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 declared that the adoption of Transfer Pricing, based on Organization for Economic Co-operation and Development ('OECD') standards, is a chief mechanism that upholds and supports the new corporate tax statute. According to the Transfer Pricing Guidelines published by the OECD, the proposed Corporate Tax UAE framework would include the implementation of official Transfer Pricing laws and Transfer Pricing documentation requirements.
What is 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. Intra-group transactions are carried out by multinational corporations 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
Let's use the example of a company that manufactures and sells auto components and has operations in the US and the UAE to demonstrate this concept. The US-based business makes the auto components and sells them to a connected firm in the United Arab Emirates, which then distributes them to local clients. Given that there is no corporation tax in the UAE and a high tax rate in the US, the US firm may charge the UAE Company a reduced price since the two companies are connected. If the parties were unrelated, this amount would not represent what they charge. In turn, this would result in a decrease in the US group company's taxable income and an increase in the UAE company's taxable income. In this situation, the group's net tax effect is favourable compared to the price the US business would have demanded if the UAE Company had been an independent entity. The group's total tax burden may be reduced as a result of this artificial income transfer from the US to the UAE, but the tax authorities' revenue would be impacted. In this case, the US tax authorities would be able to collect less tax overall.
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.
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:
- The comparable unregulated pricing technique
- The resale price approach
- The price plus technique
- Profit-sharing scheme
- 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.
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.
Abrar Ahmad holds a Master’s as well as an MPhil in Finance and has an extensive experience of 10+ years in managing all aspects of Taxation, VAT Consulting and Accounting. He also carries with him a working knowledge of corporate tax and has helped drive value and growth to the businesses of numerous clients.