Transfer Pricing

What is Transfer Pricing in UAE?

Transfer Pricing refers to setting prices for goods or services traded between different units or divisions of a multinational corporation. In the UAE, the transaction between entities is governed by the transfer pricing regulations which were further impacted under the UAE corporate tax regime.

The transfer pricing rules in the UAE are designed to ensure that related parties engage in transactions at arm's length, meaning that they trade with each other at prices that are equivalent to those that would be charged in comparable transactions between unrelated parties.

The arm's length price (ALP) is the price of a transaction between two related firms that would have been paid if the transactions had taken place between two comparable independent and unrelated parties, with just commercial consideration.

Impact of Transfer Pricing on UAE corporate tax

As declared by the Ministry of Finance, transfer pricing laws ensure conducting transactions between related parties in arm’s length terms- transactions between independent parties. Businesses in the UAE should follow the rules of transfer pricing and document requirements as per the OECD (Organization for Economic and Co-operative Development) guidelines.

Generally, the Federal Tax Authority evaluates and studies the related policies, documentation, and inter-company and inter-group transactions for consistent transactions with the transfer pricing laws.

Corporate tax returns and Transfer Pricing

In the context of corporate tax returns in the UAE, Transfer Pricing may have an impact on the amount of taxable income that a company declares.

If a company is found to have engaged in transfer pricing practices that artificially reduce its taxable income in the UAE, the FTA may make adjustments to the company's tax liability based on arm's length principles.

The local file and country-by-country (CbC) report, which are part of the transfer pricing documentation, must be submitted along with the corporate tax returns in the UAE if the company meets certain criteria.

Need for Transfer Pricing documentation

The Transfer Pricing rules in the UAE require companies to maintain documentation to support the Transfer Pricing arrangements for their cross-border transactions. This documentation must include an analysis of the Transfer Pricing policy, a description of the transactions and their economic context, and an analysis of the Transfer Pricing method used.

The documentation of the Transfer Pricing helps businesses as follows,

• To ensure valuing Transfer Pricing requirements for setting the prices and other conditions and reporting income from similar transactions in return
• To inform tax administrations well on conducting a detailed risk assessment

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