Corporate Tax implementation in UAE was announced on 31st Jan 2022 by the MoF and it was confirmed that the new tax law would be the introduction of Transfer Pricing (TP).
What is Transfer Pricing (TP) ?
Transfer Pricing (TP) is an intra-company market mechanism used for accounting and taxation purposes and allows for internal pricing transactions within businesses and between subsidiary companies operating under common ownership and control. The TP practice involves both domestic and cross-border transactions. For taxation purposes, the transfer price is essentially at an ‘open market’ or ‘arm’s length value for preventing tax evasion.
Companies use transfer pricing to reduce the overall tax burden of the parent company. They charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.
Role of OECD in transfer pricing (TP):
OECD has been striving for the prevention of tax avoidance through its ‘Base Erosion and Profit Shifting’ (‘BEPS’) action plan for several years by establishing measures to prevent multinational businesses from evading tax by artificially shifting profits to different low or no-tax jurisdictions.
The UAE, in line with most of the developed countries, has stood by the BEPS program and the adoption of the OECD rules for TP has been a logical move as part of the introduction of CT.
OECD TP Guidelines :
The Organisation for Economic Cooperation and Development (“OECD”) provides guidance for establishing the arm’s length price for the intercompany transactions between related parties.
These guidelines explains the following general concepts:
● Associated Enterprises
● Controlled Transactions
● Arm’s Length Principle
● TP methods
● TP Documentation
Associated Enterprises :
As per Article 9 of the OECD Model Tax Conventions, two enterprises are Associated Enterprises if:
✓ One of the enterprise participates, Directly or Indirectly in the
a) Management or
b) Control or
c) Capital of the others;
✓ The same participates directly or indirectly in the management, control or capital of both.
✓ The control has not been explicitly defined in the OECD TP guidelines;
Different countries had modified the definition of Associated Enterprises based on the above
Controlled Transactions :
Two or more AEs either or Both of whom are non-resident entering into transactions like:
✓ Purchase/ Sale of Tangible Property; ✓ Provision/Receipt of Services;
✓ Provision/Receipt of Intangibles; ✓ Financing Transactions;
✓ Joint development of tangible/Intangibles; ✓ Business Restructuring or Reorganization.
Arm’s Length Pricing (ALP) :
Determination of arm’s length price involves two major aspects:
✓ Identification of conditions and economically relevant characteristics.
✓ Compare the conditions and economically relevant characteristics with Comparable Uncontrolled Transactions
It will makes sure that organizations with multiple legal entities in different jurisdictions are tax-compliant and do not profit unethically from transacting between its related entities.
Transfer Pricing (TP) Methods:
OECD allows five main transfer pricing methods:
Traditional Transaction Method
✓ Comparable Uncontrolled Price Method – Same or similar products
✓ Resale Price Method – Routine distribution activities
✓ Cost Plus Method – Routine manufacturing activities
Transactional Profit Method
✓ Profit Split Method – Complex situation
✓ Net Margin Method – Routine distribution and manufacturing activities
Transfer Pricing (TP) Documentation:
There are three-tier approach for TP documentation which consisting of:
✓ Master File
– High level information regarding global business operation and TP policies
– MNE group’s business, including the nature of its global business operations, supply or value chain and its global allocation of income and economic activity
– Available to all relevant tax administrations
✓ Local File
– Detailed transactional TP documentation specific to each country.
– Provides more detailed information relating to inter-company transactions.
✓ Country by Country Report (CbCR)
– Report the amount of revenue, PBIT, IT paid and accrued per jurisdiction
– Report number of employees, state of capital, retained earnings, and tangible assets per jurisdiction.