Principle of Arm's Length under Corporate Tax in UAE

Essentially, taxable persons are required to comply with the Arm's Length Principle in business transactions for corporate tax purposes. As per the latest Explanatory Guide, the taxable income of taxable persons and agreements or transactions between Related Parties must adhere to the "arm's length principle. Therefore, it is imperative for corporations to seek the expert services of Tax Consultants, UAE to seamlessly implement tax standards and to stay compliant. 

What does the Arm’s Length Principle apply to?

 As per Article 34 of Corporate Tax Law, the Arm’s Length Principle applies to international agreements made between parties with a common interest. It extends broadly to any agreements involving connected parties and family members. As per the arm's length principle, a transaction is said to have been completed when the results of related and unrelated parties' involvement in it are comparable. To avert tax fraud, Article 34 allows the FTA the authority to redistribute revenue or expenses among connected parties or non-connected parties.

Methods for Reporting

Taxable persons must also report and document how the Arm’s Length rule applies to concerned party dealings. The following are the two ways for reporting:

• Through an exposure form that must be submitted with the tax return, which is for specific taxpayers.

• Transfer pricing evidence in the frame of a local and master file, which must be presented when requested. Except for the OECD transfer pricing guidelines, there is no financial limitation set for the document preparation both in the local formation and master file and in the formation of a local and master file, nor are there requirements for the contents of the transfer pricing documents.

Determination of arm's length arrangement

Checking whether the outcome of the arrangement or transactions is compatible with the following is crucial in determining if the Related Parties' arrangement or transaction satisfies the arm's length standard.

• A transaction occurs between independent parties or parties who are not associated.
• A similar structure or set of conditions allowed the independent parties to perform their transaction.

Calculation of the Arm's-Length Principle Using Transfer Pricing

For transactions or agreements entered into between Related Parties, the following Transfer Pricing technique shall be applied to determine the arm's length price:

• The Comparable Uncontrolled Price Method (CUP)
• Cost-plus methodology
• Transactional Net Margin Method
• Profit Split Method, also known as the Transactional Profit Split Method

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

Resale Price Analysis

It is possible to combine several methods while determining the transaction under Arm's-Length Principle. The methods listed above may be used individually by the parties or in combination to determine the arm's length Rule.

Using other techniques to calculate the Arm's Length Price

If none of the ways can be used to calculate the arm's length price in a transaction in a particular circumstance, the Taxable Person may use any alternative reasonable approach. However, the Taxable Person must show that none of the lawful strategies can be used for the arrangement or transaction under consideration in a fair manner, hence the usage of an alternative strategy that is against UAE Corporate Tax Law.

Factors for Selecting and Using the Transfer Pricing Method to Calculate Arm's-Length Prices

When selecting and using a transfer pricing technique, a few things need to be taken into account. 

• They comprise the contract's provisions pertaining with respect to the agreement or deal.
• Features or qualities of the agreement or transaction
• The economic climate
• The duties carried out
• The risks taken
• The assets used or employed by the Related Parties
• The related parties' business approach

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

Federal Tax Authority's review of income and expenses to determine if the Arm's Length Principle is followed

The Federal Tax Authority will take the following into consideration when determining whether the income and expenses from the agreement or transactions entered into by related parties satisfy the arm's length principle if none of the methods can be used to determine the arm's length price in a transaction in a given situation, the Taxable Person may use any alternative method.

Avail the services of Tax Agent in the UAE

It is imperatively advisable for taxable persons to seek the expert services of Corporate Tax UAE to seamlessly implement tax standards and to stay compliant. Therefore, contact us today and we shall be glad to assist you.