
In line with global tax frameworks, the UAE has adopted Transfer Pricing (TP) regulations as part of its Corporate Tax Law to promote transparency and ensure fairness in domestic and cross-border related-party transactions.
These rules require companies to follow the arm’s length principle, meaning that transactions between related parties must be priced as if they were between independent entities. This move aligns the UAE with OECD guidelines and international tax standards aimed at minimizing profit shifting and base erosion.
This article provides an in-depth guide to Transfer Pricing in the UAE, covering key areas such as compliance, documentation requirements, penalties, and practical steps for businesses to ensure compliance.
1. What is Transfer Pricing?
Transfer Pricing refers to the pricing of goods, services, and intangible assets between related entities, whether within a multinational group or between related entities in a domestic market. These related-party transactions must comply with the arm’s length principle, ensuring that they are conducted at market value, as if the parties involved were independent.
2. Transfer Pricing in the UAE
Transfer Pricing regulations in the UAE are aligned with the OECD’s Base Erosion and Profit Shifting (BEPS) initiative. These regulations apply to UAE businesses engaged in transactions with related parties both within the country and internationally. The objective is to prevent companies from manipulating profits by shifting income to low-tax jurisdictions or creating artificial expenses in high-tax jurisdictions.
Under the UAE Corporate Tax (CT) Law, Transfer Pricing plays a significant role in ensuring that the taxable profits of UAE entities reflect the proper economic activities conducted within the UAE. This is crucial because related-party transactions that are not at arm’s length can lead to distorted taxable income, a key concern for tax authorities. The Federal Tax Authority (FTA) emphasizes ensuring that all related-party transactions align with the arm’s length principle (ALP), as Article 34 of the UAE CT Law requires.
3. Key Aspects of UAE Transfer Pricing Regulations
- Arm’s Length Principle (ALP): Transactions between related parties should be conducted on terms comparable to those that unrelated parties would agree upon in the open market.
- Related Parties Definition: Related parties include entities within a group or individuals with common ownership or control, and in some instances, family members, as defined under IFRS.
- Connected Persons Definition: As per the UAE Corporate Tax Law, connected persons refer to individuals who hold a significant influence over a business, such as directors, shareholders, or officers. They can also include family members or other entities with close ties to the business.
- Transfer Pricing Methods: The UAE TP regulations provide several acceptable methods for determining arm’s length pricing, such as the Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM), Cost-Plus Method (CPM), Transactional Net Margin Method (TNMM), and Profit Split Method.
- Country-by-Country Reporting (CbCR): As part of the UAE’s compliance with BEPS, CbCR is required for multinational enterprises with consolidated revenues of AED 3.15 billion or more. These enterprises must disclose key financial and tax-related information on a country-by-country basis.
4. Transfer Pricing and Corporate Tax Adjustments
The UAE CT Law requires that all related-party transactions are aligned with the arm’s length principle. If transactions are not conducted at arm’s length, adjustments must be made to the accounting net profit to arrive at the correct taxable income.
This is critical because the FTA will not allow companies to reduce taxable income through artificially inflated expenses or deflated revenues in related-party transactions. For instance, if a company overpays a related party for goods or services, the excess amount would not be taxable. Similarly, if a related party is undercharged, the income should be adjusted upward to reflect arm’s length pricing.
Transfer Pricing adjustments are critical adjustments that should be made to the accounting net profit when determining the taxable income under the UAE CT Law and one of the adjustments under the UAE CT return. Companies must review all related-party transactions and make appropriate adjustments to comply with the ALP and avoid penalties for incorrect tax reporting.
5. Documentation and Compliance Requirements
UAE businesses are required to maintain robust Transfer Pricing documentation, including:
- Master File: This file provides a high-level overview of the group’s global operations, transfer pricing policies, and profit allocation across jurisdictions.
- Local File: A more detailed document focusing on the UAE entity’s specific transactions with related parties.
- Transfer Pricing Disclosure Form: Entities must disclose related-party transactions and confirm compliance with TP regulations in their annual corporate tax return.
- Contemporaneous Documentation: Businesses must maintain contemporaneous documentation, which means the necessary transfer pricing records should be prepared when the transactions occur, not after. This helps ensure that pricing decisions are based on accurate and timely information.
- Justification of Pricing to the FTA: Having robust transfer pricing documentation beforehand is crucial to justify the prices charged for related party transactions. This documentation must be available to submit to the FTA along with the Corporate Tax return to demonstrate compliance with the Arm’s Length Principle and avoid potential disputes or penalties.
It is essential to maintain accurate and timely TP documentation to demonstrate compliance in case of audits by the UAE Federal Tax Authority (FTA).
6. Penalties for Non-Compliance
Non-compliance with Transfer Pricing regulations can lead to substantial penalties in the UAE. Failing to meet documentation requirements, improperly pricing transactions, or failing to submit the CbCR can trigger penalties, ranging from financial fines to increased scrutiny from tax authorities.
7. Essential Actions for UAE Businesses
- Functional Analysis: Businesses should conduct a detailed analysis of the functions performed, risks assumed, and assets utilized by related parties.
- Benchmarking Studies: Companies need to perform benchmarking to determine whether their related-party transactions comply with the arm’s length standard, comparing them to similar transactions between unrelated entities.
- Develop a TP Policy: Businesses should establish a robust TP policy that reflects the arm’s length pricing for all intra-group transactions and ensure that it is consistently applied.
- Review and Update Documentation: UAE businesses must continuously update their TP documentation and policies to reflect changes in business operations or related-party transactions.
Contact Us
As the UAE strengthens its tax regime, Transfer Pricing compliance has become critical for businesses operating in the country. Companies must ensure they have the necessary documentation, policies, and practices to align with the arm’s length principle and avoid penalties.
XB4 Tax Experts can help businesses navigate these complexities. With a team of experienced tax professionals, we provide support in Transfer Pricing functional analysis, benchmarking, documentation, policy formulation, and ongoing compliance to ensure that your business is fully aligned with UAE regulations. Reach out to our team today to learn how we can assist you in meeting your Transfer Pricing obligations and ensure seamless Corporate Tax compliance.