The MoF (Ministry of Finance) declared on January 31, 2022, that a federal Corporate Tax will be implemented on commercial earnings in the UAE beginning from June 1, 2023. Ever since the declaration, work on finalizing the UAE corporate tax legislation has proceeded to guarantee that it combines best practices from throughout the world while minimizing the compliance issues for corporations. This legislation addresses corporations and describes significant business regulations such as transfer pricing rules, arm length principles, etc.
Transfer Pricing Regulations & their Implications
Transfer pricing is an approach that relies on business transactions between related companies, which are frequent in the continent. This includes multinational corporations and, in certain scenarios, sizable family-owned enterprises in the UAE that have control over the market.
By using a tax loophole to charge a linked entity a significantly lower or larger cost for a transaction, the strategy eventually prohibits a firm from paying a lower rate by inflating taxable income and claiming revenue to be considerably far less than it is in reality.
Key Features of UAE Transfer Pricing
- UAE transfer pricing in corporate tax law correlates to pacts with related parties. A key feature of this transfer pricing regime is that it provides for a safe harbour rule. This rule allows companies to enter into transactions with related parties at arm's length prices, provided that certain conditions are met. This rule provides certainty and predictability for businesses operating in the UAE and helps to ensure that tax authorities cannot arbitrarily adjust prices.
- Under UAE transfer pricing rules, expenditures to a connected person are only deductible if they are brought in on an arm's length basis. This means that the payments must be made at a fair market value, taking into account all relevant factors, to be deductible. If the payments are not made on an arm's length basis, they may be subject to re-characterization or adjustment by the UAE tax authorities.
- It requires compliance with the OECD's tactics of Transfer Pricing. This is a key feature of UAE transfer pricing and will ensure that companies operating in the UAE can transfer pricing their profits fairly and transparently. The UAE's commitment to the OECD's transfer pricing guidelines will provide certainty and predictability for businesses operating in the UAE.
- You have to pursue local records as well as Master records and ensure the submission of documents according to the laws about Corporate Tax in UAE
Defining Arm Length Price and its Principles
The price that would have been compensated in a transaction among two likewise situated intermediary, unconnected parties, when the contemplation is solely commercial, is known as the arm's length price (ALP). For purposes of corporate tax in UAE, related and connected parties transactions must adhere to the following principles of arm's length:
- Have an effect comparable to an autonomous party transaction that the Arm length price determines using methodologies for transfer pricing that are widely accepted worldwide.
- ALP is computed utilizing an alternative strategy when the specified techniques are inadequate.
An individual or organization is considered a related party if it has a prior connection to a company that falls under the UAE corporate tax framework by ownership, control, or kinship (in the case of natural persons).
The following are included as Related Party as per Corporate Tax in UAE
1) Two or more two people who are connected in the fourth degree, whether by blood, wedding, adoption, or custody.
2) Two or additional legitimate entities where one legal entity directly or indirectly has a 50% or higher pledge in, or restraints, the other lawful entity, either by itself or jointly with a related party.
Compensations or advantages given by a corporation to its "Connected Persons" are just deductible if the firm can verify that they:
- Adapt to the market value of the aid provided
- Were incurred solely and entirely for the business paying tax.
Documentation Required for Transfer Pricing
Businesses must abide by the transfer pricing statutes and documentation specifications solidified by the OECD Transfer Pricing Standards in UAE corporate tax Law.
The corporation will be urged to deliver, an appropriate disclosure that details its dealings with Connected and Related persons.
Where the arm's length value of their Related Party pacts attains a distinct limit in the relevant tax duration, a company will also oblige to retain a master and local file.
The corporate tax accountants will be helped by proper transfer pricing documentation to demonstrate that their transactions adhere to the arm's length doctrine, which will plop an end to transfer pricing assertions. A corporate entity's thriving difficulty level of foreign transactions and domestic will ensue in transfer pricing problems, which will drive up compliance expenditures for corporate tax companies. An entity should avail of corporation tax advisory services. Expert and knowledgeable corporate advisors or effectively help your business to address possible issues.
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.