UAE Corporate Tax: Is there any Best Transfer Pricing Method?

According to the OECD Guidelines, selection of a transfer pricing method always aims at finding the most appropriate method for a particular case. The UAE’s corporate tax law mandates MNEs in the UAE to follow the transfer pricing rules while engaging in cross-border transactions with foreign associate enterprises. It means all juridical persons need to ensure that the goods and services sold to foreign related parties (Associated Enterprises) are priced the same way they would be between unrelated parties (Independent parties). It means related-party pricing must follow the arm’s-length standard in cross-border transactions. For example, IKEA Distribution Services in the UAE sells bookcases to a related-party retailer in France, IKEA Retailer France. Apart from transferring the bookcases, IKEA Distribution Services UAE needs to price each bookcase appropriately.

Each entity that carries out intercompany sales or purchases of goods or services need to establish that it has priced those items at arm’s length. Proving arm’s length prices depends upon choosing the most appropriate transfer pricing method. Determining a transfer pricing method is one of the most critical challenges MNEs are going to face under the new UAE corporate tax regime. Providers of transfer pricing services in Dubai can help businesses in terms of finding an appropriate transfer pricing method.

In this blog, you can learn how to address the challenge of selecting an “appropriate” transfer pricing method. Here’s everything you need to know:

Is there any best transfer pricing method?

Choosing the most appropriate transfer pricing method is the secret to proving arm’s length pricing. Part II and Part III of chapter II of OECD Guidelines, covers “traditional transaction methods” and “transactional profit methods” that can be applied to establish whether the conditions imposed in the commercial or financial relations between associated enterprises are consistent with the arm’s length principle.

However, the OECD no longer recommends the hierarchy of methods and businesses are advised to select the most appropriate transfer pricing method. The transactional profit methods include the Transactional Net Margin Method (TNMM) and the Transactional Profit Split Method. The traditional transactional methods include the Comparable Uncontrolled Price (CUP) Method, the Resale Price Method and the Cost Plus Method.

The Most Appropriate Transfer Pricing Method

Each transfer pricing method results in a unique arm’s length range. However, choosing the wrong transfer pricing method will disrupt your analysis, pricing and good standing with the tax authorities. Transfer pricing consulting services in Dubai can assist you in choosing the most appropriate method.

Traditional Transactional Methods

These methods examine the terms and conditions of uncontrolled transactions made by third-party entities. The transaction will be compared with controlled transactions between related entities to make sure they’re operating at arm’s length. There are three traditional transaction methods:

  1. Comparable uncontrolled price (CUP) method

In this method, you should compare the price of property or services transferred in a controlled transaction to the prices charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances.

  1. Resale price method

The Resale price method is based on the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. The resale price is reduced by the resale price margin. What is left after subtracting the resale price margin can be regarded, after adjustment for other costs associated with the purchase of the product (e.g. customs duties),  as an arm’s length price of the original transfer of property between the associated enterprises.

  1. Cost plus method

The Cost-plus method uses the costs incurred by the supplier of property (or services) in a controlled transaction. An appropriate cost plus markup is added to this Cost to make an appropriate profit in light of the functions performed (taking into account assets used and risks assumed) and the market conditions. What is arrived at after adding the Cost plus markup to the above costs may be regarded as an arm’s length price of the original controlled transaction.

Transactional Profit Methods

A transfer pricing method that examines the profits that arise from particular controlled transactions of one or more of the associated enterprises participating in those transactions. There are two transactional profit methods:

1). Transactional net margin method

A transactional profit method examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction.

2). Transactional profit method

A transfer pricing method that examines the profits that arise from particular controlled transactions of one or more of the associated enterprises participating in those transactions.

How to Choose the Most Appropriate TP Method?

The OECD recommends choosing the most appropriate transfer pricing method. Taxpayers are required to explain why the preferred method is appropriate and the reason for rejecting other methods. Four factors can be considered while choosing the most appropriate transfer pricing method:

  1. The strengths and weaknesses of each method
  2. The appropriateness of the method given the nature of the controlled transaction (this can be determined through a functional analysis)
  3. The availability of reliable, comparable data
  4. The level of comparability between the controlled transaction and the available comparable data
  5. The economically relevant characteristics
    • Contractual terms of the transaction
    • The functions performed by each of the parties to the transaction
    • The characteristics of property transferred, or services provided
    • The economic circumstances of the parties and of the market in which the parties operate
    • The business strategies pursued by the parties

Effect in the books of the counter-related party jurisdictions

 When selecting the transfer pricing method, the company also needs to verify the impact on the other related party jurisdictions. It might be possible that the method might result in paying high taxes in other jurisdictions if not calculated properly or the methods accepted in UAE may not be accepted in other jurisdictions.

Documents to prove the best transfer pricing method used

 The key to demonstrating the entity has used the most appropriate pricing method is the documents and in some cases by maintaining the master and local files. The tax authorities will be keen to verify the documentary evidence to verify a particular method used and the documentary evidence will only prove to the tax authorities that the most appropriate or most transaction-suitable method is being used.

 Avail of the Best Transfer Pricing Services in Dubai, UAE

The OECD recommends five transfer pricing methods, and each of them may yield a different arm’s length range for the same transaction. Using the most appropriate method and demonstrating why it is the most appropriate one is paramount to a successful analysis. The leading providers of transfer pricing services in Dubai, such as Tax Gian, a brand of Jitendra Tax Consultants (JTC), can help you choose the most appropriate method.

We offer bespoke transfer pricing consulting services in Dubai in line with regulatory expectations and aligned with our client’s global business goals. Tax Gian can deliver transfer pricing models that are consistent with our client’s value chain. Our highly qualified transfer pricing advisors in Dubai can help companies ensure that all related party transactions are documented to position their Transfer Pricing model in compliance with regulatory provisions. Tax Gian’s corporate tax professionals can guide you through complex areas of international tax to mitigate the risk of non-compliance.