UAE Corporate Tax Transfer Pricing Guide

What is Transfer Pricing?

Transfer pricing involves the pricing of transactions between related parties or connected individuals. The terms and conditions of these transactions are influenced by the relationship between the parties involved. In contrast to independent parties, who determine prices through market forces, related Parties have the ability to establish prices that may not accurately represent the true market value. This can consequently impact the reported profits across various jurisdictions. To prevent the exploitation of tax liabilities through such non-arm's length pricing, the Arm’s Length Principle is applied, which necessitates that transactions between Related Parties be conducted at a fair market value, comparable to those between independent parties.

Corporate tax transfer pricing refers to the practice of setting prices for transactions between related entities within a multinational corporation. This ensures that goods, services, and intellectual property are exchanged at market rates, complying with the arm's length principle. Proper transfer pricing is crucial for accurate profit allocation across different tax jurisdictions, preventing tax evasion and ensuring fair taxation. Regulations and documentation requirements help maintain transparency and compliance with international and local tax laws.

Scope of Transfer Pricing

Transfer Pricing applies to a wide range of transactions between Related Parties or Connected Persons. These transactions may include:

• Trade of Services: Transactions involving the provision of services.
• Tangible Goods: The sale or transfer of physical products.
• Intangibles: Transfers involving intellectual property or other non-physical assets.
• Financial Transactions: Loans, guarantees, or other financial arrangements.
• Permanent Establishments (PE): Certain transactions involving a Permanent Establishment.

The provisions under the Corporate Tax Law and Ministerial Decision No. 97 of 2023 ensure that Related Parties set the terms of these Controlled Transactions in a manner consistent with how independent parties would operate under comparable circumstances.

Transfer pricing is used for several purposes:

• Tax Optimization: Companies might use transfer pricing to shift profits to low-tax jurisdictions, thereby reducing their overall tax burden.
• Performance Measurement: Helps in evaluating the performance of different divisions or subsidiaries by setting appropriate internal prices for inter-company transactions.
• Regulatory Compliance: Ensures compliance with international and local tax regulations to avoid penalties and disputes with tax authorities.

While transfer pricing can bring significant benefits, it also poses risks such as the potential for tax evasion and the complexity of documentation and compliance requirements

How Transfer Pricing Works

Transfer pricing is a method used by companies to set prices for goods, services, or intellectual property exchanged between divisions within the same company or between related entities under common control. The main objective is to ensure that transactions reflect market conditions as if they were conducted between unrelated parties, adhering to the "arm's length principle."

Here’s how transfer pricing works:

• Determination of Transfer Prices: Companies establish transfer prices using various methodologies such as the Comparable Uncontrolled Price (CUP) method, Cost Plus method, Resale Price method, Transactional Net Margin method (TNMM), and the Profit Split method. These methodologies aim to replicate the pricing that would occur between independent enterprises.
• Documentation and Compliance: Firms must document their transfer pricing practices and provide justification for the chosen methods. This documentation is crucial for compliance with international and local tax regulations and for defending against audits by tax authorities.
• Tax Implications: Transfer pricing affects the allocation of income and expenses among different jurisdictions, impacting the overall tax liability of multinational companies. By setting appropriate transfer prices, companies can manage their tax exposure while complying with regulatory requirements.
• Regular Review and Adjustment: Due to changes in market conditions, regulatory updates, and business operations, companies need to regularly review and adjust their transfer pricing policies to remain compliant and competitive.

Transfer pricing is essential for effective tax planning, performance measurement, and regulatory compliance within multinational corporations.

Arm’s Length - Principle & Application

Arm’s Length Principle

Transfer Pricing in UAE – Applicability under the UAE Corporate Tax Law

Transfer pricing regulations in the UAE are crucial under the Corporate Tax Law to ensure that transactions between Related Parties or Connected Persons are conducted at arm’s length prices. These regulations are aligned with international standards to prevent tax avoidance practices and ensure fair allocation of taxable income within the UAE jurisdiction.

Applicability of Arm’s Length Principle for transactions under the UAE Corporate Tax Law

The Arm’s Length Principle (ALP) is a cornerstone of transfer pricing rules under the UAE Corporate Tax Law. It requires that transactions between Related Parties or Connected Persons be priced as if they were conducted between independent, unrelated parties under similar circumstances. This principle ensures that taxable income accurately reflects the economic substance of transactions, thereby preventing artificial profit shifting.

How to determine if the transaction or arrangement meets the Arm’s Length Standard?

To assess compliance with the Arm’s Length Standard in the UAE:

• Comparability Analysis: Evaluate whether the terms and conditions of transactions between Related Parties or Connected Persons are consistent with those that would be agreed upon between independent parties in a comparable transaction.
• Market Benchmarking: Compare the pricing and terms of the transaction under review with those observed in transactions between unrelated parties for similar goods, services, or financial arrangements.
• Documentation Requirements: Maintain comprehensive documentation that includes detailed analyses, comparability studies, and rationale behind the chosen transfer pricing method to demonstrate adherence to the Arm’s Length Principle.

Corporate Tax Transfer Pricing Methods to be used for determining Arm’s Length Price

Under UAE Corporate Tax Law, the following transfer pricing methods are recognized for determining an arm’s length price:

• Comparable Uncontrolled Price Method (CUP): Compares prices in transactions between Related Parties with prices in transactions between unrelated parties for similar goods or services.
• Cost-Plus Method: Adds an appropriate mark-up to the costs incurred in providing goods or services to determine an arm’s length price.
• Transactional Net Margin Method (TNMM): Compares the net profit margins arising from transactions between Related Parties with those of comparable transactions between unrelated parties.
• Transactional Profit Split Method: Allocates profits between Related Parties based on their respective contributions to the transaction.
• Resale Price Method: Determines the arm’s length price based on the resale price of goods or services minus an appropriate gross margin.

Elements to Consider When Selecting and Using Transfer Pricing Technique for Calculating Arm's Length Price

Several factors influence the selection and application of Corporate tax transfer pricing methods in the UAE:

• Nature of Transaction: Consider the specific characteristics and economic substance of the transaction, including the type of goods or services involved.
• Functions, Assets, and Risks: Analyze the functions performed, assets used, and risks assumed by the Related Parties in the transaction.
• Market Conditions: Evaluate prevailing market conditions and industry practices relevant to the transaction.
• Contractual Terms: Review the terms and conditions stipulated in the contract governing the transaction between Related Parties.
• Business Strategy: Take into account the business strategies pursued by the Related Parties and their impact on pricing decisions.

This description provides a complete overview of how the Arm’s Length Principle and  UAE corporate tax transfer pricing transfer pricing methods are applied within the framework. It highlights the importance of compliance with international standards to ensure fair taxation practices and prevent tax base erosion through inappropriate transfer pricing practices.

Transactions with Related Parties and Connected Persons under the UAE Corporate Tax Law

Related Parties and Control under Transfer Pricing in UAE

Related Parties in the context of UAE Corporate Tax Law refer to entities or individuals that have the ability to directly or indirectly influence each other's business decisions. This influence often stems from control, ownership, or significant involvement in each other's operations. Understanding the concept of Related Parties is crucial in determining the application of transfer pricing rules to ensure transactions are conducted at arm’s length prices.

Who is a Related Party?

In UAE Corporate Tax Law, a Related Party includes various scenarios:

• Two or more Natural Persons: Related if they share a familial or close personal relationship.
• Natural Person and Legal Person: Related if there is substantial ownership or control between them.
• Two or more Juridical Persons: Related if there is significant ownership or control between these entities, such as parent-subsidiary relationships.
• Two or more persons are partners in the same Unincorporated Partnership: Related if they jointly control the partnership's operations.
• A person and its PE (Permanent Establishment) or Foreign PE: Related if there is control or significant influence over the PE's operations.
•  A person is a founder, beneficiary, trustee, etc., of the trust or foundation and its Relating Parties: Related if there is control or substantial influence over the trust or foundation and its beneficiaries or trustees.

Understanding these definitions is crucial for compliance with UAE Corporate Tax Law, ensuring fair taxation practices and preventing tax avoidance through improper transfer pricing practices.

What is the Concept of Control under the UAE Corporate Tax Law?

Under the UAE Corporate Tax Law, 'Control' refers to the capability of one entity to exert influence over another. This concept is crucial in determining tax liabilities and obligations. Control can manifest in several forms:

• Voting Rights: Having 50% or more of the voting rights in another entity.
• Board of Directors: Controlling 50% or more of the Board of Directors' decisions in another entity.
• Profits: Receiving 50% or more of the profits of another entity.
• Exerting Influence: Having significant influence over the business and affairs of another entity, which can be through contractual agreements, personal capacities, or any other means.

Control is determined based on factual circumstances and can vary depending on the specific arrangements and relationships between entities. Understanding control is essential for compliance with UAE Corporate Tax Law, ensuring transparency in tax reporting and obligations.

Corporate Tax Advisors in UAE

Reyson Badger is a prominent firm providing complete corporate tax services in the UAE. Their team of expert tax consultants specializes in transfer pricing methods, offering extensive knowledge and experience to assist businesses effectively. They excel in guiding clients through complex calculations and strategic tax planning, ensuring compliance and optimizing tax strategies.

For further inquiries or assistance regarding transfer pricing and other corporate tax matters, Reyson Badger stands ready to provide personalized advisory services customized to meet business needs.