The UAE's new corporate tax regime requires businesses to conduct thorough transfer pricing studies and benchmarking for transactions with Related Parties and Connected Persons, ensuring compliance with the arm's length principle.
What is transfer pricing?
Transfer Pricing refers to the rules for pricing transactions with Related Parties and Connected Persons (as described under Articles 35 and 36 of the UAE Corporate Tax law), known as Controlled Transactions. Examples include Intra-group loans, purchases, sales, asset sharing, management services, agency commissions, intellectual property transfers, cost-sharing agreements, royalty payments, provision of guarantees, leases; salary, fees, remuneration, bonuses, retirement benefits to partners, directors, etc. These transactions must be conducted as if between unrelated parties, reflecting market conditions.
Why is transfer pricing important?
Proper documentation and compliance with TP regulations prevent significant financial penalties and tax disputes. TP ensures transactions are at arm's length and stops tax base erosion by maintaining fair profit distribution. Accurate TP practices improve a company's credibility with tax authorities, investors, and stakeholders, ensuring fair profit allocation globally.
When is transfer pricing relevant?
Transfer pricing is not a one-time task but an ongoing process that requires regular updates. Businesses need to adjust their transfer pricing policies in response to regulatory updates. This is especially crucial for businesses exceeding certain revenue thresholds, requiring detailed documentation.
Who needs to comply?
All businesses engaging in Controlled Transactions must adhere to TP regulations. Those with significant revenues, particularly part of multinational groups, have stringent documentation requirements. However, even smaller entities should follow best practices to avoid potential tax disputes. Those companies above the threshold must maintain both a master file and a local file in the form prescribed by the FTA. Even businesses below mandatory documentation thresholds like SMEs should follow best practices to avoid any tax disputes for Controlled Transactions.
One of the conditions for a Qualifying Free Zone Person to benefit from a 0 per cent Corporate Tax rate on qualifying income is that they must comply with Transfer Pricing regulations and maintain proper documentation.
Where is transfer pricing applied?
TP compliance is essential within the UAE and aligns with international standards, benefiting companies operating across borders.
How to comply?
A TP study involves analyzing related party transactions, applying suitable pricing methods, and documenting the analysis of functions, assets, and risks. Benchmarking identifies and analyzes comparable transactions or companies to establish an arm's length range of prices or profit margins. Entities above documentation thresholds must maintain both a master file and a local file in the form prescribed by the FTA. Advance Pricing Agreements (APA) help pre-emptive agreements on transfer pricing methods, providing certainty and reducing dispute risks.
Understanding and complying with UAE's corporate tax and TP regulations is vital for businesses. It not only avoids penalties but also supports fair profit distribution and enhances corporate credibility. Adopting best practices in TP ensures that companies can operate smoothly and transparently in the evolving tax landscape of the UAE.
