The United Arab Emirates implemented transfer pricing regulations within its corporate tax framework on June 1, 2023. This summary explores how these laws impact UAE businesses.
Ensuring Fair Market Value Transactions
Transfer pricing regulations aim to guarantee that transactions between related parties (companies or individuals with ownership ties) reflect fair market values, aligning with OECD guidelines. This prevents businesses from manipulating profits to minimize their tax burden.
Who are Related Parties and Connected Persons?
The UAE corporate tax decree-law clearly defines related parties and connected persons, critical for applying transfer pricing rules. Related parties include family members and businesses where an individual, or combined related parties, hold a controlling interest of 50% or more. Connected persons encompass business owners, directors, officers, and their related parties.
Determining Arm’s Length Value
A core concept in transfer pricing is the “arm’s length value,” which ensures transactions are valued as if conducted between independent parties. The UAE law acknowledges various methods to determine this value, including:
Comparable uncontrolled price method
Resale price method
Cost-plus method
Transactional net margin method
Transactional profit split method
These methods align with international standards and offer flexibility through alternative approaches when necessary.
Record-keeping and Reporting
The decree-law outlines transfer pricing documentation requirements. Businesses must maintain a master file and a local file, following formats specified by the Federal Tax Authority (FTA). These files detail group operations, intangibles, financing arrangements, and local transactions subject to transfer pricing regulations. While not mandatory for regular reporting, the FTA may request these documents, and taxpayers have 30 days to comply.
Transfer Pricing for Free Zone Companies
Free zone companies must adhere to transfer pricing regulations to maintain their eligibility status. Non-compliance can impact their tax obligations.
Challenges and Importance of Documentation
Meeting the documentation and reporting requirements of transfer pricing rules can be challenging for taxpayers. Careful attention to detail and time investment are crucial. Non-compliance can lead to financial penalties and reputational damage.
Hallmark International Auditors Perspective:
With transfer pricing laws reshaping UAE taxation, achieving compliance and developing a strategic roadmap are critical. Hallmark International Auditors offers specialized assistance to decipher these complexities, ensuring adherence to regulations and mitigating risks effectively. Proactive compliance is essential to avoid financial and legal repercussions.
