UAE: New transfer pricing rules

New transfer pricing rules

On December 9, 2022, the UAE Ministry of Finance introduced Federal Decree-Law No. 47 of 2022 concerning corporate and business taxation, along with an updated “frequently asked questions” (FAQs) section that includes new transfer pricing regulations, outlined below. Let’s delve into the guide to new transfer pricing rules.

To provide clarity for taxpayers who are not knowledgeable in transfer pricing concepts, let’s commence with an overview of the UAE’s transfer pricing rules. These rules play a vital role in corporate taxation. They certainly act as a mechanism. Basically, their purpose is to prevent taxpayers from manipulating or reducing a business’s profits. This manipulation has the goal of evading taxation. Thus, the ultimate goal is to maintain the proper functioning of the taxation system.

It’s important to note that taxpayers who neither engage in transactions with related parties nor make payments to connected individuals will not be impacted by the transfer pricing rules.

Overview:

In a word, the main goal of transfer pricing rules is to ensure that transactions between related entities are fair. This fairness is based on arm’s length principles. It’s like these transactions were between independent parties.

In order to prevent the manipulation of taxable income, several provisions within the corporate tax law necessitate that the consideration for transactions with related parties and connected individuals should be determined based on their “market value.” The market value can include various financial outcomes or indicators. They should follow arm’s length standards. However, the FTA explains specific conditions in a decision.

Effective Date:

Both the law and FAQs specify that the provisions outlined in the law, including the transfer pricing regulations, will come into effect for financial years commencing on or after June 1, 2023.

Related Parties and Connected Persons:

The term “related parties” is defined quite broadly. It encompasses situations where a legal entity or an individual holds more than 50% of direct or indirect ownership or control over a taxable entity. Furthermore, the law includes a definition of “control” as the capacity of one person to influence another person.

Applicability to Taxpayers and Scope of Transactions:

The law encompasses transactions between related domestic parties as well as transactions between entities in mainland and free zones. Furthermore, if a non-resident individual or entity has a permanent establishment in the UAE, they must follow UAE transfer pricing rules. This includes maintaining and providing the necessary transfer pricing documentation. Additionally, transactions conducted between distinct business lines of an exempt entity (e.g., between an exempt business and a non-exempt business of the same exempt entity) must also adhere to the arm’s length principle.

Methods for Setting Transfer Prices

To ensure compliance with the arm’s length principle, the law outlines five transfer pricing methods, in alignment with the OECD transfer pricing guidelines. These methods, which individuals or combinations can apply, are as follows:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost plus method
  • Transactional net margin method
  • Transactional profit split method

Should none of these methods be reasonably applicable, the law permits the use of any other transfer pricing method that would result in an arm’s length outcome.

Transfer Pricing Documentation

  • Certain businesses are obligated to provide information about their transactions with related parties and connected individuals when submitting their tax returns. Additionally, the authorities may require specific businesses to maintain both a Master file and a Local file.
  • The FTA can ask a taxpayer to provide their Master file, Local file, or transaction details supporting arm’s length compliance. They’ll do this by giving at least 30 days’ notice. The FTA will specify the threshold and format for the Master file and Local file.
  • Notably, businesses claiming small business relief are exempt from complying with the transfer pricing documentation requirements.

Corresponding Adjustments

In cases where a foreign tax authority enforces an adjustment that affects a UAE entity, you must contact the FTA to request a corresponding adjustment. It should also aim to prevent double taxation for the UAE company. However, no such application is necessary for corresponding adjustments related to domestic transactions.

FTA’s Transfer Pricing Adjustments

In the process of making adjustments to the taxable base of individuals subject to taxation, the FTA must rely on information that is currently available or will be provided to the taxable person.

Penalties

The law doesn’t outline specific penalties for not following transfer pricing documentation rules or failing to submit the required information. Penalties for non-compliance are expected to align with those established in the 2017 Tax Procedures Law.

Advanced Pricing Agreements (APAs)

An APA is a proactive approach for preventing disputes related to transfer pricing by establishing criteria for applying the arm’s length principle to transactions before they occur. The law allows for the utilization of APAs through the existing clarification process.

Observation by UAE-Times.com

In the future, UAE businesses must adhere to globally accepted transfer pricing documentation. This includes a transfer pricing disclosure, Master file, and Local file, along with the current country-by-country (CbC) report obligations. The introduction of these transfer pricing rules will pose a new challenge for UAE taxpayers, affecting a wide range of businesses.

Businesses dealing with group companies in the UAE or abroad and owners or directors receiving payments for the business must evaluate their capacity to meet transfer pricing requirements. Not meeting these conditions can result in serious consequences. These consequences may include profit adjustments, extra tax liabilities, and potential penalties.

The transfer pricing rules also apply to free zone companies. A free zone company cannot qualify as such if it fails to meet the transfer pricing conditions. This is a crucial consideration for free zone companies preparing for corporate tax obligations.

The bottom line

The documentation and reporting requirements will create a significant compliance burden for certain taxpayers. It’s essential not to underestimate these obligations. Master files and local files are complex documents that need meticulous preparation. Annual reporting along with tax returns requires meticulous attention to detail. Errors or non-compliance may result in penalties, although the law does not specify materiality thresholds. The government is anticipated to provide more guidance and clarification. It’s advisable for entities to assess their business arrangements from a transfer pricing standpoint. They should initiate the required documentation preparations.

About The Author

Leave a Reply

Your email address will not be published. Required fields are marked *