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Transfer Pricing in the UAE: Principles and Documentation Requirements

Transfer Pricing in the UAE: Principles and Documentation Requirements

by | Nov 20, 2024 | PREMA Insights

I. Transfer Pricing Principles and Fundamentals

What is Transfer Pricing?
Transfer Pricing governs the pricing of transactions between entities within the same corporate group, such as sales of goods, provision of services, licensing of intellectual property, or financial arrangements. These transactions must reflect market value in accordance with the Arm’s Length Principle (ALP), which requires them to be priced as if conducted between independent parties in similar circumstances.

Why is Transfer Pricing Important?
It ensures fairness in profit allocation between related entities, particularly across different tax jurisdictions. Transfer Pricing rules prevent profit shifting to low-tax jurisdictions, thereby safeguarding tax revenues and ensuring compliance with local tax laws.

What is Tax Base Erosion?
Tax base erosion refers to the reduction of taxable income in a jurisdiction due to profit shifting. Transfer Pricing regulations address this by ensuring profits are distributed fairly and taxed where the economic activity occurs.

II. Scope of Transfer Pricing Rules

Transactions Covered
Transfer Pricing rules in the UAE apply to transactions between:

  1. Related Parties – Entities connected by:
    • Ownership – Direct or indirect ownership of 50% or more.
    • Control – Significant influence over business decisions.
    • Kinship – Relationships up to the fourth degree (e.g., parents, siblings, first cousins).
  2. Connected Persons – Individuals with significant influence over the taxable entity, such as:
    • Major shareholders.
    • Directors or officers.
    • Partners in unincorporated partnerships.

Controlled Transactions
These include transactions between Related Parties or Connected Persons, such as:

  • Supply of goods or services.
  • Financial arrangements like loans or guarantees.
  • Use of intangible assets (e.g., patents, trademarks).

    Both domestic and cross-border Controlled Transactions must adhere to the ALP.

III. Application of the Arm’s Length Principle

Key Steps to Apply the ALP

  1. Identify Relevant Transactions and Perform Comparability Analysis:
    • Define the commercial and financial relationships.
    • Analyze the functions performed, risks assumed, and assets used.
  2. Select the Appropriate Transfer Pricing Method:
    Common methods include:
    • Comparable Uncontrolled Price (CUP) – Compares prices of similar transactions between unrelated parties.
    • Resale Price Method – Based on resale prices to independent parties, minus a margin.
    • Cost Plus Method – Adds a markup to production costs.
    • Transactional Net Margin Method (TNMM) – Focuses on net profit margins.
    • Profit Split Method – Allocates profits based on each entity’s contribution.
  3. Determine the Arm’s Length Price:
    • Choose the tested party with the most reliable data.
    • Identify comparable transactions.
    • Adjust for material differences to ensure comparability.
    • Establish an acceptable price range.

IV. Transfer Pricing Documentation Requirements

Purpose
Documentation provides evidence that Controlled Transactions comply with the ALP, ensuring transparency and mitigating risks during audits.

Key Documentation Components

  1. Disclosure Form:
    • Summarizes Controlled Transactions during a tax period.
    • Submitted with the annual Corporate Tax Return.
  2. Master File:
    • Provides a global overview of the MNE Group, including:
      • Organizational structure.
      • Business operations and strategies.
      • Global Transfer Pricing policies.
  3. Local File:
    • Focuses on UAE-specific transactions.
    • Includes details on related-party dealings and how the ALP was applied.
  4. Country-by-Country Reporting (CbCR):
    • Required for MNE Groups with consolidated revenues exceeding AED 3.15 billion.
    • Discloses revenue, profits, taxes paid, and economic activity in each jurisdiction.
  5. Additional Supporting Information:
    • Must be provided upon request by the Federal Tax Authority (FTA).

V. When Master File and Local File Are Required

  1. Both Files Required:
    • If the MNE Group has total consolidated revenue of AED 3,150,000,000 or more.
    • If the Taxable Person’s revenue exceeds AED 200,000,000, even if not part of an MNE Group.
  2. Local File Only:
    • Required if the Taxable Person’s revenue exceeds AED 200,000,000, but the MNE Group does not meet the AED 3,150,000,000 consolidated revenue threshold.
  3. Master File Only:
    • Typically not required without the Local File unless specifically requested by the FTA.

Source: Transfer Pricing Guide Corporate Tax Guide | CTGTP1 | October 2023