The introduction of the Corporate Tax (“CT”) Regime in the UAE, effective from 1st June 2023, will also implement Transfer Pricing (“TP”) provisions, mandating related party transactions to adhere to arm’s length principles. The UAE became a member of the Organisation for Economic Co-operation and Development (“OECD”) Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) on 16th May 2018. By joining the Inclusive Framework, the UAE has pledged to adopt BEPS minimum standards, including TP Documentation and Country-by-Country Reporting (“CbCR”).
What is Transfer Pricing?
Transfer Pricing refers to the pricing at which two related parties conduct transactions. In a tax context, these transactions occur between two associated enterprises and are often termed ‘controlled transactions.’ Thus, transfer prices are the prices at which an enterprise transfers physical goods, intangibles, or provides services to associated enterprises. Transfer pricing encompasses all pricing arrangements between related parties.
Conversely, when an independent/unrelated party transacts with another independent/unrelated party, the transaction value represents the transfer price. Such a price is considered as ‘Arm’s Length Price’ as it is typically determined by open market factors. In a tax scenario, this transaction is commonly referred to as an ‘uncontrolled transaction.’
TP provisions are pertinent under the following circumstances:
- Internal Business Divisions: When a business is structured into multiple departments or divisions within the same country, and there is a need to discern the value-generating activities of each.
- Intercompany Transactions within the Same Company: When a division of a company provides services or transfers goods to another division within the same company, and it is necessary to ascertain the profitability of each division.
- Cross-Border Transactions: In the case of transactions involving tangible goods, services, finance, or intellectual property between entities under common ownership and control, regardless of national borders.
Under the UAE CT regime, the ALP is mandated for transactions between ‘Related Parties’ and with ‘Connected Persons.’
How can we help?
Our team offers extensive experience to assist you in managing your organization’s Transfer Pricing risk effectively, providing excellent assistance while being mindful of costs. We are equipped to deliver tailored services across all areas of Transfer Pricing, whether it involves designing and planning your supply chain or ensuring accurate documentation to meet Transfer Pricing Regulations in the UAE. Our experts are dedicated to guiding you through any challenges encountered while ensuring compliance with these regulations.
