Companies Transfer Pricing in the UAE: According to the New Corporate Tax Law

Through the issuance of the latest UAE Corporate Tax Law, the Organization for Economic Co-Operation and Development (OECD) model was affected. Hence, the introduction of transfer pricing, as well as the established corporation taxation concept. The Ministry of Finance emphasizes the adoption of Transfer Pricing, aligned with Organization for Economic Co-operation and Development ('OECD') standards, as a key pillar supporting the new corporate tax statute in the UAE. Following the Transfer Pricing Guidelines set forth by the OECD, the proposed Corporate Tax UAE framework integrates official Transfer Pricing laws and documentation requirements.

What is Companies Transfer Pricing and how significant is it?

All facets of intra-group agreements between members of a multinational organization are covered by transfer pricing. Globalization and the digitization of the economy have led to a major rise in intra-group deals. Multinational corporations carry out intra-group transactions for a variety of reasons, such as increased operational effectiveness and market penetration. The delivery of physical things, the rendering of services, the transfer or usage of intellectual property, as well as financial transactions such as loans, guarantees, etc., are the most common forms of these transactions. As a result, the profitability of a multinational group's members may be impacted by the price of intra-group agreements. 

Transfer Pricing is not to be used to reduce tax obligation

Consider a company manufacturing auto components with operations in the US and the UAE. The US-based business sells components to its UAE affiliate, which then distributes them locally. With no corporation tax in the UAE and a high rate in the US, the US firm may offer a reduced price due to their affiliation. This alters taxable incomes, favoring the group's tax burden but impacting overall tax revenue.

Since intra-group agreements make up a significant portion of world commerce, this might seriously affect the tax authorities' income. Because of this problem, tax authorities all over the globe have established guidelines and regulations to stop companies from using transfer pricing as a means of lowering their tax obligations. The Transfer Pricing guidelines published by the OECD are often used by tax authorities. Regarding the valuation of intra-group agreements for tax purposes, the OECD has published detailed guidelines. In accordance with the best global tax standards, the UAE will abide by the Transfer Pricing Guidelines published by the OECD.

Read More: What are the Corporation Tax Implications of the Transfer Pricing Rules?

Companies Transfer Pricing Guidelines published by the OECD 

The Ministry of Finance indicated that it will align itself with OECD norms. In line to transfer pricing, the OECD Guidelines adhere to the "arm's length principle." Hence, a value is said to be at arm's length if it equals the price that two unrelated parties would pay in the current market, without exerting any influence on the other. The result is that neither business treats the other differently. In order to calculate a value, the OECD Guidelines offer extensive instructions, but in general, five methodologies are used, notably the:

1. The comparable unregulated pricing technique
2. The resale price approach
3.  The price plus technique
4. Profit-sharing scheme
5. Transactional Net Margin Method

In order to determine the transfer price's arm's length value, the OECD Guidelines give thorough instructions on acceptable techniques to test, evaluate, and compare it. It also specifies the kind of paperwork that international corporations are supposed to keep.

Key advice to companies/corporations

The implementation of the Transfer Pricing regulations in the UAE is a major milestone, and it will be the first time that UAE businesses must adhere to the Transfer Pricing standards. The UAE's Transfer Pricing system is anticipated to apply to all intra-group transactions, including local and international ones, including physical commodities, services, intangibles, and financial activities. All enterprises with operations in the UAE should evaluate their present Transfer Pricing policies and the effects of the Transfer Pricing regulations on their operations. Businesses should specifically strive to prepare Transfer Pricing paperwork in accordance with the OECD's recommendations.

Summation

In order to reduce any applicable tax and Transfer Pricing risks, businesses should also assess their operational strategies. Businesses in the UAE have a rare chance to put tax and Transfer Pricing efficient structures in place that are consistent with market realities and the best worldwide Transfer Pricing standards. Although there is still time to take action, we advise firms to get started as soon as possible since this process will consume much time and effort. Contact our professional UAE corporate tax team if you want help or guidance with transfer pricing or any other tax-related issue.