The UAE Federal Tax Authority released on 9 December 2022 Federal Decree-Law No. 47 of 2022 (Taxation of Corporations and Businesses). That Decree-Law contains several articles relating to Transfer Pricing which are referred in these FAQs as The UAE Transfer Pricing Regulations.
These FAQs (55 in number) seek to provide a Guide to Taxpayers, MNCs, Businesses, Tax Professionals and Transfer Pricing Professionals on the UAE Transfer Pricing Regulations.
On 9 December 2022 the UAE Federal Tax Authority released Federal Decree-Law No. 47 of 2022 (Taxation of Corporations and Businesses). The following Articles of that Decree-Law form the UAE Transfer Pricing Regulations.
• Article 34 – Arm’s Length Principle
• Article 35 – Related Parties and Control
• Article 36 – Payments to Connected Persons
• Article 55 – Transfer Pricing Documentation
Arm’s Length Standard is the standard which a transaction or arrangement between Related Parties must meet.
Arm’s Length Standard is met if the results of the transaction or arrangement between Related Parties are consistent with the results that would have been realised if Persons who were not Related Parties had engaged in a similar transaction or arrangement under similar circumstances.
Yes. Transfer pricing rules apply to UAE businesses that have transactions with Related Parties and Connected Persons, irrespective of whether the Related Parties or Connected Persons are located in the UAE Mainland, a Free Zone or in a Foreign Jurisdiction.
All transactions and arrangements (e.g., purchases and sales of tangible as well as intangible goods, provision and acquisition of services, loans, guarantee, leasing of property, licensing of intellectual property, etc.) between Related Parties are covered within the scope of UAE Transfer Pricing Regulations.
In addition, the UAE Transfer Pricing Regulations also cover any payment or benefit provided by a Taxable Person to its Connected Person. However, such payment or benefit to a Connected Person is not covered within the scope of UAE Transfer Pricing
Regulations if the payment or benefit is to:
(i) A Taxable Person whose shares are traded on a Recognised Stock Exchange.
(ii) A Taxable Person that is subject to the regulatory oversight of a competent authority in the State.
(iii) Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
Transactions between members of a Tax Group are NOT covered within the scope of UAE Transfer Pricing Regulations, unless a member of the Tax Group needs to compute its stand-alone Taxable Income for the purposes of utilising Tax Losses incurred before joining the Tax Group or when leaving a Tax Group.
Generally, Related Parties of an individual refer to the individual’s relatives (natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship) as well as companies in which the individual, alone or together with their Related Parties, has a controlling ownership interest (typically 50% or more of shares of the company).
Similarly, Related Parties of a company refers to any other companies in which the company, alone or together with their Related Parties, has a controlling ownership interest (typically 50% or more of shares of the company), or that are under greater than 50% common ownership.
Connected Persons are different from Related Parties. A person is considered “Connected” to a business that is within the scope of Transfer Pricing Regulations if that person is:
(i) The Owner of the Business;
(ii) A Director or an Officer of the Business; or
(iii) A Related Party of either of the above.
Article 9 of Tax Treaties (which are based on OECD Model Tax Convention) deals with adjustments to profits that may be made for tax purposes where transactions have been entered into between associated enterprises (parent and subsidiary companies and companies under common control) on other than arm’s length terms. Article 9 is the authorized statement of the Arm’s Length Standard in Tax Treaties. The same Standard applies under the UAE Transfer Pricing Regulations. Further, under the Tax Treaties, the details of how to apply the Arm’s Length Standard under the Domestic Law of respective Countries has been left to those Countries. So, there is no conflict between Article 9 of the Tax Treaties and the UAE Transfer Pricing Regulations.
In accordance with the UAE Transfer Pricing Regulations, the transactions and arrangements between Related Parties must be priced at Arm’s Length Price meeting the Arm’s Length Standard.
We can say that transactions or arrangements between Related Parties or Connected Persons meets the Arm’s Length Standard when the results of such transactions or arrangements are consistent with the results that would have been realised if Persons who were not Related Parties or Connected Persons had engaged in a similar transaction or arrangement under similar circumstances.
The arm’s length result (benchmarking) of a transaction or arrangement between Related Parties must be determined by applying one or a combination of the following transfer pricing methods:
a. The comparable uncontrolled price method.
b. The resale price method.
c. The cost-plus method.
d. The transactional net margin method.
e. The transactional profit split method.
These are internationally recognised transfer pricing methods.
The Taxable Person may apply any transfer pricing method other than the five methods listed above where the Taxable Person can demonstrate that none of the above methods can be reasonably applied to determine an arm’s length result and that any such other transfer pricing method used satisfies the Arm’s Length Standard.
Generally, the following are the Transfer Pricing Methods other than the five methods listed above:
(i) Valuation of tangible assets as well as intangible assets
(ii) Commodity market quoted prices of imported or exported commodities
(iii) Statistical Average Prices or Standard Rate Cards set as a reference value by the National Business or Commerce Associations
In practice the arm’s length price of the following transactions can be determined using the Other Method (Sixth Method) mainly because data of uncontrolled comparables is not likely to be available in the public domain:
(a) Unique transactions such as transfer of intangibles, or licensing of intangibles
(b) Business Transfers
(c) Transfer of unlisted shares
(d) Long-term buying and selling arrangements
(e) Sale of fixed assets
(f) Cost Contribution Arrangements or Cost Sharing Arrangements
(g) Revenue Allocation and Revenue Splitting Arrangements
(h) Guarantees provided and received
CUP Method should be applied when we can find data of price of a comparable uncontrolled transaction between Unrelated Parties.
The CUP Method compares the price charged for goods, property or services transferred between Related Parties (Controlled Transaction) to the price charged for similar goods, property or services transferred between Unrelated Parties or Independent Third Parties (Comparable Uncontrolled Transaction) in comparable circumstances and conditions.
Steps in applying CUP
(i) Begin with the Price charged or paid for Goods transferred or Services provided in a Comparable Uncontrolled Transaction between Unrelated Parties.
(ii) Make Adjustments for differences between the Transaction and Comparable Uncontrolled Transactions, or between the Enterprises entering into such transactions, which could materially affect the price in the Open Market.
(iii) Adjusted Price is equal to the Arm’s Length Price of property transferred or services provided in Controlled Transaction between Related Parties.
RPM should be applied for Distributors who purchase goods from Related Parties and sell those goods – to Unrelated, Independent or Uncontrolled Parties - either without further processing, or without incorporating those goods into a more complicated product by way of assembly or manufacture.
RPM is a Transfer Pricing Method based on the price at which a product that is purchased from a Related Party is resold to an Unrelated Party (Independent Third Party Customers). The resale price of sales, to Independent Third Party Customers, is reduced by the resale price margin (earned by Comparable Independent Resellers or Distributors), and the amount arrived at after reduction of resale price margin is, after adjustment for direct costs, taken as the Arm’s Length Price of the product purchased from the
(i) Identify the transaction of purchase of goods, property or services from a Related Party
(ii) Identify the price (resale price) at which such goods, property or services are resold or provided to an Unrelated Party by the Taxpayer
(iii) Identify the normal gross profit margin in a comparable uncontrolled transaction. The normal gross profit margin is that margin which an independent enterprise would earn from resale of similar product – similar product purchased from an unrelated party and resold to another unrelated party.
(iv) Deduct the normal gross profit from the resale price realized by the Taxpayer
(v) Deduct direct expenses incurred by the Taxpayer (Distributor) in connection with the purchase of goods from a Related Party
(vi) Adjust the resultant amount for the differences between the uncontrolled transaction and the transaction of purchase of goods from a Related Party. These differences could be functional and other differences including differences in accounting practices. However, these differences should be such as would materially affect the amount of gross profit margin in the open market.
(vii) The price finally arrived at is the arm’s length price of the purchase of goods from a Related Party
CPM can be the Most Reliable Method for Manufacturers who supply products and Service Providers who provide services, to Related Parties and Connected Persons.
CPM can also be used where facilities or costs are shared among the Group Members under a Cost Sharing Arrangement (CSA) - the cost allocated to, or contributed by, the MNC Group Members can be determined having regard to the Arm's Length Price of the benefit derived from the shared facility.
To apply CPM costs, incurred by a supplier of goods, or services, in a Controlled Transaction between Related Parties, are identified. An appropriate markup is added to such costs so as to make an appropriate profit commensurate with the functions performed (taking into account assets employed and risks borne). The amount arrived at after adding the cost plus markup to the costs, incurred by the supplier of goods, or services, in a Controlled Transaction, is taken as the Arm’s Length Price of the goods or services supplied in the Controlled Transaction.
The cost plus markup of the supplier in the Controlled Transaction is established by referring to the cost plus markup earned in Uncontrolled Comparable Transactions.
(i) Determine the direct and indirect cost of production in respect of property transferred or service provided to a related party
(ii) Identify one or more comparable uncontrolled transactions where similar property is transferred or similar service is provided
(iii) Determine normal gross profit mark-up on costs in the comparable uncontrolled transaction. Such costs should be computed according to the same accounting norms. In other words, the components of costs of comparable uncontrolled transaction should be the same as those of controlled transaction between related parties.
(iv) Adjust the gross profit mark-up to account for functional and other differences between the controlled transaction and the comparable uncontrolled transaction. Such adjustments should also be made for enterprise level differences.
(v) The direct and indirect cost of production in the controlled transaction is increased by such adjusted gross profit mark-up
(vi) The resultant figure is the arm’s length price
Typical transactions where TNMM is used are transactions involving:
(a) Purchase and Sale of products from and to Related Parties
(b) Receipt of services and Provision of Services from and to Related Parties
(c) Distribution of finished products where RPM cannot be applied
(d) Transfer of semi-finished goods where CPM cannot be applied
Under TNMM, we select a Tested Party - either the Taxpayer or its Related Party – whose Net Operating Profit Margin earned from Controlled Transaction is compared with –
(i) the net operating profit margin earned by the Tested Party itself from Comparable Uncontrolled Transactions (Internal TNMM), or
(ii) the net operating profit margin earned by an Independent Party engaged in a Comparable Uncontrolled Transaction (External TNMM)
Thus, TNMM determines the Arm’s Length Price by comparing operating profit of Tested Party with the operating profit of uncontrolled parties engaged in comparable transactions.
The PSM identifies the profits to be split from the Controlled Transactions between Related Parties and then splits those profits between the Related Parties on an economically valid basis that approximates the division of profits that would have been agreed between Independent Enterprises in comparable circumstances. This is done by considering the relative contributions of each Related Party.
PSM is likely to be the Most Reliable Method in following transactions -
(i) Unique and valuable contributions by each of the Related Parties participating in the transaction
(ii) Transactions involving Unique and Valuable Intangibles
(iii) Highly Integrated Business Operations
(iv) Shared Assumption of Economically Significant Risks or Separate Assumption of Closely Related Risks
There are following two types of approaches for splitting profits among Related Parties under PSM -
Under a contribution analysis, the relevant profits, which are the total profits from the controlled transactions under examination, are divided between the AEs in order to arrive at a reasonable approximation of the division that Independent Enterprises would have achieved from engaging in comparable transactions.
Where out of the contributions made by the AEs some contributions (like manufacturing, distribution, services, etc.) can be reliably valued applying a one-sided method (such as TNMM) and benchmarked using comparables, while others cannot, the application of a residual analysis may be appropriate.
The choice and application of a Transfer Pricing Method or combination of Transfer Pricing Methods must be made having regard to the Most Reliable Transfer Pricing Method which can be selected by taking into account the following factors:
a. The contractual terms of the transaction or arrangement.
b. The characteristics of the transaction or arrangement.
c. The economic circumstances in which the transaction or arrangement is conducted.
d. The functions performed, assets employed, and risks assumed by the Related Parties entering into the transaction or arrangement.
e. The business strategies employed by the Related Parties entering into the transaction or arrangement.
21. What is Functions, Assets and Risks (FAR) Analysis? What are its uses?
‘FAR Analysis’ is finding and organizing facts about a business in terms of its functions performed, risks assumed, and tangible and intangible assets utilized, in order to analyze how these are allocated between the Related Parties involved in the controlled transactions. Functional analysis must identify and compare the economically significant activities - key value drivers
- involved in the controlled and uncontrolled transactions.
The OECD Transfer Pricing Guidelines define functional analysis (FAR analysis) as follows:
“An analysis of the functions performed (taking into account assets used and risks assumed) by the associated enterprises in the controlled transaction and by independent enterprises in comparable uncontrolled transactions.”
The UN Transfer Pricing Manual defines functional analysis (FAR analysis) as follows:
“An analysis involving the identification of functions performed, assets employed and risks assumed with respect to the international controlled transactions of an enterprise. The functional analysis seeks to identify and compare the economically significant activities and the responsibilities undertaken by the independent and associated enterprises.”
Following are the objectives of carrying out a FAR analysis:
• To describe the functions performed, assets used and risks borne by each of the transacting Related Parties
• To find and organize facts about business in terms of its functions, assets and risks
• To identify how functions, assets and risks are divided between transacting Related Parties
• To know what the Related Parties do, and how they generates value and incur costs
• To identify the role that each Related Party plays in the entire value chain ranging from inputs of raw material and human effort to outputs of products and services provided to end-user customers
• To determine whether a particular Related Party (Tested Party) and uncontrolled entities are comparable or not
• To highlight significant differences between a particular Related Party (Tested Party) and unrelated comparable entities
• To have an idea of remuneration the Tested Party should realise – low risk, low return; high risk, high return; routine services, routine return; value adding services, higher return
Comparability Analysis compares the Related Party transactions (controlled transactions) to Unrelated Party transactions (uncontrolled transactions). The analysis should take into account the factors affecting comparability, like the nature of the transferred assets or services, the functional analysis, the terms and conditions, and the economic conditions affecting the parties.
The UAE Transfer Pricing Regulations mandate that the price of a transaction between Related Parties must meet the Arm’s Length Standard. It therefore becomes necessary to verify the arm’s length character of the controlled transaction (transaction between Related Parties or Connected Persons).
The OECD Transfer Pricing Guidelines provide that the arm’s length character of an intra-group controlled transaction be ordinarily determined by comparing the results (either prices or profits) of that controlled transaction to the results realised in comparable uncontrolled transactions (transactions between Unrelated Parties or Independent Parties).
Under the Arm’s Length Standard, a transaction, between Related Parties or Connected Persons is analysed as if that transaction (controlled transaction) has taken place between two unrelated uncontrolled independent enterprises. That entails comparing the controlled transaction between Related Parties or Connected Persons, with a similar transaction (uncontrolled transaction) taking place in similar conditions between Unrelated, Uncontrolled or Independent Enterprises.
For doing Comparability Analysis below is a description of the Nine Step Process recommended by the OECD. It may be noted that the process is not linear: for example, some of the steps may need to be carried out repeatedly in iteration until a satisfactory result is achieved.
Step 1: Determination of years to be covered
The first step is to identify the year(s) in which the relevant transactions – between Related Parties or Connected Persons – occurred.
Step 2: Broad-based analysis of the Taxpayer’s circumstances
The ‘’broad based’’ analysis involves looking at the circumstances surrounding the transactions (between Related Parties or Connected Persons) in question rather than at the transactions themselves. This includes a review of the industry, competition, economic factors, regulatory factors, etc.
Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis
This involves identifying various transactions between Related Parties or Connected Persons (including the relevant terms and prices) and also reviewing the profile of the Related Parties or Connected Persons participating in those transactions i.e., analysis of functions, assets and risks of Related Parties or Connected Persons. The purpose is to gather the information needed to evaluate a transaction.
Step 4: Review of existing internal comparables, if any The OECD Transfer Pricing Guidelines are clear that where suitable internal comparable data exists (Related Parties transacting with both Related Parties as well as Unrelated Parties), then internal comparable data is likely to be most reliable.
Step 5: Determination of available sources of external comparables
The choice of the most reliable transfer pricing method depends on the data available to apply it.
Step 6: Selection of the Most Reliable Transfer Pricing Method
This involves evaluating the information collected in steps 2-5 and reaching a conclusion on the Most Reliable Method. Here we need to consider what is involved in applying each of the methods and what their strengths and weakness are.
Step 7: Identification of potential comparables
This involves applying the information gathered in steps 2-5 to determine what data to look for and how to refine the search to generate the most reliable comparable data.
Step 8: Determination of and making comparability adjustments where appropriate
The purpose of making comparability adjustments (if any) is to improve the reliability of the comparable data being used.
Step 9: Interpretation and use of data collected, and determination of the Arm’s Length Price
This involves both interpretation of the data and using that data to reach a conclusion on the arm’s length price.
In practice, the process outlined above is not a linear one. Steps 4 to 7 in particular might need to be carried out repeatedly until a satisfactory conclusion is reached, i.e., till the Most Reliable Method is selected, especially because the examination of available sources of information may in some instances influence the selection of the transfer pricing method. For instance, in cases where it is not possible to find information on comparable transactions (step 7) and/or to make reasonably accurate adjustments (step 8), we might have to select another transfer pricing method and repeat the process again starting from step 4.
Comparables are business enterprises or parties which have FAR profile comparable to the Taxpayer or its Related Parties.
There are two types of comparables: internal and external.
Internal comparables can be found from the Taxpayer’s own transactions with Unrelated Parties when those transactions are similar to Taxpayer’s controlled transactions with Related Parties or Connected Persons.
External comparables can be found in commercial electronic transfer pricing databases. These databases have been developed by various organizations which compile accounts filed by companies with the relevant administrative bodies and present them in an electronic format suitable for searches and statistical analysis. These products typically provide detailed financial information as well as some textual information such as short business descriptions.
(i) TP Catalyst
(iv) ORBIS (Bureau van Dijk)
(vii) Amadeus Global
Price or Profit Margin of comparable uncontrolled transaction is adjusted to account for differences, if any, between the controlled transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the Price or Profit Margin in the open market. This is known as Comparability Adjustment.
Typical Comparability Adjustments are listed below:
• Sales rebate accounted as reduction from sales or as marketing expenses
• R&D expenditure accounted as operating expense or as cost of sales
• Accounting treatment and differences in depreciation periods, employee stock options etc.
• Differences in inventories, receivables and payables (working capital adjustments)
• Differences in interest rates
• Adjustments to account for differences in functions performed, assets used, risks assumed or capital employed by the Related Parties and Uncontrolled Comparables
If reliable and accurate adjustments cannot be made to eliminate the effect of above-mentioned differences on price, gross mark-up, net profit, etc., then the comparables are dropped.
Application of the selected Transfer Pricing Method or combination of Transfer Pricing Methods may result in an arm’s length range of financial results or indicators (price or profit margins of uncontrolled comparables) acceptable for establishing the arm’s length result of a transaction or arrangement between Related Parties.
In some cases, it will be possible to apply the arm’s length principle to arrive at a single figure (e.g., price or profit margin) that is the most reliable to establish whether the conditions of a transaction are arm's length. However, because transfer pricing is not an exact science, there will also be many occasions when the application of the most reliable method or methods produces a range of figures all of which are relatively equally reliable.
So, it can be said that Arm’s Length Range is a range of prices or profit margins that are acceptable for establishing whether the conditions of a controlled transaction are arm’s length and that are derived either from applying the same transfer pricing method to multiple comparable data or from applying different transfer pricing methods.
Where the result of the transaction or arrangement between Related Parties does not fall within the arm’s length range, the Tax Authority will adjust the Taxable Income to achieve the arm’s length result that best reflects the facts and circumstances of the transaction or arrangement.
Where the Tax Authority or a Taxable Person adjusts the Taxable Income for a transaction or arrangement to meet the Arm’s Length Standard, the Tax Authority shall make a Corresponding Adjustment to the Taxable Income of the Related Party that is participating in the relevant transaction or arrangement.
Due to Corresponding Adjustment the price realized by a Related Party in a controlled transaction with the Taxpayer can be revised upwards or downwards if the Authority makes Transfer Pricing Adjustment in case of the Taxpayer. For instance, if the price of goods sold by the Taxpayer to a Related Party is adjusted by the Tax Authority upwards, then the corresponding purchase price in case of the Related Party (Domestic or Foreign) will also be adjusted upwards.
Where a foreign competent authority makes an adjustment to a transaction or arrangement involving a Taxable Person to meet the Arm’s Length Standard, such Taxable Person can make an application to the Tax Authority to make a Corresponding Adjustment to its Taxable Income. This is called Mutual Agreement Procedure (MAP).
A payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only if and to the extent –
(i) the payment or benefit corresponds with the Market Value of the service, benefit or otherwise provided by the Connected Person and
(ii) is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.
Market Value is the price which could be agreed in an arm’s-length free market transaction between Persons who are not Connected Persons in similar circumstances.
So, to determine that a payment or benefit provided by the Taxable Person corresponds with the Market Value of the service or otherwise provided by the Connected Person in exchange, the Arm’s Length Standard is applicable.
A payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only if and to the extent the payment or benefit corresponds with the Market Value of the service, benefit or otherwise provided by the Connected Person and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.
Payments or benefits provided by a Taxable Person to the following Connected Persons are exempted from the UAE Transfer Pricing Regulations:
a. A Taxable Person whose shares are traded on a Recognised Stock Exchange.
b. A Taxable Person that is subject to the regulatory oversight of a Competent Authority in the State.
c. Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
No. The UAE Transfer Pricing Regulations do not provide any guidance for controlled transactions involving Intangibles. So, the guidance provided by the OECD in its Transfer Pricing Guidelines 2022 will apply.
A. Identifying intangibles
(ii) Trademarks, trade names and brands
(iii) Rights under contracts and government licences
(iv) Licences and similar limited rights in intangibles
(v) Group synergies
B. Ownership of intangibles and transactions involving the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangibles
C. Transactions involving transfers of intangibles or rights in intangibles
D. Transactions involving the use of intangibles in connection with sales of goods or performance of services
E. Supplemental guidance for determining arm’s length conditions in cases involving intangibles
Following transactions involving Intangibles commonly happen between Related Parties:
• Shared or joint development of intangibles
• The Taxpayer providing Contract R & D services to its Related Party
• The Taxpayer licensing intangibles from or to a Related Party on payment of Royalty
• The Taxpayer funding the R & D projects undertaken by Related Parties
• One MNC Group Entity holds all intangibles on behalf of all the entities of the MNC Group
Marketing Intangibles mean Trademark, Trade Name, Brand Name and Logo. When a Taxpayer purchases goods bearing Trademark, Trade Name, Brand Name or Logo from a Related Party and does advertisement, marketing and promotion, then the Trademark, Trade Name, Brand Name and Logo of the Related Party get recognized in the Taxpayer’s market. This can be construed as brand-building services provided by the Taxpayer to its Related Party for which arm’s length compensation must be paid by the Related Party to the Taxpayer.
No. The UAE Transfer Pricing Regulations do not provide any guidance on Marketing Intangibles. But the OECD guidance on Marketing Intangibles will be applicable in the UAE.
In the context of Transfer Pricing, Business Restructuring is modification of FAR Profiles of the Taxpayer and the Related Party so that their business characteristics get modified. For example, a Taxpayer who is a Licensed Manufacturer can be restructured as a Contract Manufacturer; or a Taxpayer who is a R & D Entity can be restructured as a Contract R & D service provider. Another example is transfer of intangibles to a Central Entity (IP Holding Company) within the MNC Group.
No. The UAE Transfer Pricing Regulations provide any guidance on Business Restructuring. But, the guidance provided by the OECD Transfer Pricing Guidelines 2022 (in Chapter IX: Transfer pricing aspects of business restructurings) will be applicable.
a. Taxable Persons have to file, together with their Tax Return, a disclosure containing information regarding the Taxable Persons’ transactions and arrangements with its Related Parties and Connected Persons in the form prescribed by the Tax Authority.
b. If a Taxable Person’s transactions with its Related Parties and Connected Persons for a Tax Period meet the conditions prescribed by the Minister, the Taxable Person must maintain both a Master File and a Local File in the form prescribed by the Tax Authority.
The disclosure form and conditions will be provided under separate Ministerial decisions and Tax Authority guidance.
a. Information regarding the Taxable Persons’ transactions and arrangements with its Related Parties and Connected Persons has to be reported in the form which will be prescribed by the Tax Authority.
b. Local File can be prepared mainly by documenting the FAR Analysis and the Comparability Analysis.
c. Master File can be prepared by filing in the prescribed details in the format provided under separate Ministerial decisions and Tax Authority guidance.
Yes, TP documentation is applicable for all related party transaction if it exceeds the threshold (yet to be announced) irrespective of domestic or cross border transactions.
No, currently there is no such exclusions for SMEs or start-ups. Any specific exclusions will be announced later.
The UAE Transfer Pricing Regulations will apply to Tax Periods commencing on or after 1 June 2023.
A Free Zone Person who is a Qualifying Free Zone Person can benefit from a preferential Corporate Tax rate of 0% on its “Qualifying Income” only. To be considered a Qualifying Free Zone Person, the Free Zone Person must:
• maintain adequate substance in the UAE;
• derive ‘Qualifying Income’;
• not have made an election to be subject to Corporate Tax at the standard rates; and comply with the transfer pricing requirements under the Corporate Tax Law.
Safe Harbor Rules provide for circumstances in which a certain category of Taxpayers can follow a simple set of rules under which transfer prices are automatically accepted by the Tax Authority. Stated differently, Safe Harbor Rules provides a window for the taxpayers wherein in case of defined circumstances the income-tax authorities shall accept the TP declared by the taxpayer.
The UAE Transfer Pricing Regulations do not have Safe Harbour Rules.
Where the underlying transaction is held by the Tax Authority not to be at arm’s length, primary adjustments are made in order to align the said transfer price with the arm’s length price (ALP). This is known as Primary Adjustment.
So, Primary Adjustment means the determination of the transfer price in accordance with the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the taxpayer.
To make the actual allocation of profits consistent with the primary transfer pricing adjustment, some jurisdictions have enacted under their domestic law a constructive transaction (a secondary transaction), whereby the excess profits resulting from a primary adjustment are treated as having been transferred in some other form and taxed accordingly. Ordinarily, the secondary transactions will take the form of constructive dividends, constructive equity contributions, or constructive loans.
The secondary Adjustments are designed to ensure that the cash profits of the taxpayer are in line with the tax profits following a primary adjustment.
The UAE Transfer Pricing Regulations do not have provision for Secondary Adjustment.
An APA is an agreement between a Taxpayer and Tax Authority determining the transfer pricing methodology for pricing the tax payer’s international transactions for future years. The methodology is to be applied for a certain period of time based on the fulfilment of certain terms and conditions (called critical assumptions).
An APA aims to avoid any transfer pricing disputes, by determining in advance a set of criteria to apply, for specific controlled transactions, to ensure their compliance with the Arm’s Length Principle.
The UAE Transfer Pricing Regulations do not have provision for APA.
The scope of Transfer Pricing Planning is highlighted below:
a. Value Chain Planning
b. Planning for Development of Intangibles and Intellectual Property (IP)
c. Business Restructuring
Dos for Transfer Pricing Compliance
• Have a proper Transfer Pricing Policy to set the Price at Arm’s Length
• Build capability of Your Team to identify the Covered Transactions between Related Parties and Connected Persons
• Draw up Agreements for Intra-Group Covered Transactions
• Ensure that the Obligations of Parties under the Agreement, as well as the Terms and Conditions of the Agreement, are in harmony with, and reflect the actual operations on the ground
• Do consider Transfer Pricing Planning
• Ensure adequate substance in the Entities located in low tax jurisdictions
• Have a system for Segmentation of Accounts
• Identify the Transactions covered by Transfer Pricing Regulations
• Set the Price of covered Transactions at Arm’s Length, on basis of a preliminary Arm’s Length Benchmarking
• Review the Price set every Quarter, based on new Data of Comparables
• Keep a written Record of preliminary Arm’s Length Benchmarking and the Quarterly Reviews
• Maintain record of related Correspondence with Relates Parties and Connected Persons: Emails, Negotiations, Con-Calls, Benefits of the Intra-Group Transaction, etc.
• List the Benefits of undertaking the Transaction and maintain supporting evidence
• Do a final Benchmarking based on fresh Data of Comparables
• Make necessary adjustments or fine-tuning of Prices by issuing Debit/Credit Notes
• Document the Benchmarking in the form of a formal TP Study Report
• Prepare, keep and maintain the necessary Transfer Pricing Documentation