In accordance with the new corporate tax law, the United Arab Emirates implemented transfer pricing laws into force as of June 1, 2023. The consequences for UAE-based firms are outlined in this synopsis. If transfer pricing ideas are new to you, the regulations are designed to make sure that payments to related parties or transactions with related parties reflect "arm's length" or "open market" values.
Aligned with OECD guidelines, these regulations establish acceptable methods for valuation and compliance requirements. They play a vital role in preventing profit distortion for tax avoidance. Entities not engaging in transactions with related parties or making payments to connected individuals may be exempted or subject to reduced compliance, pending confirmation through a Cabinet Decision.
Related Parties and Connected Persons in the Context of Transfer Pricing Rules
A thorough description of related parties and connected persons is given in the corporate tax decree-law of the United Arab Emirates, especially about the application of transfer pricing regulations. For individuals, related parties include family members and businesses in which the individual, operating alone or along with related parties, owns a controlling interest, usually equal to or greater than 50% of the company's shares.
The business owner, directors, officers, and related parties connected to the owner, an officer, or a director are all considered connected persons under the corporate tax decree-law. By laying the foundation for the appropriate application of transfer pricing regulations, these definitions guarantee that payments and transactions between these entities follow the concepts of fairness and market value.
Determining Arm’s Length Value under Transfer Pricing Rules
The essential idea of arm's length value in the context of transfer pricing regulations states that transactions must be valued regardless of whether they are between unrelated parties to ensure independence and fairness. The United Arab Emirates' corporate tax decree-law provides authorized procedures for figuring out this arm's length value, by accepted global norms and the OECD transfer pricing principles.
Several transfer pricing techniques are supported by the corporate tax decree-law to ascertain arm's length value. The cost-plus approach, the comparable uncontrolled price method, the resale price method, the transactional net margin method, and the transactional profit split method are some of these techniques. These techniques offer a framework for impartial and equitable valuation in related-party transactions while also adhering to international standards. Additionally, in cases when the stated methodologies are deemed unfeasible, the decree law authorizes the employment of alternative techniques. Expert advice from transfer pricing experts may be necessary in these situations.
Determining Arm’s Length Value: Methods Approved under Corporate Tax Decree-Law
Arm's length value calculation is based on a fundamental principle that emphasizes valuing transactions regardless of whether they were carried out independently, without influence, between unrelated parties. The corporate tax decree-law in the United Arab Emirates approves specified transfer pricing procedures for proper arm’s length value determination:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost-Plus Method
- Transactional Net Margin Method
- Transactional Profit Split Method
These tried-and-true techniques comply with international norms and are consistent with the OECD transfer pricing rules. Expert advice, especially from transfer pricing specialists, could be necessary to put these strategies into practice successfully. Notably, the decree law offers flexibility in valuation processes by allowing alternative methodologies to be used in situations where the stated approaches are considered unfeasible.
Record-keeping and reporting on transfer price
The decree law offers a general overview of the transfer pricing documentation that a taxpayer might need to retain, and in due course, a Cabinet Decision will be released to specify which taxpayers are subject to the reporting and documentation obligations.
Two standard OECD documents, a master file, and a local file, are included in the decree-law's list of documents. According to the decree law, these records must be maintained in a format determined by the FTA, however, it is expected that this format will resemble or be the same as that recommended in the OECD guidance.
The master file will often include details about the global business operations of the organization to which the taxable person is affiliated. These details should include information like:
- Group structure
- Description of the group business
- Intangibles of the group
- Intercompany financing arrangements
- Financial and tax position of the group
Typically, the local file includes:
- Details about the person who is subject to taxes, including an organizational chart and a business plan.
- Records of significant local transactions governed by transfer pricing regulations
- The FTA may request these documents at any time; however, they are not required to be provided as part of the regular reporting procedure. The taxpayer will have 30 days to provide the files upon request.
The decree law mentions the potential for a notice or decision to be issued requiring a taxpayer to file a transfer pricing disclosure at the time the tax return is filed, in addition to the requirement to maintain a master file and a local file. It is unclear at this stage whether such a notice or decision will be generated, or if it will apply to all taxpayers or just a few of them.
Free Zone Companies and Transfer Pricing Conditions
The need for transfer pricing regulations is stated clearly for businesses operating in free zones. The eligibility status of a free zone enterprise may be hampered by failure to meet transfer pricing requirements. As free zone businesses are ready to pay corporate taxes, this becomes an even more important factor.
Challenges with Compliance and Documentation Requirements
For some taxpayers, the documentation and reporting requirements that come with transfer pricing rules create a significant compliance burden. It takes a lot of time and effort to create accurate master files and local files. If annual reporting is necessary in addition to tax filings, it must be done carefully because there could be consequences for errors or non-compliance. BMS Auditing places a strong emphasis on the careful approach that documentation must take to guarantee compliance with legal requirements.
BMS Auditing Analysis
Transfer pricing laws are being implemented, which presents new challenges for taxpayers in the United Arab Emirates and has an impact on a variety of companies that do business there. Owners and directors who get paid for business-related expenses, as well as any foreign or domestic parties who transact with group firms, must assess if they comply with transfer pricing regulations. Breaking these standards can have major consequences, including increased tax payments, fines, and possible changes to profits.
BMS Auditing: Navigating Transfer Pricing Rules
Thorough compliance and strategic planning are crucial as companies navigate the intricacies of transfer pricing rules. Businesses may fulfill transfer pricing conditions, handle documentation requirements, and expedite the compliance process with the specialized assistance provided by BMS Auditing. Adherence to these standards in a proactive manner is crucial to prevent any possible financial or legal fallout.
