Understanding Transfer Pricing in the UAE: A Comprehensive Guide

It can be challenging to find your way through the complexities of transfer pricing in the UAE. The implementation of the UAE Corporate Tax Law makes it vital for businesses to understand the complexities of transfer pricing in order to comply and optimize their tax positions. With this guide, the aim is to shed light on transfer pricing in the UAE and to clarify its principles, requirements, and implications.

What Is Transfer Pricing and Why Is It Important in the UAE?

Transfer pricing applies to the prices set for transactions between connected parties, like subsidiaries, affiliates, or entities sharing common control. The main goal is to guarantee that these transactions occur at arm’s length, which means the terms and prices align with those between independent parties in the open market.

With the introduction of the Corporate Tax Law, which applies to financial years commencing on or after June 1, 2023, transfer pricing has become increasingly important in the UAE. This legislation requires that dealings between associated individuals and linked parties comply with the arm’s length principle in order to guarantee equitable taxation and avert profit shifting.

Who Is Subject to Transfer Pricing Regulations in the UAE?

The UAE’s transfer pricing rules apply to a broad spectrum of entities, including:

Multinational Enterprises (MNEs): Companies operating across multiple jurisdictions.
Domestic Groups: Entities operating solely within the UAE but engaging in transactions with related parties.
Free Zone Entities: Businesses established in UAE free zones, especially if they transact with related parties.

Transfer pricing rules must be adhered to by all entities, including those who are exempt from corporate tax or qualify for small business relief. However, the documentation requirements may differ depending on specific thresholds.

What Are the Key Transfer Pricing Documentation Requirements?

To ensure transparency and compliance, the UAE mandates specific documentation:

Transfer Pricing Disclosure Form (TPDF): Required for entities with related party transactions exceeding AED 40 million.
Master File: Applicable to MNEs with consolidated group revenues exceeding AED 3.15 billion.
Local File: Mandatory for entities with revenues over AED 200 million or those part of an MNE group meeting the above threshold.
Country-by-Country Report (CbCR): For MNEs with consolidated revenues above AED 3.15 billion, detailing global allocation of income, taxes, and business activities.

These documents must be prepared contemporaneously and submitted upon request by the Federal Tax Authority (FTA).

How Are Transfer Prices Determined?

The UAE aligns with the OECD Transfer Pricing Guidelines, endorsing five primary methods to determine arm’s length pricing:

Comparable Uncontrolled Price (CUP) Method: Compares the price charged in a controlled transaction to that in a comparable uncontrolled transaction.
Resale Price Method: Focuses on the resale margin of a product purchased from a related party.
Cost Plus Method: Adds an appropriate markup to the costs incurred by the supplier in a controlled transaction.
Transactional Net Margin Method (TNMM): Examines the net profit margin relative to an appropriate base, such as costs or sales.
Profit Split Method: Allocates combined profits from controlled transactions based on the relative value of each party’s contribution. If none of these methods are suitable, businesses may adopt an alternative method, provided it aligns with the arm’s length principle and is well-documented.

What Are the Penalties for Non-Compliance?

Non-compliance with transfer pricing regulations can lead to significant repercussions:

Financial Penalties: Failure to submit required documentation or inaccuracies can result in substantial fines.

Tax Adjustments: The FTA may adjust taxable income, leading to increased tax liabilities.
Reputational Damage: Non-compliance can tarnish a company’s reputation, affecting stakeholder trust.

It’s imperative for businesses to maintain accurate records and ensure timely submissions to mitigate these risks.

How Can Kinanis UAE Assist You?

At Kinanis UAE, we specialize in guiding businesses through the complexities of transfer pricing regulations. Our services include:

Comprehensive Transfer Pricing Analysis: Evaluating your intercompany transactions to ensure compliance.
Documentation Preparation: Assisting in the preparation of TPDFs, Master Files, Local Files, and CbCRs.
Strategic Advisory: Providing insights to optimize your transfer pricing strategies and mitigate risks.

Our team of experts is dedicated to ensuring your business remains compliant and thrives in the evolving tax landscape.

Ready to Navigate Transfer Pricing with Confidence?

Don’t let the complexities of transfer pricing hinder your business growth. Reach out to Kinanis UAE today for expert guidance tailored to your needs.