Transfer Pricing Rules in the UAE
In line with the new corporate tax law, the United Arab Emirates has enforced Transfer Pricing Rules in UAE laws effective June 1, 2023. This synopsis outlines the implications for UAE-based firms. If you are unfamiliar with transfer pricing concepts, these regulations ensure that payments to related parties or transactions with related parties reflect “arm’s length” or “open market” values.
Following OECD guidelines, these regulations define approved valuation methods and compliance standards. They are crucial in preventing profit manipulation for tax avoidance purposes. Entities that do not engage in transactions with related parties or payments to connected individuals may qualify for exemptions or reduced compliance requirements, pending confirmation through a Cabinet Decision.
Understanding Related Parties and Connected Persons in Transfer Pricing Regulations
The corporate tax decree-law of the United Arab Emirates provides a comprehensive definition of related parties and connected persons, particularly concerning the implementation of transfer pricing regulations. In this context, related parties encompass family members and businesses where an individual, either independently or jointly with related parties, holds a controlling interest typically amounting to 50% or more of the company’s shares.
Under the corporate tax decree-law, connected persons include not only business owners, directors, and officers but also related parties associated with these individuals. These definitions establish a framework for the proper implementation of transfer pricing regulations, ensuring that transactions and payments between these entities adhere to principles of fairness and market value.
Determining Arm’s Length Value under Transfer Pricing Rules
The core concept of arm’s length value in transfer pricing regulations mandates that transactions should be priced as if they were conducted between unrelated parties, ensuring impartiality and equity. The corporate tax decree-law of the United Arab Emirates outlines approved methodologies for determining this arm’s length value, aligning with international standards and OECD transfer pricing principles.
Several transfer pricing techniques are supported by the corporate tax decree-law to ascertain arm’s length value. The cost-plus approach, the comparable uncontrolled price method, the resale price method, the transactional net margin method, and the transactional profit split method are some of these techniques. These techniques offer a framework for impartial and equitable valuation in related-party transactions while also adhering to international standards. Additionally, in cases when the stated methodologies are deemed unfeasible, the decree law authorizes the employment of alternative techniques. Expert advice from transfer pricing experts may be necessary in these situations.
Methods Approved under Corporate Tax Decree-Law
Arm’s length value calculation is based on a fundamental principle that emphasizes valuing transactions regardless of whether they were carried out independently, without influence, between unrelated parties. The corporate tax decree-law in the UAE approves specified transfer pricing procedures for proper arm’s length value determination:
- Transactional Profit Split Method
- Cost-Plus Method
- Transactional Net Margin Method
- Comparable Uncontrolled Price Method
- Resale Price Method
These established techniques conform to international standards and align with OECD transfer pricing guidelines. Implementing these strategies effectively may require expert guidance, particularly from transfer pricing specialists. Importantly, the decree-law provides flexibility in valuation processes by permitting alternative methodologies when the prescribed approaches are deemed impractical.
Documentation and Reporting Requirements for Transfer Pricing
The decree law provides an outline of the transfer pricing documentation that taxpayers must maintain, with a forthcoming Cabinet Decision to detail which taxpayers are required to comply with reporting and documentation obligations.
Two standard OECD documents, a master file, and a local file, are included in the decree-law’s list of documents. According to the decree law, these records must be maintained in a format determined by the FTA, however, it is expected that this format will resemble or be the same as that recommended in the OECD guidance.
The master file will often include details about the global business operations of the organization to which the taxable person is affiliated. These details should include information like:
- Group structure
- Description of the group business
- Financial and tax position of the group
- Intercompany financing arrangements
- Intangibles of the group
Generally, the local file include:
The decree law outlines that the local file typically includes:
Details about the taxpayer, including an organizational chart and a business plan.
Records of significant local transactions governed by transfer pricing regulations.
The FTA may request these documents at any time, although they are not mandatory for regular reporting. Upon request, the taxpayer has 30 days to provide the files.
Additionally, the decree law mentions the possibility of a notice or decision requiring taxpayers to submit a transfer pricing disclosure at the time of filing their tax returns, in addition to maintaining a master file and a local file. It remains unclear whether such a notice or decision will be issued universally or selectively, affecting all taxpayers or only specific ones.
Challenges Associated with Compliance and Documentation Requirements
For certain taxpayers, adhering to the documentation and reporting requirements under transfer pricing rules poses a substantial compliance challenge. Developing precise master files and local files demands considerable time and effort. When annual reporting is mandatory alongside tax filings, meticulous attention is crucial to avoid repercussions for inaccuracies or non-compliance. YUGA Accounting underscores the meticulous approach necessary for documentation to ensure adherence to legal standards.
Transfer Pricing Requirements for Free Zone Companies
The need for transfer pricing regulations is stated clearly for businesses operating in free zones. The eligibility status of a free zone enterprise may be hampered by failure to meet transfer pricing requirements. As free zone businesses are ready to pay corporate taxes, this becomes an even more important factor.
YUGA Accounting Analysis
Transfer pricing laws are being implemented, which presents new challenges for taxpayers in the United Arab Emirates and has an impact on a variety of companies that do business there. Owners and directors who get paid for business-related expenses, as well as any foreign or domestic parties who transact with group firms, must assess if they comply with transfer pricing regulations. Breaking these standards can have major consequences, including increased tax fines, payments, and possible changes to profits.
YUGA Accounting: Navigating Transfer Pricing Rules
Thorough compliance and strategic planning are crucial as companies navigate the intricacies of transfer pricing rules. Businesses may fulfill transfer pricing conditions, handle documentation requirements, and expedite the compliance process with the specialized assistance provided by YUGA ACCOUNTING. Adherence to these standards in a proactive manner is crucial to prevent any possible financial or legal fallout.
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