The adoption of a new model of transfer pricing has lately drawn tremendous attention due to its growing impact on corporate income taxation in Dubai. The objective is to create frameworks that sovereign states may employ to prevent multinational firms from artificially moving earnings in order to take advantage of differences and inconsistencies in tax regulations across different jurisdictions. The framework will streamline the entire taxation mechanism in the country enabling both the government and the businesses to benefit from it.
What Is Transfer Pricing in UAE?
As per the Organization of Economic Cooperation and Development (OECD), Transfer Price refers to the price at which a business transfers intangible properties and physical goods or provides services to the associated businesses.
The UAE has joined the OECD comprehensive model on Base Erosion & Profit Shifting (BEPS) to streamline its taxation as per global standards. By joining the model, the country has deliberately committed to exercising BEPS standards including Transfer Pricing Documentation. With the implementation of corporate tax beginning in June 2023, Transfer Pricing regulation will also have a proportionate impact on customs duties, withholding taxes, excise tax, value-added taxes, and a variety of other government charges.
Transfer Pricing Regulations in UAE
Enriched by oil revenues, the UAE has experienced a dazzling economic rise in a couple of years that transform the country into a strong vibrant economic and commercial hub attracting foreign investments into the country. To take its initiative of making the country a global economic hub to further, the Ministry of Finance (MoF) in UAE announced that the Federal Corporate Tax (CT) on corporate revenues would be imposed in the United Arab Emirates (UAE) starting with fiscal years beginning on or after 1 June 2023.
On April 28, 2022, a Public Consultation Document (PCD) with more detailed information on the expected UAE CT regime was also released with the intention of soliciting feedback from interested parties and stakeholders prior to implementation. Businesses must abide by the transfer pricing regulations and documentation requirements established in accordance with the OECD Transfer Pricing Guidelines in UAE.
Why is Financial Compliance Increasing in UAE?
The OECD has been at the forefront of leading the fight against tax evasion for a number of years through its “Base Erosion and Profit Shifting” (BEPS) framework. BEPS aims to develop regulations that sovereign governments may employ to prevent multinational firms from artificially moving earnings in order to exploit discrepancies and gaps in the tax systems of other states.
- The Economic Substance Regulations (“ESR”) were introduced on April 30, 2019, by the UAE Ministry of Finance according to a Cabinet resolution in response to the UAE’s pledge to comply with the OECD objectives.
- In accordance with Cabinet Resolution No. 32 (CR 32), the UAE additionally implemented Country-by-Country Reporting (“CbCR”) regulations for a multinational group of businesses (“MNE”) operating across the UAE.
- Supporting the BEPS program, the UAE government additionally adopted the OECD rules for transfer pricing in regard to introducing the corporate tax in the country.
How Governments Can Benefit from Transfer Pricing in the UAE?
All major economies today have approved transfer pricing regulations in order to identify, evaluate, and secure their share of taxes connected to cross-border trade and taxation.
Transfer pricing is interlinked with global stability, global economic growth, revenues generation, international trade, and cross-border activities in the following manner:
- Encourage economic growth at the unilateral, bilateral, and multilateral levels
- To effectively manage the effects of double taxation on international transactions
- Encourage a steady flow of workforce, money, products, and services across international and worldwide frontiers
How Will Be Transfer Pricing Applicable To UAE Businesses?
The transfer pricing will have crucial implications for businesses operating across UAE. Therefore, businesses from small to medium to large commence evaluating potential implications on their activities and operations which may also include the below-mentioned aspects:
- Effects on former positions taken in relation to the Economic Substance Regulations
- Efficient administration of the additional compliance requirements as a result of these regulations
- Effects on free zone structures and implementation of the requirements to qualify for the 0% CT rate
- Alignment of already existing TP procedures and documentation with the new transfer pricing regulations
- Implementation of the TP rules including identifying transactions that a business carries out with other associated parties
- Impact on current operating models and pricing of pertinent transactions to see if any adjustments are necessary to bring them into compliance with the arm’s-length requirement
Transfer Pricing Method – Process of Applying Transfer Pricing in UAE
- Review transactions that occurred between or more than one legal entity; for instance, Free Zone, Mainland, or Overseas enterprise
- Evaluation of whether the transaction falls under a related party or linked person
- Impact assessment to identify the changes required from the TP policies to build robust and sustainable transfer pricing policies
- Review of the current document and policy regarding intercompany transfer pricing
- Evaluation of the UAE TP regulatory procedure
- Preparation of a county-by-county report, together with a master file and local file
- Impact assessment in the event of organizational structure change
Repercussion for Non-Compliance with TP
- Potential loss of 0% CT rate applicable to QFZP businesses
- Penalties for failing to comply with the CbCR and Notification requirements can range from AED 10,000 to AED 1,000,000
- Potential TP adjustments made under the FTA might result in an expansion of the UAE business’s tax base
- For failure to comply with the ESR requirements, an administrative fine of AED 10,000 to AED 300,000 may be applied
In addition to that, taxpayers in the UAE must be aware of the fact that they may have to pay penalties under the Corporate Tax laws and regulations in case of not being able to maintain contemporaneous Transfer Pricing documentation. An experienced tax consultancy like Avyanco can help you with your corporate tax and transfer pricing requirements. Our expertise in Corporate Tax in Dubai and Pricing Transfer gives us the insight to deliver customized solutions for our clients.
Role of a Tax Consultant to Implement
Taxation consultants in Dubai keep an in-depth understanding of the taxation laws and rules and aspire to assist businesses and individuals to comply with the laws efficiently. Team Avyanco brings vast experiences to assist you in successfully managing and maintaining your business’s transfer pricing by delivering top-notch tax and transfer pricing services. We will help you to avoid fines and penalties that you may have to face in case of not complying with the taxation laws and rules in the UAE.
- Optimization of the TP policies: We will assist you to determine the transfer pricing and preparation of the master file and local file when a new product entered the market, Mergers and Acquisitions occurred when new intellectual property rights were acquired. Our solutions will be tailored to your specific business models and requirements.
- Appearing to tax authorities: Transfer pricing consultants can help you in various other situations, especially where federal tax authorities audit your business’s tax documentation. As the audit that is conducted by the federal tax authorities involved legal work; thus, you must have the right representative at that time to smoothly go through the process. Trust Avyanco and we will promise nothing but excellent service.
- Favourable outcomes: Your chances of securing a favourable outcome are limited if tax authorities do not likely to accept your position early in the process. Therefore, involving taxation professionals prior to tax authorities gathering information is important for establishing trust and reach to favourable outcomes.
How will Avyanco Auditing Help You in Transfer Pricing Rules in the UAE?
Based in UAE, Avyanco is a globally recognized and trusted auditing and taxation advisory working actively to assist businesses and individuals in their tax compliance needs. We keep professionalism, transparency, and accuracy above anything else when it comes to helping businesses with their taxation needs. Team Avyanco will not only help you effectively comply with taxation laws in Dubai but assist you to adhere to the transfer pricing policies as well.
- Review actual business operations/activities undertaken by the company
- Review and identify risks (if any) in the existing TP arrangements of the group
- Applicable tax rules and TP methodology mapping with a business model and transaction scenarios
- Clarifications for uncertainties
- TP documentation and compliances
- Tax dispute resolution
1. What are Transfer Pricing Rules in UAE?
Transfer pricing policies in the UAE are aimed at ensuring that transactions between Related Parties are carried out on arm’s length terms; to put it simply as if the transactions were carried out between independent business associates. Numerous articles in the new Corporate Tax Law in the UAE require that the consideration of transactions with Related Parties and Connected Persons must be examined in reference to their market value in order to prevent the exploitation of taxation income.
2. Do Transfer Pricing Regulations Include Both Local and International Transactions?
Yes. Transfer pricing rules apply to UAE companies that carry out transactions with Related Parties and Connected Persons, whether they are located on the UAE’s mainland, in a Free Zone, or in any other jurisdiction.
3. Who are the Related Parties?
Article 35 of Corporate Tax Law defines the meaning of the term Related Parties. In general, Related Parties of a person referred to his relatives as well as business associates in which the person – alone or together with relatives, holds a strong ownership interest. The interest may range from 50% or more of the company’s total shares.
Similar to this, a company’s “Related Parties” are any other businesses in which the business, alone or jointly with its Related Parties, holds a controlling position or interest (usually 50% or more of the company’s shares) or that have more than 50% common ownership.
4. Who are Connected Persons?
Connected Persons are different from Related Parties. A person will be considered “connected” to a business that is within the scope of UAE CT if they are:
- The owner of the business;
- A director or officer of the business; or
- A Related Party of either of the above.
5. How Can Transfer Pricing Models Be Used To Determine The Arm’s Length Value?
Usually, for transfer pricing reasons, taxpayers must often use one or more of the following procedures to calculate the arm’s length values:
- The cost-plus model
- The resale price model
- The transactional profit split model
- The transactional net margin model
- The comparable uncontrolled price model
6. What Documentation Should A Business Maintain in Regards with Transfer Pricing Rules?
Businesses will be expected to maintain a record of their interactions with Related Parties and Connected Persons, as well as some businesses will be compelled to provide this information in their tax reports. Moreover, companies that claim small business relief will not have to adhere to the transfer pricing rules in Dubai. In addition, some companies might be asked to maintain local and master files.
7. Is it Important for Taxpayers to Consider Whether Arm’s-length Agreements Exist for Intra-group Loans?
Yes. All transactions between Related Parties and Connected Persons are subject to transfer pricing regulations in the UAE. Hence, any loan acquired from (or perhaps granted to) a Related Party or Connected Person is required to be at arm’s length e.g. duration, interest rate, etc.
8. Would Transactions in a Tax Group Need To Comply with Transfer Pricing Rules?
Transactions between members of a Tax Group are excluded in the consolidation of the Group’s financial results statements, so they are exempt from transfer pricing requirements unless a member of the Tax Group needs to determine its stand-alone Taxable Income in order to use Tax Losses incurred before joining the Tax Group or when leaving a Tax Group.