Starting June 1st, 2023, the Corporate Tax Regime in the UAE will include Transfer Pricing Regulation which requires related party transactions to be carried out at arm’s length. The UAE has also joined the OECD Inclusive Framework on Base Erosion and Profit Shifting, committing to implement the BEPS minimum standards, including Transfer Pricing Documentation and Country-by-Country Reporting (CbCR).With these changes, businesses operating in the UAE must ensure their transfer pricing practices are in compliance with the new regulations.
Horizon Biz Consultancy are experts in offering transfer pricing compliance services in the UAE. With years of experience in tax planning, tax compliance and business consulting, they have developed a deep understanding of the local tax regulations and the international tax environment.
The transfer pricing provisions in the UAE will become effective on June 1, 2023, as part of the UAE Corporate Tax Law. The transfer price refers to the price charged between related parties that is equivalent to what two independent parties would charge for the same transaction, also known as arm’s length price.
Multinational companies frequently utilize transfer pricing to distribute profits between their domestic and international branches, which makes it essential for UAE or Dubai Branch Offices to stay compliant when it comes to transfer prices. While transfer pricing strategies can provide tax benefits for a business, regulatory authorities strongly discourage manipulating transfer prices to evade taxes.
Determining Arm’s Length Principle Applicability under the UAE Corporate Tax Law
The arm’s length principle requires that transactions between related parties as defined in law are conducted as if they were between independent parties. It’s crucial to examine if the result of the arrangement or transaction aligns with what would have been expected if:
The Transfer Pricing Regulations apply to transactions or agreements between entities that are related or connected, regardless of their location within or outside the UAE, whether they are based in the mainland or in a free zone. Under the UAE corporate tax law, there will be two types of TP regulations to ensure that all related party transactions within UAE are also under the purview of transfer pricing:
In order to determine exactly what your company’s Transfer Pricing is, it is important to understand the concept of related parties, control and connected persons. At Horizon Biz Consultancy, our thorough understanding of your business operations helps us arrive at this insight as we navigate through the complexities with great attention to detail.
Which entities are considered as Related Parties for Transfer Pricing Transactions?
According to Law, Related Party can refer to any of the following parties
A juridical and natural person are said to be Related Parties if
Ownership Interest
The natural person is a shareholder of the juridical person and has fifty percent (50%) or more ownership interest, whether directly or indirectly in it. The Natural Person can hold such interest alone or with Related Parties.
Control
The natural person controls the juridical person, whether directly or indirectly. The Natural Person can Control the juridical person alone or with other Related Parties.
Two or more juridical persons are said to be Related Parties if
Ownership Interest
A juridical person has fifty percent (50%) or more ownership interest, whether directly or indirectly in the other juridical person. The juridical person can hold such interest alone or with Related Parties.
Control
The juridical person Controls the other juridical person. It can be directly or indirectly. The juridical person can Control alone or with Related Parties.
Any Person who has Ownership Interest or Control
Any person has fifty percent (50%) or more ownership interest, whether directly or indirectly or Control over two or more juridical persons. The person can hold such interest alone or with Related Parties.
A Connected Person under the Law refers to a person who
‘Control’ can be by agreement or by own right or in any other way.
Owner
An ‘owner’ is a natural person having ownership interest in a Taxable Person or controls such Taxable Person, whether directly or indirectly. In a situation where the Taxable Person is a partner in an Unincorporated Partnership, the Connected Person shall be someone who:
If a benefit or payment is provided to the Connected Person by the Taxable Person, it will be deductible only in the situation where it corresponds to the Market Value for the benefit provided and is sustained entirely and specifically for the business of the Taxable Person.
To ascertain if the payments are in consonance with the Market Value, the Federal Tax Authority will apply the relevant provisions of Article 34 to the Connected Person.
The benefit or payment provided to the Connected Person by the Taxable Person will not be deductible where a Taxable Person:
The Cabinet may determine any other person who shall not be able to claim deduction on a benefit or payment made to a Connected Person.
International Transfer Pricing Policy Compliance
Transfer Pricing Policy Design and Implementation
Risk Mitigation of Detailed International Transfer Pricing Regulations
Intra-Group Transaction Process Audit and Implementation
Transfer Pricing Dispute Mediation
Authority Representation, Arbitration and Litigation Support
Hiring a business consultant like Horizon Biz Consultancy for transfer pricing compliance in the UAE can provide your business with valuable expertise.
Our six decades-long experience and multi-industry expertise ensure several benefits for your company.
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It involves meeting all TP documentation & reporting requirements, analyzing related party transactions, and ensuring arm’s length pricing to avoid tax authority penalties.
It applies to purchase/sale of goods, services, IP, financial transactions etc. between related entities of a multinational group.
TP compliance is required if related party transactions exceed AED 10 million OR have cross-border dealings with entities that have over AED 50 million in revenues.
Main documents are Local File, Master File, Country-by-Country Report, Specific Disclosure Form, and Economic Substance Form.
Penalties can include up to AED 50,000 for inaccurate documentation and higher for repeated violations. Our team helps avoid this.
Transfer pricing documents must be updated every year based on latest financial data to prove arm’s length dealings to tax authorities.
