Your Compliance Roadmap for Transfer Pricing in UAE
Transfer pricing is becoming a growing concern in the UAE. The UAE implemented a 9% corporate tax on profits above AED 375,000. A recent survey found that over 65% of UAE businesses are still adapting to such new regulations on transfer pricing. Getting your compliance in order is crucial to avoiding penalties and winning the trust of regulators.
The UAE transfer pricing regime is new but is growing rapidly. Businesses must understand both the technical and practical aspects. Regulators are actively monitoring for compliance, and documentation standards are high. Planning can save businesses from costly pitfalls and regulatory scrutiny.
Understanding Transfer Pricing Under Corporate Tax UAE
Transfer pricing (TP) is the pricing of connected-person or related-party transactions within a group of companies. The UAE laws are based on OECD guidelines that require companies to use the “arm’s length principle.” Related-party transactions are priced as if they were conducted between independent companies in the open market.
UAE TP rules apply to domestic and cross-border transactions. All businesses must have documentation, especially if they have cross-border transactions or are part of a multinational group.
When is a Transfer Pricing Agreement Mandatory?
In the United Arab Emirates, compliance with transfer pricing is mandatory. Every business must understand when a TP agreement is necessary. The triggers and responsibilities for mandatory TP agreements are described in the following points.
Threshold Limits
All transactions between Related Parties must comply with the arm’s length principle, regardless of their inclusion in the Disclosure Form. Payments or benefits granted by a Taxable Person to its Connected Person are only deductible if they align with the Market Value (MV) of the received service or benefit.
For disclosure purposes, thresholds are defined. In the Related Party Transactions schedule, disclosure is required if the aggregate value of all transactions with Related Parties, recorded in the Financial Statements or at Market Value, exceeds AED 40 million. Once this primary threshold is surpassed, individual transaction categories exceeding AED 4 million must also be disclosed.
The Connected Persons schedule is to be completed only if aggregate value of transactions with at least one Connected Person (including their related parties) exceeds AED 500,000. If this threshold is exceeded, any payment or benefit exceeding AED 500,000 per Connected Person (together with its related parties) must be disclosed.
A TP agreement becomes mandatory when your company’s revenue in a given tax period exceeds AED 200 million. You must also comply if you are a member of a multinational corporation whose total revenue exceeds AED 3.15 billion.
These legal limits are strictly followed. You must create and keep up comprehensive TP documentation, including Local and Master Files, if you go over these limits.
Connected Individuals and Related Parties
TP regulations are applicable if your company works with connected or related parties. Businesses or people with a substantial ownership or control connection are considered related parties. Managers, directors, and close family members who participate in business decisions are examples of connected persons.
According to TP regulations, every transaction involving these parties must be justified and documented. Penalties and compliance gaps may arise if all related parties remain unidentified.
Documentation Needs
You are required to create a local file if your revenue surpasses AED 200 million. You also need a Master File if your MNC group revenue exceeds AED 3.15 billion. Every business, regardless of size, must include a TP disclosure form in its yearly tax return.
All related party transactions and connected individuals are listed on this form. Both regulatory compliance and audit defence depend on accurate documentation. The tax authority may impose fines or make adjustments for incomplete records.
Penalties and Timing
If the Federal Tax Authority (FTA) requests your TP documentation, you must have it on hand and submit it within 30 days. Heavy fines, a reversal of the burden of proof, or, in the worst situations, the loss of business licenses, may result from noncompliance.
Due to the FTA’s stringent deadlines and the potential for severe administrative penalties for incomplete or delayed documentation, timely compliance is essential.
Agreements on Advance Pricing (APA)
Companies can submit applications to the tax authority for Advance Pricing Agreements. For upcoming transactions, APAs offer clarity on transfer pricing techniques. This lowers the possibility of audits and disputes.
APAs are particularly helpful in high-value or complex transactions where authorities may contest the pricing.
Transaction Types Protected
TP rules cover many different types of transactions. This covers financial transactions, intellectual property, trade in goods and services, and interactions with long-term establishments.
If related parties or connected persons are involved, even domestic transactions within group companies are governed by TP regulations. Despite a 0% tax rate, companies operating in free zones are still required to comply and keep thorough records to support their pricing policies.
Authority and Considerable Impact
Possessing 50% or more of the voting rights, choosing the majority of the board, or keeping the majority of the profits are all considered forms of control. Large loans, royalties, or other agreements that affect business practices can also have a substantial impact.
Even when direct ownership is less than 50%, TP compliance is triggered by the existence of influence or control. This guarantees that the TP framework captures all pertinent relationships.
Steps to Implement a Robust TP Agreement
For compliance and risk management, a solid TP agreement is necessary. The following steps provide a helpful guide for companies operating in the UAE.
Evaluate and Determine Related Party Deals
Examine your company’s structure and chart all transactions involving related parties. Determine each transaction that might be subject to TP regulations. Such a step makes it easier to ensure that nothing is overlooked and all compliance standards are fulfilled.
Choose and Record the Best Pricing Strategy
Select a top-notch transfer pricing strategy and ensure your justification is well-documented. The arm’s length principle must be reflected in the approach. CUP, Cost-Plus, and TNMM are examples of common strategies.
Analyze Benchmarking
Use trustworthy external data to compare your intercompany prices with industry norms. Your pricing decisions are supported by benchmarking. It offers proof that your prices reflect going rates in the market.
Create and Formally Sign the TP Agreement
Create a thorough contract that addresses pricing, compliance, dispute resolution, and the extent of the transaction. The contract ought to be comprehensive and unambiguous. It must comply with OECD guidelines and UAE law.
Preserve Documentation and Compliance
Maintain all necessary paperwork and prepare it for submission. Ensure your staff is well trained on compliance requirements and update your agreements as regulations change. You can maintain compliance and audit readiness with regular reviews.
Staying Ahead in UAE’s Transfer Pricing Regime
In the UAE, complying with transfer pricing is now crucial for businesses. The regulations are stringent, and breaking them carries harsh consequences. You can minimize risks and establish a solid rapport with regulators by knowing when TP agreements are required, taking the appropriate actions, and maintaining documentation.
Renowned audit services in Dubai, like Premier Auditing & Accounting LLC, helps businesses stay updated on FTA’s regulatory updates on Transfer Pricing. Keep abreast of regulatory changes, be proactive, and review your agreements regularly.
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