The implementation of the UAE Corporate Tax will trigger the Transfer Pricing rule under the OECD. Businesses need to comply with Transfer Pricing rules and maintain adequate documentation, as these rules will be mandatory and shall be applicable to domestic transactions also.
Transfer pricing rules seek to ensure that transactions between Related Parties are carried out on arm’s length terms, as if the transaction was carried out between independent parties. To prevent the manipulation of taxable income, various articles in the Corporate Tax Law require that the consideration of transactions with Related Parties and Connected Persons needs to be determined by reference to their “Market Value”.
Federal Decree law 47 of 2022 has introduced Transfer Pricing provisions to ensure that all transactions between Related Parties or payments to Connected Persons are at an arm’s length.
The arm’s length result of a transaction or arrangement between Related Parties must be determined by applying one or a combination of the following transfer pricing methods:
Related Parties and Connected Persons
Related Parties refer to 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 natural person, alone or together with their Related Parties, has a controlling interest (50% or more of shares of the company). For companies, Related Party means other companies in which the company, alone or together with their Related Parties, have a controlling ownership interest (50% or more of shares of the company), or that are under greater than 50% common ownership. Connected Persons refers to the owner of the business, a director or officer of the business, or a Related Party of either of the above.
Transfer Pricing Documentation / Reporting
If a Taxable Person’s transactions with its Related Parties and Connected Persons for a Tax Period meet the conditions prescribed (Ministerial Decision No 97 of 2023) the Taxable Person must maintain both a master file and a local file in the form prescribed by the Authority.
A Taxable Person may be required by the Authority to disclose information on transactions and arrangements they have with their Related Parties and Connected Persons together with their Tax Returns.
Generally, a master file should provide an overview of the business and include information such as the corporate structure of the business. A local file, on the other hand, typically contains more detailed information on the Related Party transactions. A Taxable Person must comply with a request issued by the Authority to provide information which supports the arm’s length nature of its transactions or arrangements with its Related Parties and Connected Persons. These documents must be submitted to the Authority within 30 days following a request by the Authority.
Any business that has transactions with group companies and any payments made to owners or directors/relatives should meet the arm’s length/Transfer Pricing conditions.
A Taxable Person needs to take into account the arm’s length principle under the transfer pricing rules when preparing their opening balance sheet. This requirement is intended to prevent non-arm’s length transactions and arrangements entered into prior to the introduction of Corporate Tax from impacting the calculation of Taxable Income.
Transfer Pricing will play a crucial role as inter-company and intra-group transactions will be impacted and will be undertaken at arm’s length. Companies will need to evaluate their current processes and assess the impact on transactions. Transfer Pricing documentation and reporting requirements will create a significant compliance burden for taxpayers.
We at M&M Auditing have a dedicated team of tax experts who are well versed in the Transfer Pricing Regulations in UAE and can cater to your TP requirements. Businesses looking for Transfer Pricing Services in Dubai can contact us.