Transfer Pricing Regulation
Transfer PricingRegulation
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Transfer Pricing Procedure
In UAE
The UAE Ministry of Finance on 9 December 2022 released the Federal Decree-Law No. 47 of 2022 on the taxation of businesses and corporations. Ministry of Finance also updated about “frequently asked questions” section, which includes new transfer pricing rules.
According to the transfer pricing rule, transactions between parties are carried out on arm’s length terms. The articles in the corporate tax law require that the consideration of transactions with connected persons and related parties be determined by reference to their “market value.” This might represent an arms’ length of indicators or financial results as the goal of transfer pricing is to prevent the manipulation of taxable income.
Effective Date
The FAQs and the law both state that the provisions including the transfer pricing will be effective for financial years starting on or after 1st June 2023.
Applicable To Taxpayers And Scope Of Transactions
- Transactions between mainland and free zone entities as well as domestic related parties are all covered within the scope of the law.
- A non-resident person having a permanent establishment in the UAE would also be subject to the advance transfer pricing agreement and provisions. Therefore, he would be required to submit and maintain the relevant transfer pricing documentation.
- Transactions done between different business lines of an exempt person must comply with the arm’s length principle.
Transfer Pricing Methods
The law sets five transfer pricing methods for the purpose of the application of the arm’s length principle.
Resale price method
Comparable uncontrolled price method
Cost plus method
Transactional profit split method
Transactional net margin method
If none of these methods can be reasonably applied, the law allows for the application of other transfer pricing methods to comply with the arm’s length result.
Transfer Pricing
Documentation
- Businesses are required to maintain a Master file and a local file.
- Businesses are required to submit a disclosure containing information about their transactions with related parties along with their tax returns.
- Federal Tax Authority may ask a taxpayer to provide a copy of their Local and Master file or any other information to support the arm’s length. FTA can issue a notice at any time but not less than 30 days.
- Format and threshold of the local and master file to be prescribed by the FTA.
According to the FAQs, businesses that claim small business relief will not have to comply with the transfer pricing documentation rules.
Penalties
No particular penalties for non-compliance with the transfer pricing documentation requirements or non-submission of such information. However, it is expected that penalties for non-compliance would be in line with the applicability under the Tax Procedures Law of 2017.
Advance Pricing Agreements
(APAs)
An APA is an approach that aims to prevent transfer pricing disputes. These disputes are arising by criteria for applying the arm’s length principle to transactions. through the regular clarification process, the law provided that APAs will be exploitable.
ebs Observation
In the future, UAE businesses will need to comply with the internationally accepted transfer pricing documentation requirements.
It is expected that the government of UAE will issue further guidance as the law does not provide any materiality thresholds. ebs recommends that businesses look into their business arrangements from a transfer pricing perspective and start to prepare the required documentation.
Large, small, and medium groups now face a certain risk due to monitoring by the tax department and regulatory standards. Several global corporations are also thinking about the possible cost management options provided by a well-designed transfer pricing model.
FAQ’s
The corporate tax law is going to be effective from 1 June 2023 and includes some transfer pricing (TP) provisions that are broadly aligned with Organization for Economic Cooperation and Development (OCED) principles.
It refers to the value attached to the transfer of services, goods, and technology between related entities. It also refers to the value attached to transfer between unrelated parties.
These are the main three types of transfer pricing:
Market-based transfer price, Cost-based transfer price, and Negotiated transfer prices.
There are generally over sixty governments that have adopted transfer pricing rules which in some cases are based on the arm’s length principle.
There are five main OECD methods for transfer pricing such as CUP, Resale Price, Cost Plus, TNNM, and the Profit Split Method. Taxpayers need to choose the most appropriate method for their particular case.
On 31 January 2022, the Ministry of Finance of the UAE announced that the UAE will introduce a Federal Corporate Tax (CT) on business profits that will be effective for financial years starting on or after 1 June 2023. The corporate tax law is applicable in the context of the UAE transfer pricing (TP) rules which are applicable in UAE.
If you want to reach out to our accountants for a meaningful discussion on transfer pricing policies support in UAE, connect with us.
Maximize your profits through expert transfer pricing services in the UAE with ebs.