Transfer Pricing

In line with the new corporate tax legislation, the United Arab Emirates enacted transfer pricing laws effective June 1, 2023. This summary details the implications for firms based in the UAE. If you are unfamiliar with transfer pricing concepts, these regulations aim to ensure that transactions and payments between related parties adhere to “arm’s length” or “open market” values.

Aligned with OECD guidelines, these regulations set forth acceptable valuation methods and compliance requirements. They are crucial in preventing profit distortion for tax avoidance. Entities that do not engage in transactions with related parties or make payments to connected individuals may be exempt from these regulations or subject to reduced compliance, pending confirmation through a Cabinet Decision.

Related Parties and Connected Persons Under Transfer Pricing Regulations

A detailed description of related parties and connected persons is provided in the United Arab Emirates’ corporate tax decree-law, particularly regarding the application of transfer pricing regulations. For individuals, related parties encompass family members and businesses where the individual, either alone or in conjunction with related parties, holds a controlling interest, typically defined as 50% or more of the company’s shares.

Under the corporate tax decree-law, the business owner, directors, officers, and any related parties associated with the owner, an officer, or a director are all considered connected persons. These definitions establish the groundwork for the proper application of transfer pricing regulations, ensuring that payments and transactions among these entities adhere to principles of fairness and market value.

Determining Arm’s Length Value in Accordance with Transfer Pricing Regulations

The core principle of arm’s length value in transfer pricing regulations asserts that transactions must be valued as if they were between unrelated parties to ensure independence and fairness. The United Arab Emirates’ corporate tax decree-law outlines authorized procedures for determining this arm’s length value, aligning with accepted global standards and OECD transfer pricing principles.

The corporate tax decree-law endorses several transfer pricing methods to determine arm’s length value, including the cost-plus approach, the comparable uncontrolled price method, the resale price method, the transactional net margin method, and the transactional profit split method. These methods provide a framework for fair and impartial valuation in related-party transactions, in line with international standards. Furthermore, if the specified methods are deemed impractical, the decree-law permits the use of alternative techniques. In such cases, consulting with transfer pricing experts may be necessary.

Determining Arm’s Length Value: Methods Authorized by the Corporate Tax Decree-Law

The calculation of arm’s length value is grounded in a fundamental principle that emphasizes valuing transactions as if they were conducted independently and without influence between unrelated parties. The corporate tax decree-law in the United Arab Emirates endorses specific transfer pricing methods for determining proper arm’s length value:

• Comparable Uncontrolled Price Method
• Resale Price Method
• Cost-Plus Method
• Transactional Net Margin Method
• Transactional Profit Split Method

These proven techniques align with international standards and OECD transfer pricing guidelines. Expert advice from transfer pricing specialists may be necessary to implement these strategies effectively. Importantly, the decree-law provides flexibility in valuation processes by permitting alternative methodologies when the specified approaches are deemed impractical.

Documentation and Reporting of Transfer Pricing

The decree-law provides a broad outline of transfer pricing documentation requirements that taxpayers must retain, pending a forthcoming Cabinet Decision to specify which taxpayers are obligated to report and maintain documentation.

Included in the decree-law are two standard OECD documents: a master file and a local file. As per the decree-law, these records must be kept in a format specified by the FTA, anticipated to align closely with or mirror the format recommended in OECD guidance.

The master file typically encompasses comprehensive information about the global business activities of the affiliated organization to which the taxpayer belongs. This includes:

• Group structure
• Description of the group’s business
• Intangible assets within the group
• Inter company financing arrangements
• Financial and tax position of the group

Usually, the local file comprises

Information regarding the taxpayer, including an organizational structure and business plan. Documentation of significant local transactions governed by transfer pricing regulations. The FTA may request these documents at any time, although they are not mandatory for regular reporting. Taxpayers will have 30 days to submit these files upon request. The decree law mentions the possibility of issuing a notice or decision mandating taxpayers to file a transfer pricing disclosure concurrently with their tax returns, in addition to maintaining a master file and a local file. It remains unclear whether such notices or decisions will be issued universally or selectively.

Transfer pricing regulations are explicitly outlined for companies operating within free zones. Compliance with these regulations is crucial as it can impact the eligibility status of free zone enterprises. Ensuring adherence to transfer pricing requirements is particularly significant for free zone businesses that are preparing to fulfill corporate tax obligations.

Challenges with Compliance and Documentation Requirements

For certain taxpayers, complying with the documentation and reporting obligations under transfer pricing rules represents a substantial burden. Creating precise master files and local files demands considerable time and effort. If annual reporting is mandated alongside tax filings, meticulous attention is essential to avoid potential repercussions for inaccuracies or non-compliance. Vitra Tax Consultants emphasizes the meticulous approach necessary for documentation to ensure adherence to legal requirements.

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