The price of transactions between Related Parties or Connected Persons is referred to as transfer pricing. Group entities may artificially move earnings from higher tax jurisdictions to lower tax jurisdictions, and from high-tax companies to low- or no-tax businesses, through transactions and agreements amongst group entities. This would reduce the Group’s overall tax burden. Organisations that have released comprehensive rules on transfer pricing, such the United Nations (UN) and the Organisation for Economic Co-operation and Development (OECD), provide standards for documentation and offer guidance on how to manage transactions between Related Parties from a tax perspective.
In the UAE, agreements and transactions involving Related Parties or Connected Persons in domestic groups are also subject to transfer pricing regulations, in addition to Multinational Groups of Entities (MNE Groups). Some key terms as outlined in the UAE Corporate Tax Law include:
The Arm’s Length Principle states that agreements and transactions between connected or related parties must be valued as though they had taken place between independent parties in comparable circumstances, as per Article 34 of the Corporate Tax Law.
Controlled Transactions: A “Controlled Transaction” is a transaction or arrangement between Related Parties or Connected Persons.
Related Parties:
Related Parties as outlined in the UAE Corporate Tax Law, refer to:
- Pre-existing relationship with another Person through kinship (in the case of natural persons), ownership, or control, regardless of whether that other Person is resident or not in the UAE (Article 35 of the Corporate Tax Law).
- Natural Persons: The definition of kinship or affiliation covers the relationship of two or more individuals who are related up to the fourth degree of kinship or affiliation, including by way of adoption of guardianship.
- Ownership: If a juridical person, alone or together with its Related Parties, directly or indirectly owns a 50% or greater ownership interest in the other juridical person.
- Control: Control is the direction and influence over one Person by another Person and can be determined in several ways, including but not limited to instances where:
- A person can use at least 50% of another person’s voting rights.
- A Person can determine the composition of at least 50% of another Person’s board of directors.
- A Person can receive 50% or more of the profits of another Person.
- A Person can determine, or exercise significant influence over, the conduct of the business and affairs of another Person.
Scope of The Transfer Pricing Rules
Any agreements or transactions involving Related Parties or Connected Persons are subject to the Transfer Pricing regulations in the UAE. While standalone entities without any Related Party transactions and exempt or eligible entities for small business relief are subject to transfer pricing regulations and must adhere to the Arm’s Length Principle in the case of controlled transactions, they are not obliged to create and maintain transfer pricing documentation.
International Agreements For The Avoidance Of Double Taxation
According to the OECD Model Convention, transactions between “Associated Enterprises” must be carried out in a way that is equivalent to that which would take place between independent parties under similar conditions. The regulations governing transfer pricing in the UAE shall not overrule the conditions of any international agreement that is in force locally.
Application of the Arm’s Length Principle
According to the OECD Model Convention, transactions between “Associated Enterprises” must be carried out in a way that is equivalent to that which would take place between independent parties under similar conditions. The regulations governing transfer pricing in the UAE shall not overrule the conditions of any international agreement that is in force locally.
Application of the Arm’s Length Principle
Three key steps in applying the Arm’s Length Principle for Controlled Transactions are as follows:
a. Identify Related Parties, Connected Persons, relevant transactions and arrangements and perform a comparability analysis accordingly.
b. Selection of the most appropriate Transfer Pricing method: There are five internationally accepted Transfer Pricing methods detailed in the OECD Transfer Pricing Guidelines and internalised under Article 34(3) of the Corporate Tax Law. They are:
- The Comparable Uncontrolled Price (CUP) Method
- The Resale price Method (RPM)
- The Cost-plus Method (CPM)
- The Transactional Net Margin Method (TNMM)
- The Profit Split Method (PSM)
According to Article 34(4) of the Corporate Tax Law, if none of the five recognised methods can be applied reasonably or reliably, the Arm’s Length Price may be calculated using methods other than the five transfer pricing methods listed in the Corporate Tax Law, provided that these other methods satisfy the Arm’s Length Principle. The primary aim of applying a variety of techniques to test the Arm’s Length Principle should be to arrive at a decision that considers the case’s specific facts, circumstances, and accessible evidence.
c. Determination of the Arm’s Length Price: Once the most appropriate Transfer Pricing method has been identified, the method is applied on the tested party and on the data of Comparable Uncontrolled Transaction(s) to arrive at the Arm’s Length Price.
Overview of Transfer Pricing documentation are as follows:
a. General Transfer Pricing disclosure form: This covers details of the Controlled Transactions during a Tax Period.
b. Master File: This provides a high-level overview of the Group’s business and the allocation of income and economic activity within a Group. This is required for businesses that are part of an MNE Group with consolidated revenue over AED 3.15 billion or where the Taxable Person’s Revenue exceeds AED 200 million.
c. Local File: This provides detailed information on operations of the local entity and analysis and testing of the outcomes of the Controlled Transactions against the Arm’s Length Principle. This is required for businesses that are part of an MNE Group with consolidated revenue over AED 3.15 billion or where the Taxable Person’s Revenue exceeds AED 200 million.
d. Country-by-Country Reporting (CbCR): This provides jurisdictional quantitative information about an MNE Group as well as an overview of the different activities conducted by affiliates of an MNE Group, businesses that are part of an MNE Group with consolidated revenue over AED 3.15 billion.
e. Under Article 55(4) of the UAE Corporate Tax Law, the FTA may request certain information from Taxable Persons who are not required to maintain a Local File and a Master File. The FTA Some may request for the following examples of the information:
- Information regarding transactions with Related Parties and Connected Persons.
- Any information to support the arm’s length nature of the transaction.
- Any other information that the FTA deems necessary to assess the arm’s length nature of the transaction.
- Information used for application of the chosen method.
Such additional documentation may include (but is not limited to) documentation supporting arm’s length analysis of the Controlled Transaction (i.e. functional analysis, benchmarking studies, intercompany agreements, meeting minutes, evidence of decisions taken, emails, invoices, workpapers computing the transfer prices, among others).
Objectives Of Transfer Pricing Documentation
1. Ensuring that Taxable Persons appropriately consider Transfer Pricing requirements when setting prices and other terms for transactions between Related Parties or Connected Persons, and accurately report outcomes of these transactions on their Tax Returns.
2. Providing the FTA with the necessary data to conduct a Transfer Pricing risk assessment and arrive at an informed position regarding the need for an audit.
3. Providing the FTA with the necessary information to facilitate a comprehensive audit of the Transfer Pricing practices of Persons subject to the Corporate Tax in the UAE, while recognising the potential need for additional information as the audit progresses.
Contemporaneous Transfer Pricing documentation
The FTA expects that documentation is maintained either at the time of the Controlled Transaction or, by the time the Taxable Person submits its Tax Return for the Tax Period in which the Controlled Transaction is undertaken. These policies and the supporting documentation should be prepared, regularly reviewed and reassessed at least annually to reflect changes in the Taxable Person’s business or structure and the regulatory and wider business environment.
Key takeaways and next steps
Considering the extensive guidelines prescribed in the UAE Corporate Tax Law towards Transfer Pricing, it is essential that the business complies to the rules and requirements. Seeking expert assistance to ensure compliance and avoid potential penalties is highly recommended. The team of expert tax professionals at Gatestone Group will ensure your company meets these guidelines. For more information, contact us via email at [email protected] or call us at 971 4 450 1023 and start today!
