10 July 2023
The United Arab Emirates (UAE) is ushering in an era of change with the implementation of a Corporate Tax Regime on June 1, 2023. This significant step will also result in the implementation of Transfer Pricing Regulations, which will establish the essential principle of transactions between related parties are performed at arm's length.
On May 16, 2018, the UAE became a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Through this participation, the UAE expressed its determination to uphold the BEPS minimum standards, which include a wide range of key issues. Among these criteria are the mandatory implementation of Transfer Pricing Documentation and Country-by-Country Reporting (CbCR).
This step towards compliance with international tax practices demonstrates the UAE's commitment to promoting openness and equitable taxes within its economic landscape. The implementation of Transfer Pricing Regulations and the adoption of BEPS principles demonstrate the UAE's commitment to global financial norms.
"Transfer Pricing" refers to the valuation at which transactions occur between two parties who are inevitably connected. This type of transaction is classified as a "Controlled" transaction in the world of taxation since it takes place between two affiliated businesses. "Transfer Prices" essentially cover the predetermined prices at which an enterprise conveys:
The broad phrase "transfer pricing" refers to all pricing agreements involving parties with a relationship.
In contrast, when one independent, unrelated entity enters into a transaction with another independent, unrelated business, the value of the transaction represents the "Transfer Price." This Transfer Price is known as the "Arm's Length Price," because it frequently aligns with market forces present in an open market scenario. Such transactions are sometimes referred to as "Uncontrolled" transactions in the tax environment.
The introduction of corporate taxation caused a debate about transfer pricing in the UAE, particularly among corporations that do cross-border transactions with their associated entities. The value attributed to inter-group cross-border transactions involving different sectors of an organisation is represented by the transfer price. For example, if a subsidiary organisation in the UAE sells goods or offers services to its parent or sister company, the amount charged is referred to as the transfer price.
However, transfer pricing regulations require corporations to charge their internal divisions or affiliated parties in the same way that they would price an unrelated entity in the open market. This effectively means that related parties must be charged at arm's length rates. When examining potential transfer pricing risks, organisations must look for the presence of any controlled transactions.
Controlled transactions are exchanges between two businesses that have an associational link as defined by their status as related businesses. Given that transfer pricing is based on the terms and conditions set by "associated enterprises" for their "controlled transactions," businesses must distinguish between transactions that are "controlled" and those that are "uncontrolled." Businesses can seek counsel from transfer pricing experts in Dubai to acquire greater insights and support in this area.
The fundamental goal of transfer pricing legislation is to restrict Multinational Enterprises (MNEs) from transferring earnings across organisations in order to avoid paying proper taxes. This kind of alteration is only possible when a certain level of control is applied across multiple entities. When enterprises are classified as associated, this control is formed. Enterprises are considered related if they meet the following requirements:
An enterprise engages in the management, control, or capital of another enterprise, either directly or indirectly.
The same people are involved in the management, control, or capital of two different businesses, either directly or indirectly.
Controlled Transactions Illustrative Examples:
1. Dates are being sold by Company A to Company B. Company A owns all of the shares in Company B. Given that Companies A and B are related businesses, the Dates sale is a controlled transaction in this particular case.
2. Dates are sold by Company A to Company B. Company C owns both Company A and Company B wholly (100%). Because Companies A, B, and C are related businesses, the selling of dates is a controlled transaction.
3. Dates are sold by Company A to Company B. Mr. X is the sole director of both Companies A and B. Because Companies A and B are related businesses, the sale of dates falls under the category of restricted transactions.
An uncontrolled transaction is defined as an interaction between two (or more) firms that do not share the status of "associated enterprises," implying that they are independent organisations in terms of management, control, or capital. As an example:
Pens are being sold by Company A to Company B. Companies A and B have no relational ties through management, control, or capital. Companies A and B share no common owners or employees. Pen sales are classified as unregulated transactions in this case because they are not related enterprises.
Businesses that meet particular conditions (to be outlined in a future Ministerial Decision) will be required to maintain Transfer Pricing (TP) documentation, which will include a master file and a local file. This documentation must be supplied to the Federal Tax Authority (FTA) within 30 days of a request. Similarly, the FTA maintains the right to require additional supporting documentation during a 30-day period following the request.
While the Law does not go into detail about the content to be included in the master and local files, information collected from the UAE CT Public Consultation Document indicates anticipated compliance with OECD standards.
According to the law, UAE firms may be required to submit a disclosure together with their tax return within nine months after the end of the fiscal year. The particular contents of the TP disclosure form are not defined in the Law, but they are expected to be disclosed later.
Finally, the implementation of corporate tax legislation in the UAE represents a substantial shift in the country's economic landscape, necessitating a renewed focus on transfer pricing issues. Each step, from preserving TP paperwork to comprehending the ramifications of linked party transactions, is significant. The notion of Qualifying Free Zone Persons allows for lower tax rates, but the obligation to follow transfer pricing rules emphasizes the importance of transparency and compliance. Through these changes, businesses have the opportunity to not only navigate the intricacies of transfer pricing but also set new benchmarks for corporate integrity and financial transparency. The Audit Firm’s expertise includes developing transfer pricing systems that seamlessly correspond with their clients' value chains. It is recommended to consult an expert Tax consultant in Dubai to assist businesses in ensuring full documentation of all transactions involving related parties.