The United Arab Emirates (UAE) has implemented a robust Transfer Pricing (TP) regime, in line with international standards such as the OECD TP Guidelines (OECD TPG) and BEPS. This article delves into the intricacies of Article 34, 35, and 36 of the UAE Corporate Tax Law, its implementing decisions, guide etc., concerning Transfer Pricing (“TP Regulations”). These regulations aim to ensure that transactions with related parties maintain the arm’s length principle, preventing potential tax avoidance and ensuring fair tax assessment. This article provides a comprehensive overview of the applicability, methods, consequences, documentation, and other important aspects of UAE’s Transfer Pricing regulations.
A. Applicability:
All transactions and arrangements with related parties and payments or benefits to connected persons must adhere to the arm’s length principle, which involves determining the price at which unrelated parties would agree to transact. This principle applies to both domestic and cross-border Controlled Transactions.
Exceptions: Certain entities, including listed companies and those under regulatory oversight in the UAE, are exempt from transfer pricing regulations for payments or benefits to connected persons.
Notable Transactions: The regulations cover a range of transactions and arrangements, such as:
a. Cross-border and domestic sales, royalty payments, etc.,
b. Managerial remuneration,
c. Transactions with domestic and foreign permanent establishments,
d. Cost contribution arrangements, business restructuring, and group synergies etc.,
Related Parties: Related parties can be individuals or juridical persons with a pre-existing relationship with another entity through ownership, control, or kinship. Ownership and control typically have a threshold of 50% or more.
Connected Persons: In the UAE CT Law, connected persons include owners, directors, officers of taxable persons, and their related parties.
B. Application:
The arm’s length result (a single result or range of results) can be calculated using one or a combination of the following five methods or any method other than 5 methods if these cannot be reliably applied:
- Comparable Uncontrolled Price Method
- Cost Plus Method
- Resale Price Method
- Transactional Profit Split Method
- Transactional Net Margin Method
The choice and application of methods should consider contractual terms, characteristics, economic circumstances, functions, assets, risks, and business strategies.
It’s important to note that there is no hierarchy among these methods, but transactional-level methods like CUP are generally preferred over company-level methods like TNMM.
Additional key points include:
Interquartile Range: Interquartile range (25th to 75th percentile) can be used to determine an arm’s length range.
Data: a three-year (3) weighted average data from the transaction year and the two previous years can be used for comparability analysis. At least two years of data must be available to accept a comparable company. The search for comparables should be updated every three years.
Choice of Database: There is no preference for a specific commercial database, as long as it provides reliable information for comparability analysis provided that the order for applying comparables is followed (local, regional (Middle East), then other regions).
Special Cases: The regulations provide specific application rules for unique cases like financial transactions, intra-group services, intangibles, cost contribution arrangements, business restructuring, group synergies, and permanent establishments.
C. Consequences:
Transfer Pricing Adjustments:
In cases where a transaction, arrangement, or payment doesn’t meet the arm’s length standard, the Taxable Person or the Federal Tax Authority can make adjustments to the taxable income of the Taxable Person and the corresponding UAE-related party. For foreign-related parties, the Mutual Agreement Procedure under tax treaties can be applied.
Penalties:
The FTA may levy administrative and tax penalties in cases of tax evasion or adjustments in assessments.
D. Documentation:
Certain taxable persons must maintain a Local File and Master File as per Ministerial Decision No. 97 of 2023. These include:
- Taxable persons who are constituents of Multinational Enterprise (MNE) groups with a total consolidated group revenue of AED 3.15 billion or more in the relevant tax period.
- Taxable persons with revenue in the relevant tax period of AED 200 million or more.
Master files are not required for UAE-headquartered groups that are not MNE groups. Even when master or local file is not required to be maintained, the taxable persons must maintain records supporting the arm’s length nature of their transactions or arrangements.
E. Filings:
Taxable persons must submit a Transfer Pricing disclosure form along with their tax return for each tax period. Additionally, they should provide any requested information or documents to the FTA as needed. MNE Groups with substantial consolidated group revenue have additional CbCR reporting requirements.
F. Other Matters:
Advance Pricing Agreement: Taxpayers may apply for an advance pricing agreement with the FTA regarding specific transactions or arrangements.
International Agreements/Tax Treaties: The provisions of international agreements signed by the UAE with other jurisdictions are also relevant in the application of UAE’s Transfer Pricing regulations.
Conclusion
The UAE’s Transfer Pricing regulations are designed to align with international standards and promote fair tax assessments. Businesses conducting related party transactions in the UAE should adhere to these guidelines, maintaining proper documentation and complying with the arm’s length principle. Understanding and adhering to these regulations is essential to ensure compliance and avoid potential penalties or disputes with tax authorities.
