Transfer pricing involves the guidelines and approaches used to determine the prices of transactions conducted between companies that share common ownership or control.
As per the current information from the Ministry of Finance (MOF), transfer pricing rules aim to ensure that transactions between related parties are conducted at arm’s length, as if the transaction were between independent parties. UAE businesses are required to comply with these transfer pricing rules and documentation requirements, which are aligned with the OECD Transfer Pricing Guidelines.
Applying the arm’s length principle is essential to ensure that related party transactions reflect fair market pricing for goods or services. It is expected that transfer pricing regulations will be incorporated into the UAE Corporate Tax Law, encompassing various transfer pricing methods, extensive annual documentation, and stringent penalties for non-compliance.
As a standard practice, the Federal Tax Authority (FTA) will assess and scrutinize transfer pricing policies, documentation, inter-company and inter-group transactions, etc., to verify compliance with transfer pricing regulations. Businesses failing to comply may face substantial penalties.
Generally, taxpayers must submit a self-declaration regarding compliance with transfer pricing rules along with their electronic tax returns.
Importance of Transfer Pricing Documentation:
Transfer pricing documentation ensures that taxpayers consider transfer pricing requirements while establishing prices and conditions and reporting income from related party transactions in their tax returns. It also provides tax administrations with the necessary information to assess transfer pricing risks accurately.
Documentation Model under OECD Guidelines:
As per the OECD guidelines on transfer pricing, a three-tier approach is used for transfer pricing documentation:
- Master file – containing standardized information for all multinational enterprise (MNE) group members.
- Local file – includes details of material transactions for local taxpayers.
- Country-by-Country Report – provides a global allocation of the MNE group’s income, tax paid, and indicators of economic activity in each jurisdiction.
Transfer Pricing Documentation:
Local File:
Business entities involved in related party transactions must maintain information and documents in accordance with laws and regulations. The local file, as per the OECD guidelines, includes various details such as the local entity’s description, business strategy, controlled transactions, financial information, and transfer pricing methods used.
Country-by-Country Report (CbCR):
The parent company of an international group with a consolidated turnover exceeding USD 857 million (AED 3.15 billion) must submit a Country-by-Country Report to the relevant authority in its country of residence. This report provides a breakdown of the multinational group’s global revenue, profit before tax, income tax accrued, and other indicators of economic activities for each jurisdiction where the MNE operates.
Transfer Pricing Methods under OECD Guidelines:
The arm’s length price for a controlled transaction is determined by selecting and applying the most appropriate transfer pricing method. The OECD recognizes five main transfer pricing methods, and companies should consider various factors when choosing the appropriate method for their specific transactions. The regulations may also allow the use of methods other than the approved Transfer Pricing Methods if the Taxable Person can demonstrate a reliable arm’s length price and appropriate documentation that satisfies the required provisions under the UAE Corporate Tax law