TRANSFER PRICING RULES IN THE UAE MANAGING INTERCOMPANY TRANSACTIONS

This article has been researched and written by the Tax & Compliance Team at Creation Business Consultants. AI has not been used in generating this article.

The United Arab Emirates (UAE) has recently introduced transfer pricing regulations, aligning with global standards set by the Organisation for Economic Co-operation and Development (OECD). These rules are essential for multinational companies operating within the UAE to ensure that intercompany transactions are conducted at arm’s length, thereby preventing tax evasion and ensuring fair taxation.

CORPORATE TAX:

The tax imposed by the Corporate Tax Law on juridical persons and Business income.

TRANSFER PRICING AT A GLANCE: 

The pricing of transactions involving Related Parties or Connected Persons is known as transfer pricing, and it has grown in significance because of corporate cross-border trade and globalization. Due to the importance of transfer pricing, laws pertaining to it have been introduced in numerous nations.

The Group may illegally move profits from higher-tax jurisdictions to lower-tax jurisdictions, and TAX from high-tax jurisdictions to low-tax or no-tax jurisdictions, through transactions and agreements amongst Group entities. This would reduce the Group’s overall tax burden.

Tax administrations may evaluate the prices of transactions involving Related Parties or Connected Persons to determine whether the transactions have been priced at Market Value to prevent such price distortion.

ARM’S LENGTH PRINCIPLE:

According to Article 34 of the Corporate Tax Law, the arm’s length principle was introduced in the United Arab Emirates and states that agreements and transactions involving Related Parties or Connected Persons must be valued as though they had taken place between independent parties in comparable circumstances. The arm’s length principle is cantered on determining the price at which two independent parties would have come to an agreement under comparable conditions. Whenever feasible, this should be done using direct or indirect evidence of the behaviour of independent parties.

APPLICATION OF THE ARM’S LENGTH PRINCIPLE:

There are four key steps in applying the Arm’s Length for controlled transactions:

• Identify the relevant transactions, arrangements, related parties, and connected persons, then conduct a comparability study in accordance with that information.
• Identification of the commercial and financial relations.
• Contractual terms of the transaction.
• Functional Analysis.

SCOPE OF THE TRANSFER PRICING RULES: 

Any agreements or transactions between Related Parties or Connected Persons are subject to the transfer pricing regulations in the United Arab Emirates.

While they must comply with the arm’s length principle in the case of controlled transactions, exempt entities, entities that have chosen the small business relief, and standalone entities without any Related Party transactions are all subject to the rules governing transfer pricing. However, they are not obligated to create and maintain TP Documentation.

TRANSFER PRICING METHODS:

The OECD Transfer Pricing Guidelines outline the five globally recognized transfer pricing techniques, as detailed on our UAE transfer pricing service page, which are outlined under Article 34(3) of the Corporate Tax Law.

Traditional transaction methods such as the Comparable Uncontrolled Price (CUP) Method, the Resale Price Method (RPM), and the Cost plus Method (CPM) are considered to be the most straightforward ways to determine whether terms in the financial and commercial dealings between Related Parties or Connected Persons are at arm’s length. This is because any discrepancy between the price of a controlled transaction and the price of a comparable uncontrolled transaction can typically be directly linked to the parties’ financial and commercial relationships, and arm’s length conditions can be established by replacing the price of the controlled transaction with the price of the comparable uncontrolled transaction.Transactional profit methods, such as the Profit Split Method (PSM) and the Transactional Net Margin Method (TNMM), are applicable when there is little or no publicly available information about third parties and each party contributes something special and valuable to the Controlled Transaction. They are also relevant when the parties engage in highly integrated activities. Under these circumstances, where each party to a transaction provides distinct and valuable functions, a two-sided approach might be preferable to a one-sided approach.

TRANSFER PRICING DOCUMENTATION: 

In general, a series of documents created by Taxable Persons to demonstrate compliance with the arm’s length principle in their Related Party transactions is referred to as transfer pricing documentation. The goal of the transfer pricing documentation is to provide the FTA with a thorough understanding of the transfer pricing regulations and how they are applied by the Taxable Person, as well as to assess the outcomes of transfer pricing for each pertinent period under review.

For specific Taxable Persons, the applicable UAE legislation has specified five requirements for transfer pricing documents that must be completed for each tax period:

1. A disclosure form on transfer pricing, including information on controlled transactions made during a tax period.
2. Master File, which offers a high-level summary of the business operations of the group, as well as the distribution of revenue and economic activity within it. Only major firms as defined by Ministerial Decision No. 97 of 2023 are covered by it.
3. Local File provides comprehensive details on how the local entity operates, as well as analyses and tests the results of the controlled transactions to determine compliance with the arm’s length principle. Only major firms as defined by Ministerial Decision No. 97 of 2023 are covered by it.
4. The Country-by-Country Report, as outlined in Cabinet Resolution No. 44 of 2020, offers a summary of the various activities carried out by affiliates of an MNE Group and includes quantitative information about an MNE Group (above AED 3,150,000,000).
5. Additional supporting information upon request of the FTA, pursuant to Article 55(4) of the Corporate Tax Law, may also be required.

APPLYING THE ARM’S LENGTH PRINCIPLE WITH RESPECT TO INTANGIBLES: 

In transfer pricing, questions on intangibles are perhaps the most challenging to answer. The distinctive qualities of intangibles, their simplicity in transferring via a contractual agreement, the difficulty in locating comparable arrangements due to their special nature, and the significance of intangibles in generating revenue for organizations are reasons for this complexity.

Identifying the entity or entities within an MNE Group entitled to a portion of the returns generated from using the intangibles is essential in transfer pricing instances involving intangibles. Two main categories of transactions involve the identification and evaluation of intangibles:

• Transactions involving the transfer of intangibles or rights in intangibles.
• Transactions involving the use of intangibles in connection with the sale of goods or the provision of services.

The following procedures must be taken in order to use the framework for analyzing transactions involving intangibles between Related Parties or Connected Persons:

• Identify the intangibles used or transferred.
• Identify legal ownership of intangibles by examining the terms and conditions of legal arrangements, such as pertinent license agreements, registrations, contracts, and other relevant documents, as well as the contractual rights and obligations, such as the contractual assumption of risks in the relationships between the Related Parties or Connected Persons. Identify the full contractual arrangements.
• Identify who is economically responsible for the intangibles by using the Functional Analysis to identify the parties using the assets, managing risks, and performing duties relevant to the development, enhancement, maintenance, protection, and exploitation (DEMPE) of the intangibles.
• Verify that the parties’ actions and the terms of the applicable contracts are consistent. Determine whether the party assuming economically significant risks is truly in control of the risks in real life and has the resources to undertake the risks associated with the DEMPE of the intangibles.
• Explain how the actual controlled transactions pertaining to the DEMPE of the intangibles were conducted, taking into account the intangibles’ legal ownership, other pertinent contractual relationships under pertinent registrations and contracts, and the parties’ actions, including their pertinent contributions of assets, liabilities, and functions.
• Establish the arm’s length price for these transactions in accordance with the contributions of each party in terms of the tasks completed, the resources utilized, and the risks taken.

TRANSFER PRICING ADJUSTMENTS: 

In accordance with Article 34 of the Corporate Tax Law, the FTA is required to modify the taxable income included in the tax return to attain the arm’s length result that most accurately represents the facts and circumstances of the transaction or arrangement if the outcome of the controlled transaction does not fall within the arm’s length range. The taxable person will also have access to the information provided by the FTA to make the adjustment. 

In cases where the FTA or a taxable person modifies the taxable income to comply with the arm’s length criterion, the FTA shall cause the applicable adjustment to be reflected in the taxable income of the local related party involved in the transaction or arrangement.

Article 34 (11) of the Corporate Tax Law states that the taxable person may ask the FTA to adjust their taxable income in line with the relevant Double Taxation Agreement’s applicable provisions if the application of the arm’s length principle causes a foreign competent authority to modify the transfer price. After reviewing the foreign tax authority’s stance, the FTA may move forward with a matching change as needed.

INTERNATIONAL AGREEMENTS FOR THE AVOIDANCE OF DOUBLE TAXATION: 

Articles 34 to 36 of the Corporate Tax Law provide the domestic legislative foundation for transfer pricing in the United Arab Emirates (UAE). The UAE also boasts a well-established network of double taxation agreements.

“Associated Enterprises” is referred to in the provisions of some agreements that the UAE engaged in to avoid double taxation. The phrase “Associated Enterprises” and the standards that must be followed in transactions involving them are defined in the OECD Model Convention. The OECD Model Convention specifies, in particular, that transactions between such parties must be carried out in a way that is similar to what would happen between independent parties under similar conditions.

The terms of any international agreement that is in effect in the UAE will take precedence over the legislation governing transfer pricing.

For more information regarding how Creation can assist with tax services in the UAE, contact us today!

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