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UAE based business groups and multinationals need to do their homework on 'transfer pricing' policies, and keep checking what's allowed and what's not. But for businesses with revenues of up to Dh200 million, the latest update provides a break. Image Credit: Shutterstock

Dubai: The UAE authorities continue to offer flexibility to small and mid-sized enterprises when it comes to their compliance on corporate tax, which goes live June 1.

On transfer pricing, the Ministry of Finance made it clear on Thursday that companies with revenues of up to Dh200 million from maintaining ‘master files’ and ‘local files’. It will be of particular help for those mid-sized businesses that are building up their revenues and also have cross-border dealings with associate entities.

These guidelines were issues as part of the UAE Corporate Tax provisions on ‘transfer pricing’, one of the most intricate areas within the tax regime. It covers dealings between group entities or where the owners/directors have significant shared interests. Or when these businesses are part of a bigger multinational and have extensive business arrangements between themselves.

The Ministry of Finance update also says that businesses need not have the master- or local- file if the overall group revenues are below Dh3.15 billion.

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The latest announcement is being seen by audit industry as another big break that the UAE authorities are giving businesses that are still aiming to reach a certain scale. “First there was the 0 per cent CT on income up to Dh375,000, then came the exemptions offered to businesses under Small Business relief,” said a tax consultant.

“Transfer pricing – even though it applies to multiple business that are part of a group or ‘related’ – is more intricate. But there are plusses from the ceiling set at Dh200 million and Dh3.15 billion on revenues.”

What will a 'master file contain?

  1. Organizational structure
  2. Geographic locations of operations
  3. Main value/profit drivers
  4. Descriptions of business activities of business units (products and services)
  5. Intangible assets
  6. Intercompany financing
  7. Enterprise financials and tax positions

Greater scrutiny too

What it also does is make businesses coming under UAE’s CT comply with strict transparency requirements when they conduct activity with group entities. The authorities have also cut down on the possibility of business owners seeking to lower their CT commitments using transfer pricing mechanism.

Then there are the other trans-national commitments that come with the start of the corporate tax regime in the UAE.

“Multinationals operating in the UAE will still have to be prepared to submit evidence and documents for cross-border transactions - if asked by the tax administration of the other countries who are members of the OECD,” said Jitendra Gianchandani, Managing Partner of Dubai-based JCG.

These corporates have increasingly complex taxation issues to deal with, because the taxation of multinational enterprises cannot be viewed in isolation. They come – and in UAE’s case, will come – under a broad international context.

- Jitendra Gianchandani of JCP

“Since UAE is a member of the OECD, it requires all the member countries to have a unified tax system. More pertinently, have unified transfer pricing methods to avoid double taxation, disputes, and to value cross-border transactions between associate enterprises operating outside of the UAE in OECD countries.”

A hands-off approach
The latest transfer pricing methodology announced by UAE FTA will follow international best practices by inviting independent third-party bids on contracts. And as proof to ensure that inter-company transactions are conducted on a hands-off and transparent basis

- Sameer Lakhani, Managing Director of Global Capital Partners.

Keep at arm’s length

The OECD guidelines focus on applying the ‘arm’s length principle’ to evaluate the transfer pricing of associated enterprises in cross-border transactions. After June 1, UAE based businesses will find that they can save on time and possible litigation/dispute costs through keeping that arm’s length approach.

More so, when multiple administrations come into play with cross-border dealings, and even those involving associated businesses.