Transfer Pricing: Configuring TP Processes in Line with UAE Corporate Tax

Overview of Transfer Pricing

Transfer pricing refers to the pricing of goods and services exchanged between related entities. This pricing may not always reflect the true market value, which can lead to tax advantages and underpayment in one or more jurisdictions. To mitigate such discrepancies, tax authorities may scrutinize transactions between related parties to ensure they are priced at market value. If a transaction does not reflect fair market value or the Arm’s Length Price, tax authorities can perform a transfer pricing adjustment.

According to Article 55 of the UAE Corporate Tax (CT) Law, every taxable entity must disclose information regarding controlled transactions with related parties in their tax returns.

Recognizing the complexities surrounding transfer pricing, the Federal Tax Authority (FTA) has released guidance that outlines the rules, procedures, and compliance requirements for determining related party transactions, ensuring they are conducted on an Arm’s Length basis.

Key Features of the UAE Transfer Pricing Law

Applicability:

The transfer pricing provisions in the UAE apply to transactions between related or connected parties. The CT Law clarifies the definitions of “Connected Person” and “Related Parties” to distinguish these transactions from regular business dealings.

Substance Over Form:

While related parties may have intercompany agreements in place, the actual conduct of transactions takes precedence over the documented terms. If there are significant discrepancies between the contractual terms and the actual execution, the transaction should be evaluated based on actual conduct.

Arm’s Length Principle:

Article 34 of the CT Law mandates that taxable entities align their transfer pricing practices with the Arm’s Length Principle. A controlled transaction is compliant if its outcome is consistent with that of transactions between unrelated parties. This is evaluated through comparability analysis, comparing controlled transactions with comparable uncontrolled transactions.

Key Steps in Applying the Arm’s Length Principle:

1. Transfer Pricing Disclosure Requirement: Taxable persons must submit a transfer pricing disclosure alongside their tax return, using a form to be prescribed by the FTA.
2. Transfer Pricing Documentation: This documentation consists of records that demonstrate compliance with the Arm’s Length Principle in related party transactions. It provides the FTA with insights into the taxable entity’s transfer pricing policies and their implementation.
3. Exemptions: Entities qualifying for small business relief and standalone entities with no related party transactions must comply with transfer pricing rules but are not required to maintain TP documentation.

Transfer Pricing Methods

The transfer pricing rules outline several methods to determine whether a transaction aligns with the Arm’s Length Price:

1. Traditional Methods: These include comparable uncontrolled price (CUP), resale price method (RPM), and cost-plus method.
2. Transactional Methods: These involve profit split and comparable profit methods.
3. Alternative Methods: As per Article 34(4) of the CT Law, alternative methods may be used if the standard five methods cannot be reliably applied, as long as they adhere to the Arm’s Length Principle.