Transfer pricing refers to the pricing of cross-border transactions between related parties, such as subsidiaries, branches, or affiliates of a multinational enterprise (MNE). It ensures that such transactions are conducted at arm’s length, mirroring the terms and conditions that would apply between unrelated entities. This practice is crucial for preventing profit shifting and base erosion, which can erode the tax base of countries and lead to tax avoidance.
The Organization for Economic Co-operation and Development (OECD) guidelines require that businesses should maintain proper documentation in a three-tiered structured way: The Master File, The Local File, and Country by Country Reporting. The local file is an essential component of transfer pricing documentation required by the OECD.
In this blog, we will discuss the key information that must be included in the local file as per OECD’s transfer pricing guidelines. (You may read our previous blog to know about the Master File). Transfer pricing advisers in Dubai can help you prepare the documentation. Read ahead for more insights:
The Local File in a Nutshell
While the master file can be considered the blueprint of the MNE group, the local file provides information on the local entity and controlled transactions between the related parties. The local file gives assurance that the taxpayer has taken appropriate measures to ensure an arm’s length price has been charged for all material transactions between related parties/associated parties.
The Local File should include information such as the Details of the Local Entity, Controlled Transactions and Financial Information. Consult with transfer pricing experts in Dubai for more insights on the Local File. It should
What Does Information on Local Entity Entail?
This should include information such as the following:
- A description of the management structure of the local entity, a local organisation chart, and a description of the individuals to whom local management reports and the jurisdiction(s) in which such individuals maintain their principal offices.
- A detailed description of the business and business strategy pursued by the local entity including an indication of whether the local entity has been involved in or affected by business restructurings or intangibles transfers in the present or immediately past year and an explanation of those aspects of such transactions affecting the local entity
- Key competitors
What do Controlled Transactions Encompass?
For each material category of controlled transactions in which the entity is involved, provide the following information:
- A description of the material controlled transactions (e.g. procurement of manufacturing services, purchase of goods, provision of services, loans, financial and performance guarantees, licences of intangibles, etc.) and the context in which such transactions take place
- The amount of intra-group payments and receipts for each category of controlled transactions involving the local entity (i.e. payments and receipts for products, services, royalties, interest, etc.) broken down by tax jurisdiction of the foreign payer or recipient
- An identification of associated enterprises involved in each category of controlled transactions, and the relationship amongst them.
- Copies of all material intercompany agreements concluded by the local entity
- A detailed comparability and functional analysis of the taxpayer and relevant associated enterprises with respect to each documented category of controlled transactions, including any changes compared to prior years
- An indication of the most appropriate transfer pricing method with regard to the category of transaction and the reasons for selecting that method
- An indication of which associated enterprise is selected as the tested party, if applicable, and an explanation of the reasons for this selection
- A summary of the important assumptions made in applying the transfer pricing methodology
- If relevant, an explanation of the reasons for performing a multi-year analysis
- A list and description of selected comparable uncontrolled transactions (internal or external), if any, and information on relevant financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description of the comparable search methodology and the source of such information
- A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled transactions, or both
- A description of the reasons for concluding that relevant transactions were priced on an arm’s length basis based on the application of the selected transfer pricing method
- A summary of financial information used in applying the transfer pricing methodology
- A copy of existing unilateral and bilateral/multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions described above.
What should the Financial information Component Cover?
The Financial Information in the Local File should contain the following information:
- Annual local entity financial accounts for the fiscal year concerned. If audited statements exist they should be supplied and if not, existing unaudited statements should be supplied.
- Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements.
- Summary schedules of relevant financial data for comparables used in the analysis and the sources from which that data was obtained.
UAE Transfer Pricing Documentation Threshold
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.