Transfer Pricing
The United Arab Emirates has included transfer pricing provisions in its new corporation tax code, which takes effect on June 1, 2023. Transfer pricing refers to the price at which two related parties must execute a transaction. A controlled transaction is one that takes place between two associated businesses. Therefore, we can define transfer pricing as the price at which a company transfers goods, which can either be tangible or intangible or provides a service to an associate enterprise. The transfer pricing requirements in the tax decree legislation provide a framework for ensuring that transactions between related parties or payments for individuals associated with the business are at “arm’s length” or “open market” value. Businesses will be expected to maintain TP documentation and submit a disclosure form, subject to specific situations.
Arm’s length principle
For the purpose of assessing the taxable income of parties, every transaction with a connected party or associated persons must be conducted at arm’s length. According to tax law, a transaction or agreement with a related party or associate person is deemed to have followed the arm’s length principle if the outcome is the same as if the identical transaction had occurred with an unrelated person.
Calculating the arm’s length value
The corporate tax decree law approves the following method for calculation of transfer pricing methods for arm’s length price:
- The comparable uncontrolled price method
- The resale price method
- The cost-plus method
- The transactional net margin method
- The transactional profit split method
The methods mentioned above are well-established and adhere to OECD transfer pricing guidelines. When applying these methods for valuation, standard practices are usually followed.
Transfer pricing documentation
The main objective of transfer pricing documentation is to ensure that the price paid for the transfer of goods, services, or intangible assets between related parties is in compliance with the arm’s length principle. Transfer pricing documentation is a set of documents that multinational corporations must prepare and maintain in order to ensure the price of transactions between related parties are at arm’s length price.
Why Transfer Pricing Documentation?
Makes certain that taxpayers consider transfer pricing obligations when determining prices and other terms, as well as reporting income from such transactions on their tax returns.
To provide tax authorities with the information they need to perform a well-informed transfer pricing risk assessment.
Documentation Model under OECD Guidelines
According to the OECD recommendations on transfer pricing, authorities use a three-tier method for transfer pricing documentation, which includes:
Master file – containing standardized information for all Multinational enterprise group members
Local file – material transactions of local taxpayers
Country by Country Report – Global allocation of the Multinational enterprise groups’ income and tax paid, indicators of the location of economic activity within the Multinational enterprise group.
Why choose us
- The introduction of transfer pricing legislation will put UAE taxpayers with new challenges. It is a key component of the new tax structure, and it will have an impact on a wide range of UAE enterprises.
- Any business that has transactions with group businesses, whether in the UAE or elsewhere, and any owner or director who gets payments for the company, must assess whether they can fulfill the transfer pricing rules. Transfer pricing consultants at AMICUS TAX help taxpayers satisfy their home country and overseas documentation needs by creating transfer pricing documentation reports that analyze the arm’s length norms of their intercompany transactions.
- The repercussions of failing to satisfy the standards are considerable: ultimately profits might be adjusted, and additional tax might be payable. As a consequence, penalties might also be due. It is at this very moment that AMICUS TAX’s professionals come into play and assist taxpayers.
- The transfer pricing requirements are particularly included in the laws for free zone companies: A free zone firm cannot be recognized as a qualifying free zone company if, among other things, it does not fulfill the transfer price rules. This must be kept in mind as free zone enterprises prepare for corporation tax.
- The documentation and reporting requirements will impose a considerable compliance burden on some taxpayers, and these obligations should not be overlooked. Master files and local files are complicated documents that require time and effort to accurately assemble.
- If there is an annual reporting obligation in addition to the tax return, it will necessitate attention and effort, and penalties are likely to be imposed if there are errors or a lack of compliance.