Navigating the Transfer Pricing Landscape in the UAE: A Comprehensive Guide

The United Arab Emirates (UAE) has emerged as a global business hub, attracting multinational corporations and entrepreneurs from around the world. As businesses expand their operations across borders, transfer pricing has become increasingly important in ensuring that transactions between related entities are conducted at arm’s length and in accordance with international tax principles.

UAE has implemented Transfer Pricing (TP) rules as part of the newly enacted Corporate Tax (CT) Law, effective from 1 June 2023. The TP rules aligns with the Organisation for Economic Co-operation and Development’s (OECD) Transfer Pricing Guidelines. These regulations mandate that transactions between related parties be conducted at prices that independent parties would agree to under similar circumstances. This ensures that taxable profits are reported accurately in the UAE and prevents artificial shifting of profits to lower-tax jurisdictions.

Key Considerations for Transfer Pricing in the UAE

• Identifying Related Parties/Connected Persons: Related parties are entities that have a direct or indirect control relationship, such as parent companies, subsidiaries, and also includes two or more natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship. Transactions between related parties and connected persons are subject to transfer pricing regulations.
• Arm’s Length Principle: The arm’s length principle is the cornerstone of transfer pricing. It requires that transactions between related parties be conducted at prices that independent parties would agree to under similar circumstances.
• Transfer Pricing Methods: The CT Law outlines the following approved transfer pricing methods for determining arm’s length value:

1. The comparable uncontrolled price method
2. The resale price method
3. The cost-plus method
4. The transactional net margin method
5. The transactional profit split method
6. The CT Law also allows an alternative method if none of the listed methods can be reasonably applied.

• Transfer Pricing Documentation: Transfer pricing documentation is crucial for demonstrating compliance with transfer pricing regulations. It should include a detailed analysis of the transaction, the transfer pricing method used, and the supporting data.
• Transfer Pricing Audits: FTA may conduct transfer pricing audits to ensure compliance with regulations. Businesses should be prepared to provide documentation and support for their transfer pricing positions within 30 days of information request made by the FTA.
• Transfer Pricing Dispute Resolution: In case of disputes with the FTA regarding transfer pricing, businesses can seek resolution through administrative procedures or through the UAE courts.

Impact of Transfer Pricing Regulations on UAE Businesses

The implementation of transfer pricing regulations has significant implications for UAE businesses:

• Increased Compliance Burden: Businesses must implement transfer pricing documentation and procedures to ensure compliance with regulations.
• Potential Tax Liabilities: Non-compliance with transfer pricing regulations can result in additional tax liabilities and penalties.
• Reputational Risk: Failure to comply with transfer pricing regulations can damage a company’s reputation and lead to legal challenges.

Steps to Prepare for Transfer Pricing Compliance in the UAE

UAE businesses should take proactive steps to prepare for transfer pricing compliance:

• Assess Transfer Pricing Risks: Conduct a transfer pricing risk assessment to identify potential areas of non-compliance.
• Develop Transfer Pricing Policies: Establish clear transfer pricing policies and procedures.
• Maintain Transfer Pricing Documentation: Prepare comprehensive transfer pricing                       documentation for all related party transactions.
• Seek Expert Advice: Consult with BOT- Advisory’s transfer pricing experts to ensure compliance with regulations and optimize tax positions.

 

Transfer pricing regulations in the UAE play a vital role in ensuring fair taxation and preventing profit shifting. Businesses operating in the UAE must understand and adhere to these regulations to avoid potential tax liabilities and reputational risks. By proactively addressing transfer pricing compliance, businesses can ensure that their operations are aligned with international tax principles and contribute to a sustainable tax system in the UAE.