Corporate Tax

TRANSFER PRICING : Configuring TP Process in line with UAE Corporate Tax

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Transfer price is the price at which goods and / or services are transferred between companies which are related to one another. This price may or may not reflect the real market value of these goods or services and the TP mechanism developed by companies can lead to obtaining undue tax advantage and underpayment of tax in one or more jurisdictions. To prevent such price distortions, tax administrations may assess the prices of transactions between Related Parties or Connected Persons to verify if the transactions have been priced at Market Value. Tax administrations may perform a Transfer Pricing adjustment if a transaction is not found to be reflective of the Market Value or Arm’s Length Price.

Based on the same fundamental principle, Article 55 of the CT Law of the UAE also requires every taxable person to disclose information relating to transactions and arrangements (controlled transactions) with related parties and connected persons, along with the Tax Return.

Due to the complexity of the subject, FTA has also released a guide on transfer pricing, with an aim to provide an overview of the Transfer Pricing rules and procedures, including the determination of the Related Party transactions, whether transactions are done on an Arm’s Length basis and other related compliance requirements including Transfer Pricing documentation.

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Below are the key features of the transfer pricing Law and guidance issued by FTA.

Applicability of Transfer Pricing:

The Transfer Pricing provisions in the UAE apply to transactions or arrangements between Persons who are Related Parties or Connected Persons.

CT tax law provides explanation of the term “Connected Person” and “Related Parties”, since it was necessary to elaborate these terms and to segregate transactions with these parties from the ones entered with regular customers in the normal course of business.

Substance over form:

Transactions entered by related parties may be governed by way of intercompany agreements. Although such agreements can have the terms and conditions of the transactions documented, where there are material differences between the contractual terms and the actual conduct, the transaction should be determined based on the actual conduct.

Arm Length Principle

Article 34 of the CT law requires a taxable person to ensure that transfer pricing practices are consistent with the Arm’s Length Principle. The law deems a transaction or arrangement (both domestic and cross border) involving a related party or connected person (Controlled Transaction) to adhere to the arm’s-length principle, if the results of the transaction align with what would have been achieved had the involved parties not been related or connected in any way (Uncontrolled Transactions).

Such a comparison of the Controlled Transaction(s) with Comparable Uncontrolled Transaction(s) is named as a “comparability analysis” and is at the heart of the application of the Arm’s Length Principle.

Key steps in applying the Arm’s Length Principle for Controlled Transactions:

Transfer pricing disclosure requirement

The taxable person is required to submit a transfer pricing disclosure along with the tax return, in a form which will be prescribed by FTA on its website going forward.

Transfer Pricing Documentation

Generally, Transfer Pricing documentation refers to a set of records prepared by Taxable Persons to demonstrate their compliance with the Arm’s Length Principle in their Related Party transactions. The purpose of Transfer Pricing documentation is to provide the FTA with a clear and comprehensive understanding of the Taxable Person’s Transfer Pricing policies and their application, to test the Transfer Pricing outcome for each relevant period under review.

The requirement of maintaining the documentation varies depending on whether a related party transaction was entered, whether the taxable person is a MNE Group and whether the specified threshold of revenue or profits was exceeded.

Exempt entities or entities which have elected for the small business relief, as well as standalone entities with no Related Party transactions are subject to Transfer Pricing rules and need to meet the Arm’s Length Principle in case of Controlled Transactions but are not required to prepare and keep TP Documentation.

Transfer Pricing Methods

The transfer pricing rules provide various methods for determining whether a transaction is carried out at Arm’s Length Price:

Other Transfer Pricing methods Article 34(4) of the Corporate Tax Law stipulates that the Arm’s Length Price may be calculated using methods other than the five Transfer Pricing methods listed in the Corporate Tax Law, if none of the five recognized methods can be reasonably or reliably applied, and provided these other methods satisfy the Arm’s Length Principle.

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