UAE Corporate Tax Strategy: An introduction to Transfer Pricing

With the introduction of corporate tax from June 1st 2023, transfer-pricing rules have become critical for UAE businesses carrying out intra-group cross-border transactions. Transfer pricing kicks in when goods or services are transferred between groups or divisions of the same parent company known as associate enterprise as part of a cross-border transaction. Transfer pricing helps the companies reduce the overall tax burden of the parent entity, especially the burden of double taxation.

By adhering to transfer pricing rules companies can shift tax liabilities arising from a cross-border transaction to a low-cost tax jurisdiction. However, transfer pricing in the UAE can be a complex process as the country is new to the corporate tax regime. At this point, it makes sense to hire the expertise of the best transfer pricing advisers in Dubai to navigate through transfer pricing complexities.

In this article, we will discuss what is transfer pricing as per the UAE corporate tax regime and how businesses can prepare for it. Read ahead for gaining useful insights:

What is transfer pricing?

Transfer pricing rules govern the pricing of intra-group cross-border transactions between divisions of a company. These transactions can be in the form of tangible goods, services, intellectual property or funding. The term transfer pricing refers to the prices of goods and services that are transferred between entities under common control. For example, if a subsidiary company in the UAE sells goods or renders services to its holding company or a sister company in Bahrain, the price charged is referred to as the transfer price.

However, the tax authorities in each jurisdiction want to know how companies determine these prices. Under the transfer pricing regime, a company is not permitted to treat its related companies preferentially. The company is required to charge its own divisions—or related parties–as it would charge an unrelated company in the open market. In other words, related parties must be charged arm’s-length prices.

Why transfer pricing rules are created?

An international market like the UAE is a hub of MNEs that regularly engage in cross-border transactions. With the introduction of corporate tax in the UAE from June 1st 2023, complying with transfer pricing rules is crucial to companies to avoid tax risks, potential audits by tax authorities and litigation.

Pricing determines profits and when profits cross borders tax authorities of each country want its fair share of taxable income. Tax authorities would like to ensure that companies are not abusing the rules where profits are taxed. Consult with transfer pricing advisers in Dubai for more information on the relevance of transfer pricing rules.

Arm’s Length Principle (APL) Standard

The arm’s length principle is an international standard for transfer pricing transactions that the OECD member countries agreed to be used by MNE groups and tax administrations. When independent entities engage in transactions with each other, the prices of goods transferred or services rendered and the conditions governing transfer or rendering (conditions of their commercial and financial relations) are determined by market forces.

If transfer pricing is not reflective of market forces and the arm’s length standard, it could distort the tax liabilities of the associated enterprises and the tax revenues of the host jurisdictions. Therefore, OECD members have decided that an appropriate adjustment can be achieved by establishing the conditions of the commercial and financial relations that they would expect to find between independent enterprises in comparable (similar) transactions under comparable (similar) circumstances i.e. “comparable uncontrolled transactions”).

Transfer Pricing Methods

Businesses must choose 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 cover “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.

Traditional Transactional Methods

Traditional transaction 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
  2. Resale price method
  3. Cost plus method

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 (TNMM)
  2. Transactional profit split method

Avail of the Best Transfer Pricing Services in Dubai, UAE

The global expansion of MNEs, increased complexity of supply chains, and sustained divergence in countries’ tax rates mean that businesses need to factor in transfer pricing while developing a corporate strategy. The leading providers of transfer pricing services in Dubai, such as Tax Gian, a brand of Jitendra Tax Consultants (JTC), can help you navigate through the complexities of transfer pricing.

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.