The Organization for Economic Cooperation and Development (OECD) defines transfer pricing as the price at which a firm transfers tangible products or assets to associated firms or offers services to them. The UAE has adopted the comprehensive Base Erosion and Profit Shifting (BEPS) model built by the OECD to align its tax processes with global standards. Through the adoption of this great move, the country has voluntarily selected to stick to BEPS demands, particularly those pertaining to transfer pricing documentation.

When corporate taxation is imposed, which was planned to start in June 2023, transfer pricing laws also have a proportionate effect on value-added taxes, withholding taxes, customs duties, excise taxes, and countless other government charges. For example, the price at which a subsidiary firm based in the UAE renders or sells services to its parent corporation or a sister company situated in Bahrain is known as the transfer price.

Regulations in the UAE

With the help of its oil money, the UAE has faced a noticeable economic transition in recent years, growing into a dynamic and powerful commercial center that has been perfect at luring in foreign investors. The MoF (Ministry of Finance) of the nation has reaffirmed its objectives of being an international economic powerhouse with a major announcement. According to this, the Federal Company Tax (CT) on firm income is implemented by the UAE starting with fiscal years.

The Ministry also released a Public Consultation Document (PCD) on April 28, 2022, which added broad details about the proposed UAE CT system. This task was made to aggressively look for feedback from interested parties and stakeholders prior to the implementation phase. As part of this new tax environment, enterprises functioning in the UAE are required to abide by transfer pricing rules and fulfill document requirements that align with the standards defined in the OECD Transfer Pricing Guidelines.

The transfer pricing laws in the UAE were made to confirm that linked parties run business on an “arm’s length” basis. This essentially means that the pricing at which these related parties transact with each other must be similar to what one may reasonably expect from similar transactions involving unlinked parties. Stated differently, the goal is to avert any planned manipulation of profits or pricing with the intention of reducing tax rules, promising that these intercompany transactions happen in a fair and market-driven territory.

Arm’s Length Price

The price that would have been fixed if the same transaction had been done between two unrelated, independent, and comparable businesses, taking just commercial considerations into account, is known as the arm’s length price (ALP). The idea of an arm’s length price is predicated on the view that transactions involving linked parties should be conducted at prices that are similar to those that would be applicable in an open market where supply and demand define the terms of the transaction.

The OECD Transfer Pricing Guidelines incorporate the Arm’s Length Principle into the transfer pricing restrictions under the corporate tax laws of the UAE. This suggests that all transactions between related parties must stick to the arm’s length principle and transfer pricing norms in order to preserve equity and avoid manipulating profits or prices for tax purposes.

Financial compliance has risen in the UAE as a result of global pressure, Economic Substance Regulations (ESR), Country-by-Country Reporting (CbCR), and transfer pricing rules. Governments in the UAE stand to benefit from transfer pricing by promoting economic growth, managing double taxation, and facilitating international flow.

Utilizing Transfer Pricing for Businesses in the UAE

The implementation of transfer pricing rules will have a significant impact on businesses that operate in the United Arab Emirates. Consequently, companies of all sizes are beginning to assess possible implications for their company operations. These elements include:

• Finding the methods by which transfer pricing corresponds with past stances taken on the ESR.
• Making for the new compliance demands that these regulations entail.
• Evaluating the effect on the free zone agreements in place and the conditions needed to qualify for the 0% Corporate Tax (CT) rate.
• Verify that existing transfer pricing processes and the related documentation meet the demands of the new regulations.
• Discovering which linked parties’ B2B transactions are governed by transfer pricing laws.
• Assessing whether any adjustments are crucial to meet the arm’s-length demand by looking at the cost of relevant transactions and the functional models that are in place now.

Transfer Pricing Process in the UAE

• Check the transactions involving several legal entities, including global, mainland, and free zone firms.
• Run a related party assessment to ascertain whether linked or related parties are involved in the transaction.
• Estimate the consequences and apply the vital adjustments to build robust and enduring transfer pricing laws.
• Review the rules and papers pertaining to intercompany transfer pricing.
• Verify if the transfer pricing guidelines set forth by the nation are being adhered to.
• For reporting, make a master file, a local file, and a country-by-country report.
• Assess how a change in organizational structure may make an impact on transfer pricing.

TP Non-Compliance Repercussions in the UAE

• • Danger of Loss of 0% CT Rate

Firms using Qualified Free Zone Privilege (QFZP) may forfeit their eligibility for the 0% Corporate Tax (CT) rate if specific conditions aren’t fulfilled.

• • Penalties for Country-by-Country Reporting (CbCR) and Notification Violations

Ignoring CbCR and notification requirements might result in fines ranging from 10,000 to one million AED.

• • Potential Expansion of the Tax Base

The taxable revenue of the UAE company may increase if the amendments made by the Federal Tax Authority (FTA) are not followed.

• • Economic Substance Regulations (ESR) Non-Compliance Fine

Violation of the ESR may end in administrative fines ranging from 10,000 to 3 lakhs.

• • Tax Penalties for Corporations

Corporate tax laws and regulations may impose more penalties for failure to keep existing TP documentation. Look for guidance from seasoned tax experts to negotiate corporate tax and TP regulations. This will definitely confirm tailored compliance and solutions.

The Function of Tax Consultants in Tax Compliance Implementation

• • Support for Effective Compliance

With their great understanding of tax laws, the tax consultants support businesses and help people comply with the law effectively. A knowledgeable team can help you handle transfer pricing regulations compliantly and effectively, so you can stay out of trouble and avoid fines.

• • Optimizing TP Policies

Local file preparation and transfer pricing estimates for several scenarios, such as the introduction of fresh items, mergers, acquisitions, and the purchase of intellectual property rights. Seek the best solutions tailored to your firm’s specific requirements.

• • Representation Before Tax Authorities

The top specialists in transfer pricing can offer crucial support when federal tax officers review your tax paperwork. A legal expertise team can ensure a seamless audit process and give excellent service.

• • Getting Positive Outcomes

It is imperative that you employ tax specialists to increase your confidence and improve your chances of getting favorable results from tax authorities. For great support and effective compliance, you can contact us.