Transfer Pricing assessment has become an important aspect of corporate tax compliance in the United Arab Emirates (UAE), following the introduction of UAE Federal Decree-Law No. 47 of 2022. Transfer Pricing assessment ensures taxpayers to comply with the arm's length principle, which requires that transactions between related parties are carried out at arm's length principles in accordance with international standards. This article provides an overview of transfer pricing assessment requirements in the UAE and strategies that multinational enterprises (MNEs) can adopt for international tax compliance and risk management.
For a multinational group, transfer pricing allocates revenue from end-sales to its members, compensating them for their contributions to the product's value sold to third parties.
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UAE Corporate Tax Regulations
Under Article 34 of the UAE Federal Decree-Law No. 47 of 2022, all transactions between related parties must comply with the arm's length principle to prevent BEPS (Base Erosion and Profit Shifting) which ensures that tax planning in the UAE is fair and transparent. Related parties include entities that have direct or indirect ownership of 25% or more or are under common control. The regulations draw upon international standards set out in the OECD Transfer Pricing Guidelines to determine arm's length prices for related party transactions.
Transfer Pricing Methods
There are several Transfer pricing methods that can be used to determine arm's length prices. These methods include:
- Comparable Uncontrolled Price (CUP) method: This method compares the price charged for goods or services in a controlled transaction with the price charged for similar goods or services in a comparable uncontrolled transaction.
- Cost Plus Method (CPM): This method involves adding a markup to the costs incurred by the supplier of goods or services in a controlled transaction to determine an arm's length price.
- Resale Price Method (RPM): This method involves subtracting a markup from the resale price of goods or services in a controlled transaction to determine an arm's length price.
- Transactional Net Margin Method (TNMM): This method involves comparing the net profit margin earned by the taxpayer in a controlled transaction with the net profit margin earned by unrelated parties in comparable transactions.
- Profit Split Method: This method involves allocating the combined profits or losses of related parties in a controlled transaction based on their respective contributions to the value chain.
Transfer Pricing Documentation
Transfer Pricing documentation is the process of maintaining records and information to support the arm's length nature of controlled transactions. Transfer Pricing documentation is important for several reasons, including:
- Demonstrating compliance with TP regulations and avoiding penalties.
- Supporting tax planning and risk management strategies.
- Enabling effective communication with tax authorities and approved tax agents.
Transfer Pricing documentation typically includes a master file, which provides an overview of the MNE's global operations and TP policies, and a local file, which provides detailed information on the TP policies and transactions of the local entity.
Transfer Pricing Risk Management
Transfer Pricing risk management involves identifying and mitigating the risks associated with Transfer Pricing regulations. This can be achieved through a combination of the following strategies:
- Conducting a Transfer Pricing risk assessment to identify potential risks and develop mitigation strategies.
- Implementing Transfer Pricing policies and procedures that are consistent with the OECD guidelines and UAE tax laws.
- Maintaining up-to-date Transfer Pricing documentation to support the arm's length nature of controlled transactions.
- Engaging with approved tax agents and tax authorities to ensure compliance with Transfer Pricing regulations.
What are the Corporation Tax Implications of the Transfer Pricing Rules?
Cross-Border Transactions and Intellectual Property
Cross-border transactions and the transfer of intellectual property (IP) are common areas of focus for Transfer pricing assessment. In the context of the UAE, it is important to consider the following factors:
- The UAE has signed double taxation agreements with several countries, which may impact the Transfer pricing assessment of cross-border transactions.
- The UAE has introduced TP regulations that specifically address the transfer of intellectual property (IP) between related parties.
- The UAE has adopted the OECD's BEPS (Base Erosion and Profit Shifting) Action 8-10 guidelines, which provide guidance on the transfer pricing of intangibles.
Compliance Strategies for Corporate Tax UAE
To ensure compliance with UAE corporate tax regulations, it is important to consider the following strategies:
- Conducting a Transfer Pricing risk assessment to identify potential risks and develop mitigation strategies.
- Developing Transfer Pricing policies and procedures that are consistent with the OECD guidelines and UAE tax laws.
- Maintaining up-to-date Transfer Pricing documentation to support the arm's length nature of controlled transactions.
- Engaging with approved tax agents and tax authorities to ensure compliance with Transfer Pricing regulations.
Seek the Expert Services of Top Tax Consultants in UAE
Transfer pricing assessment is an essential aspect of corporate tax compliance in the UAE. With the increasing focus on international tax compliance and the implementation of the OECD's BEPS (Base Erosion and Profit Shifting) initiative, businesses operating in the UAE must ensure that their cross-border transactions are conducted in accordance with the arm's length principle and the UAE's transfer pricing regulations. To achieve this, taxpayers are advised to consider engaging approved Corporate tax UAE agents who have expertise in transfer pricing assessment and can provide advice on compliance strategies. Thus, contact us today and we shall be glad to assist you.
Ensure compliance and optimize your business strategy with expert transfer pricing guidance today! Call us +971 4 2500251
