The UAE Transfer Pricing Guide provides clear insights and examples on various aspects of transfer pricing in the UAE. It covers topics like the arm’s length principle, documentation, and specific transactions such as financial deals and services within a group. It also discusses audits and risk assessments. This guide aligns with the OECD Transfer Pricing Guidelines and key UAE regulations. While not legally binding, it serves as the main reference for transfer pricing matters and offers insight into how the FTA will interpret the regime.
Ensuring Compliance with UAE Transfer Pricing Rules
To comply with the amended Transfer Pricing Rules and mitigate risks, UAE-based taxpayers must review operations involving permanent establishments, partners, and other related parties. This review is to ensure these operations comply with the arm’s length principle, and that Transfer Pricing documentation is prepared according to applicable requirements.
The new Transfer Pricing rules also mandate that companies submit a transfer pricing disclosure form as part of their annual corporate income tax return. Failure to comply with these requirements may result in penalties ranging from AED 10,000 to AED 100,000.
Transfer Pricing Guide – Prescribed Transfer Pricing Methods
Comparable Uncontrolled Price Method (CUP):
- Conducts direct price comparison between related party and uncontrolled transactions.
- Applicable for physical products with internal or external pricing data.
- Differentiates between Internal and External CUP.
- Data availability, timing, and transaction terms are crucial for accurate comparison.
Resale Price Method (RPM):
- Compares gross margins between related party and comparable industry companies.
- Suited for buy-sell transactions with minimal value addition.
- Internal and External RPM distinctions.
- Factors like functional analysis, comparability adjustments, and marketing intangibles are vital.
Cost Plus Method (CPM):
- Compares direct and indirect costs plus mark-up with similar industry benchmarks.
- Utilized for transfer of semi-finished goods.
- Distinguishes between Internal and External CPM.
- Considers product comparability, functional analysis, and accounting practices.
Transactional Net Margin Method (TNMM):
- Compares net margins of related party with similar industry competitors.
- Applicable for manufacturers, service providers, and distributors with value-added functions.
- Internal and External TNMM variations.
- Considers comparability adjustments, profit level indicators, and operating/non-operating items.
Profit Split Method (PSM):
- Divides profits as third parties would expect from comparable transactions.
- Used for highly integrated operations, unique contributions, and significant risks.
- Employs residual and contribution analysis approaches.
- Profit splitting factors and data availability are key considerations.
Other Transfer Pricing Methods:
- Utilized when recognized methods are impractical, ensuring compliance with the Arm’s Length Principle.
- May include valuation approaches like Discounted Cash Flow (DCF) if applicable.
Simplified Transfer Pricing Guide: Understanding Arm’s Length Range
Arm’s Length Range: Inter-Quartile Range (IQR)
The Inter-Quartile Range (IQR) explained:
- The IQR consists of three key points: the Lower Quartile (25th), Median (50th), and Upper Quartile (75th).
Choosing a point within the range:
- A point closer to the lower quartile might be suitable for companies with limited functions, no assets, and minimal risk.
- A point nearer to the upper quartile suggests high-value functions, risk-taking ability, and asset employment.
Considerations for data:
- Use multiple years of data (at least 3 years).
- Minimum 2 years of data are needed for comparability.
Updating frequency:
- Update financial data of comparable companies annually.
- Conduct a comprehensive search update every three years.
Timing of search:
- For policy setting: Use data as of the analysis date.
- For compliance: Perform the search at the time of the tax return deadline.
Understanding the Scope of Transfer Pricing Rules
The Transfer Pricing Rules Apply to:
- Foreign transactions with related parties or controlled parties.
- Domestic transactions with related parties or controlled parties.
- Transactions involving exempt entities or exempt business segments within the entity.
- Transactions between the entity and its domestic or foreign Permanent Establishment (PE).
- Transactions between a branch and its head office.
The Transfer Pricing Life Cycle
Essential Steps for Applying the Arm’s Length Principle
1. Conducting Functional, Assets, and Risks (FAR) Analysis.
2. Choosing the most suitable Transfer Pricing method.
3. Establishing the Arm’s Length Price.
Potential Sources for Comparable Data
| Internal Comparable: | Third-party segment/transactions (internal data accessible to the taxable entity) |
| External Comparable: | Independent comparable transactions/companies (external data sourced from TP databases) |
Choosing Comparable Entities:
| Qualitative Criteria | Business strategies, functions, assets, and product/service range. |
| External Comparable Factors | Size (sales, assets), related party transactions, R&D/sales ratio, export activities, and exceptional circumstances. |
| Manufacturing/Trading/Services | TP Catalyst Orbis S&P Capital IQ |
| Financial Transactions (Interest Rates) | Loan Connector Bloomberg Refinitiv Eikon |
| Intangibles (Royalty/License Fee) | Royaltystat Royaltyrange |
Transfer Pricing Guide – Key Clarification
The applicability of the TP Disclosure Form will depend on materiality thresholds.
- TP regulations encompass domestic transactions between Related Parties (RP) and Controlled Parties (CP), including transactions within free zones.
- TP regulations extend not only to Multinational Enterprise (MNE) groups but also to domestic UAE groups.
- In case of conflicts between UAE TP regulations and an international agreement or Double Taxation Avoidance Agreement (DTAA), the provisions of the international agreement take precedence.
- “Significant influence” within the “Control” definition necessitates consideration of various factors and specific circumstances pertinent to the scenario under assessment.
- Taxable persons falling short of thresholds are still bound by TP regulations and must adhere to the Arm’s Length Principle (ALP). They should also retain supporting documentation, to be filed within 30 days upon request by the Federal Tax Authority (FTA).
- Entities opting for small business relief are exempt from maintaining documentation but must comply with TP regulations and meet the ALP.
- Domestic UAE Groups without foreign entities are exempt from the Master File requirement but should maintain a Local File.
- While maintaining inter-company agreements, taxpayers should weigh factors like a simplified approach, materiality thresholds, transaction criticality, ensuring that the cost and administrative burden do not outweigh the benefits.
- When employing the Transactional Net Margin Method (TNMM), a transaction-specific benchmarking analysis is advisable. Entity-wide analysis through aggregation may not suffice and may serve only as corroborative analysis.
- The FTA does not favor any specific commercial database; reliability is paramount in assisting Taxable Persons with comparability analysis.
- In cases of insufficient domestic data for TP analysis, taxable persons can consider regional or global comparables, following the order of priority (local, regional – Middle East, then other regions).
- Multiple years of data should be utilized, and comparable companies must have at least two years of data for acceptance.
- The Arm’s Length Range should be determined using the Interquartile Range.
- A full update of comparables search should occur every three years, with an annual financial update.
- Additional guidance is available regarding Financial Transactions, Intra-group services, Intangibles and Cost Contribution Arrangements, Profits Attribution to Permanent Establishments, and Business Restructurings.
- Clarifications on Advance Pricing Agreements (APA), TP litigation, Mutual Agreement Procedure (MAP), Disclosure Form threshold, TP & Corresponding Adjustment Mechanism are pending.
