The Critical Role of Transfer Pricing in the UAE Corporate Tax Framework

In the wake of the newly implemented corporate tax regime in the UAE, businesses must diligently adhere to transfer pricing (TP) rules. For entities, it is crucial to ensure that these transactions comply with the arm’s length principle to avoid penalties and maintain tax integrity.

In this edition, we will take a look at the critical role that transfer pricing plays in the corporate tax framework in the UAE.

What Does Transfer Pricing Refer To?

Transfer pricing is a set of norms that govern how transactions with Related Parties and Connected Persons are priced. These transactions, termed Controlled Transactions, must reflect market conditions as if conducted between unrelated entities. Here are some examples to help you grasp the concept better.

• Intra-group loans and purchases
• Sales and asset sharing
• Management services and agency commissions
• Intellectual property transfers and royalty payments
• Cost-sharing agreements and guarantees
• Leases and remuneration, including salaries, fees, bonuses, and retirement benefits for partners and directors

The Significance of Transfer Pricing Compliance

Proper transfer pricing compliance is crucial for several reasons

• Preventing financial penalties: Adhering to TP regulations helps businesses avoid hefty fines and tax disputes.
• Ensuring fair profit allocation: TP practices ensure that profits are distributed fairly, preventing tax base erosion.
• Enhancing credibility: Accurate TP practices boost the credibility of a company with tax authorities, investors, and stakeholders.

Transfer pricing is an ongoing requirement, not a one-time task. Companies must continually update their TP policies to stay compliant with evolving regulations. This is particularly important for businesses that exceed specific thresholds of revenue, which involves detailed documentation.

Which Businesses Need To Comply With Transfer Pricing?

Any business engaged in Controlled Transactions must adhere to TP rules. Companies with substantial revenues, particularly the ones that are a part of multinational groups, face stringent scrutiny for documentation. Even smaller entities must adopt best practices to avoid tax disputes.

Companies above the documentation threshold must maintain both a master file and a local file as prescribed by the Federal Tax Authority (FTA). SMEs should also follow these guidelines to remain safe from any issue related to Controlled Transactions Successful businesses expanding overseas seek transfer pricing services from established service teams of professionals.

Transfer Pricing for Free Zone Entities

For a Qualifying Free Zone Person to benefit from a 0% corporate tax rate on qualifying income, it is mandatory to comply with transfer pricing regulations and maintain proper documentation. TP compliance aligns with international standards, making it crucial for companies operating within the UAE and across borders.

Steps to Comply with TP Requirements

A comprehensive approach to adhere to transfer pricing policies includes:

• Analyzing related party transactions: Assessing functions, assets, and risks.
• Applying suitable pricing methods: Determining the most appropriate methods for pricing.
• Benchmarking: Identifying and analyzing comparable transactions or companies to establish an arm’s length range of prices or profit margins.

Professional Assistance for Fulfilling TP Requirements and Corporate Tax Regulations

Amidst the evolving tax regime in the UAE, it’s imperative for entities above the documentation threshold to maintain a master file and a local file as prescribed by the FTA. Advance Pricing Agreements (APAs) can provide pre-emptive clarity on transfer pricing methods, reducing the risk of disputes. Businesses must partner with one of the reputed tax consultants like the IMC Group for a detailed understanding of corporate tax requirements in 2024. The experts will take care of your transfer pricing requirements, ensuring proper compliance with tax regulations.