implementation of corporate income tax in the UAE, the country will adopt the OECD Transfer Pricing Rules.

Consequently, all companies operating within the UAE will need to adhere to certain documentation requirements and abide by transfer pricing regulations. These rules will apply not only to international transactions but also to domestic transactions, making compliance mandatory for all businesses.

Do UAE businesses need to worry about this?

Multinational enterprises will face the primary impact of transfer pricing. This concern holds utmost importance and significance for these corporations.

Drafting and preparing transfer pricing policies or studies for substantial transactions is a complicated and time-intensive endeavor, necessitating professional expertise and guidance for most businesses.

As per the OECD TP Guidelines, transfer pricing documentation typically consists of a Master file, a Local file, and a Country-by-Country Report (CbCR). However, compliance with these guidelines can be challenging, and failure to comply may lead to significant penalties.

In the United Arab Emirates (UAE), the CbCR requirements have been in effect since 2019. The UAE authorities adhere to the OECD guidelines on transfer pricing documentation, which include the following three tiers:

• Master file: This file contains comprehensive information about the entire Multinational Enterprise (MNE) group, including its organizational structure, business activities, intangible assets, and transfer pricing policies.
• Local file: The local file focuses on specific taxpayer transactions that are considered material. It provides detailed information about the controlled transactions, the entities involved, the transfer pricing methods applied, and the analysis supporting the arm’s length nature of these transactions.
• Country-by-Country Report: This report provides indicators regarding the economic activities conducted by the MNE group in different jurisdictions. It includes information on the global allocation of the group’s income, taxes paid, and other relevant economic indicators.

Complying with these documentation requirements can be demanding since both the Master file and the Local file need to be kept up-to-date. This necessitates significant time and effort to prepare and maintain accurate information. It is crucial to ensure compliance to avoid facing heavy penalties for non-compliance.

Impact of other transfer pricing aspects

Free zone regimes

According to the Ministry of Finance (MoF) FAQs, free zone businesses in the UAE will be subject to UAE corporate tax (CT). The UAE government has no plans to change any aspect of the CT regime, which means that CT incentives will still be available to businesses operating within free zones, as long as they comply with all regulatory requirements and do not conduct business in the mainland Emirates.

Considering the ongoing availability of CT incentives for businesses in free zones, it may be necessary to assess certain transfer pricing considerations. Once the detailed transfer pricing rules are released, it will be important to analyze whether the arm’s length principle will apply to these free zone businesses. Additionally, free zone entities may need to engage with mainland UAE entities when developing their transfer pricing rules.

Withholding tax

From MoF FAQs, domestic and cross-border payments are unlikely to be subject to withholding tax in the UAE.

This implies that UAE businesses may not have to withhold any tax from dividends, interest, royalties, or similar payments made to related or non-related parties.

Tax Grouping

In the United Arab Emirates (UAE), the alternative to forming a group tax structure or fiscal unity would be for each individual company within a group to file separate tax returns. This means that each company would be assessed for taxes independently, and their tax liabilities would be calculated and paid separately.

Qualifying intra-group transactions

Under specific conditions, certain intra-group transactions and reorganizations may be exempt from UAE corporate tax (CT). However, the categorization of transactions as ‘Qualifying intra-group transactions and reorganizations’ and the requirement to adhere to the arm’s length principle in those cases need further clarification.

Take Calculated Risks with Accountant Foundry

Organizations operating in the UAE may encounter difficulties with the introduction of transfer pricing (TP) requirements. It is crucial for businesses to address TP implications proactively to ensure compliance and reduce transfer pricing costs.

Moreover, organizations should strategize for the seamless implementation of UAE corporate tax (CT) and transfer pricing regimes from an early stage.

If you require any support regarding your tax obligations, Accountant Foundry is available to assist you.