In recent years, transfer pricing has gained significant attention as organizations expand their operations globally. With the UAE aligning its tax control mechanisms with international standards and introducing new regulations, it is becoming increasingly integrated into the global tax framework under the OECD BEPS initiative. The establishment of transfer pricing rules and regulations aims to promote compliance and transparency.

In this guide, we will explore transfer pricing in the UAE, key guidelines that must be followed, and strategies to navigate these regulations effectively.

What is Transfer Pricing?

Transfer pricing refers to the price that is charged for goods and services, or the values given to intangible assets, between different but affiliated companies. It guarantees that these transactions are at prices that would have been arrived at by different and unrelated organizations who are arms length to each other.

For instance, when a parent company sells a service to its subsidiary, the price has to be charged at the prevailing market rate in order to avoid compromising on the tax base.

Why Transfer Pricing Matters in the UAE

The UAE has implemented transfer pricing rules to:

• Prevent profit shifting and tax base erosion.
• Align with global tax practices and commitments under the OECD BEPS framework.
• Ensure that intercompany transactions are conducted on an arms’ length system for them to have economic integrity.

These measures also safeguard the UAE from being used as a tax haven and guarantee local and foreign companies establish their entities in the country and adhere to global taxation legal requirements.

Scope of UAE Transfer Pricing Rules

The UAE’s transfer pricing regulations apply to:

1. Related Parties: Entities under common control or ownership.
2. Connected Persons: Owners, directors, or relatives with financial interests in the transactions.
3. Both Domestic and Cross-Border Transactions: Transactions within UAE entities and across international borders are subject to transfer pricing scrutiny.

Core Principles of the UAE Transfer Pricing Framework

1. Arm’s Length PrincipleThe UAE mandates that transactions between related parties must adhere to the arm’s length standard. This means the pricing must reflect fair market value, similar to transactions between independent entities.
   Example:If a UAE company sells goods to its overseas subsidiary, the price should be comparable to what it would charge an unrelated party.
2. OECD BEPS ComplianceThe UAE follows the guidelines outlined in the OECD BEPS Action Plan, particularly Action 13, which emphasizes transfer pricing documentation and reporting standards.
3. Mandatory DocumentationThe UAE requires businesses to maintain detailed transfer pricing documentation to justify related-party transactions. These include:
   • Transfer Pricing Disclosure Form: Filed alongside the tax return, this form summarizes related-party transactions.
   • Local File: Contains detailed information on transactions specific to the UAE.
   • Master File: Provides a global overview of the group’s structure, operations, and intercompany arrangements.
4. Benchmarking StudiesBusinesses are expected to conduct benchmarking analyses to determine appropriate pricing by comparing similar transactions within the industry.
5. Audits and PenaltiesNon-compliance with transfer pricing regulations may lead to audits, adjustments to taxable income, and potential penalties.

Documentation Deadlines

To comply with transfer pricing rules, businesses must:

• Submit the Transfer Pricing Disclosure Form with their annual corporate tax return.
• Prepare the Local File and Master File if they meet the relevant thresholds.

Key Challenges for Businesses

While the UAE’s transfer pricing regulations are aligned with global standards, businesses may face challenges, including:

1. Complexity in DocumentationEnsuring proper documentation for transactions can be resource-intensive, especially for large multinational entities.
2. Adherence to Arm’s Length PrincipleConducting accurate benchmarking analyses to justify pricing can be challenging.
3. Understanding Local and Global Tax RegulationsStaying updated on UAE-specific rules and international standards requires expertise.

Steps to Ensure Compliance

1. Identify Related-Party TransactionsMaintain a clear record of all transactions with related parties.
2. Prepare DocumentationCompile the necessary Transfer Pricing Disclosure Form, Local File, and Master File.
3. Conduct Benchmarking StudiesCompare your intercompany pricing against industry standards to ensure adherence to the arm’s length principle.
4. Engage ProfessionalsConsulting with experts like Avyanco can help businesses navigate compliance requirements efficiently.

Conclusion

The UAE transfer pricing legislation clearly shows that the UAE is encouraging its members to maintain high standards for a transparent and compliant business environment. These regulations are important and must be implemented for the businesses operating in the UAE to minimize penalties.

Avyanco delivers the best of practices in transfer pricing and tax compliance for a multinational corporation as well as for a growing business in the UAE.

You can reach out to us today for compliance of your business with the transfer pricing in the UAE!