The Master File: A Key Tier of Transfer Pricing Documentation

Transfer prices refer to the prices of goods and services MNEs charge on cross-border transactions between their group entities or subsidiaries. The prices should be at arm’s length, which means the companies should charge the transactions the same way they would between unrelated companies. The OECD mandates that firms should maintain proper documentation in a three-tiered way: the Master File, the Local File and Country by Country Reporting.

In a previous blog, we provided you with an overview of this three-tiered approach concerning transfer pricing document requirements in the UAE. In this blog, we will shed light on the Master file which will be followed up with further blogs on the Local File and Country by Country Reporting. Transfer pricing experts in Dubai can assist you with the documentation requirements. Let us dive in to understand why the ‘Master File Is a Key Tier of Transfer Pricing Documentation:

What is a Master File?

The master file should provide an overview of the MNE’s business including its global operations, overall transfer pricing policies for the creation and ownership of intangibles and its financial activities, and its global allocation of income and economic activity to place the MNE’s transfer pricing practices in their global economic, legal, financial, and tax context. While preparing the master file, the MNEs should use their best judgment to determine the appropriate level of detail, considering that the OECD guidelines indicate it is not necessary for the master file to include exhaustive details. However, the advice of transfer pricing advisers in Dubai can come in handy while preparing the master file.

What information should be included in the master file?

The master file must contain the following five pieces of information:

MNE group’s organizational structure

It should include a graphical representation illustrating the MNE group’s legal and ownership structure and geographical location of operating entities

Description of the MNE’s business or businesses

It should include descriptions such as:

• MNE’s important drivers of business profit
• Description of the supply chain for the group’s five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5% of group turnover
• List and description of the key service arrangements between the MNE group members other than R&D services, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intra-group services
• A brief written functional analysis describing the principal contributions to value creation by individual entities within the group, i.e. key functions performed, important risks assumed, and important assets used
• A description of important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year

MNE Group’s Intangibles

This may include,

• A general description of the MNE group’s overall strategy for the development, ownership and exploitation of intangibles, including the location of principal R&D facilities and the location of R&D management
• A list of intangibles or groups of intangibles of the MNE group that are important for transfer pricing purposes and which entities legally own them
• A list of important agreements among identified associated enterprises related to intangibles, including cost contribution arrangements, principal research service agreements and licence agreements
• A general description of the group’s transfer pricing policies related to R&D and intangibles
• A general description of any important transfers of interests in intangibles among associated enterprises during the fiscal year concerned, including the entities, jurisdictions, and compensation involved

MNE’s intercompany financial activities

This information must include the following:

• A general description of how the MNE group is financed, including important financing arrangements with unrelated lenders
• The identification of any members of the MNE group that provide a central financing function for the group, including the jurisdiction under whose laws the entity is organised and the place of effective management of such entities
• A general description of the MNE group’s general transfer pricing policies related to financing arrangements between associated enterprises

MNE Group’s financial and tax positions

This should contain details such as:

• The MNE group’s annual consolidated financial statement for the fiscal year concerned if otherwise prepared for financial reporting, regulatory, internal management, tax or other purposes
• A list and brief description of the MNE group’s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among jurisdictions

Threshold Limit for UAE Transfer Pricing Documentation

As per Ministerial Decision No (97) of 2023, exemption has been given to certain taxpayers from maintaining the master file and local files. As per regulations threshold limits is, for taxpayers that are part of an MNE group with consolidated revenues of more than or equal to AED 3.15 billion or taxpayers with more than or equal to AED 200 million revenues in the relevant tax period are required to maintain UAE transfer pricing documentation.

However, it does not mean that taxpayers are free to transfer goods or products or provide services to associate enterprises at will and charge prices that are not at arm’s length. Since the UAE is a member of the OECD, hence UAE tax administration (FTA) and taxpayers have to follow the OECD guidelines for transfer pricing transactions. If you are still confused or uncertain about transfer pricing documentation requirements, consult with the best transfer pricing advisers in Dubai, UAE.

Transfer Pricing Consultants in Dubai Can Help You

The OECD’s Three-Tiered Approach, encompassing Country-by-Country Reporting, Master Files, and Local Files, serves as a foundational framework to enhance transparency and consistency in transfer pricing practices. These documentation pillars empower tax authorities to assess the fairness of intercompany transactions, prevent profit shifting, and ensure that multinational enterprises pay their fair share of taxes in each jurisdiction. Transfer pricing advisers in Dubai such as Tax Gian, a brand of Jitendra Tax Consultants (JTC) provide reliable assistance for businesses.

Tax Gian’s team of tax experts in Dubai offers top-notch corporate tax advice for all businesses. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. Contact us today to ensure corporate tax compliance in Dubai, UAE.