Introduction

Transfer Pricing (TP) rules are designed to ensure that transactions between related parties are conducted at fair market value, preventing profit shifting and tax avoidance. These rules align with the Arm’s Length Principle (ALP) and are based on international guidelines set by the OECD’s Transfer Pricing Guidelines.

Transfer Pricing in the UAE

The UAE has adopted Transfer Pricing Regulations under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. Businesses with related-party transactions must ensure compliance with these regulations by maintaining appropriate documentation and following internationally recognized pricing methods.

Key Transfer Pricing Principles

1. Arm’s Length Principle (ALP)

• Transactions between related parties must be priced as if they were conducted between independent entities under open market conditions.
• Ensures fair allocation of profits across jurisdictions.

2. Methods for Determining Arm’s Length Price

The following OECD-approved methods can be used:

• Comparable Uncontrolled Price (CUP) Method – Compares the price of related-party transactions to similar independent transactions.
• Resale Price Method (RPM) – Based on resale margins applied by independent entities.
• Cost Plus Method (CPM) – Determines a fair markup on costs incurred.
• Transactional Net Margin Method (TNMM) – Assesses the net profit margin of related transactions compared to independent entities.
• Profit Split Method (PSM) – Allocates profits based on value contribution by each party.

Transfer Pricing Documentation Requirements

Businesses engaging in related-party transactions must maintain:

1. Master File: Overview of the multinational group’s transfer pricing policies.
2. Local File: Specific details about intercompany transactions within the UAE.
3. Country-by-Country Reporting (CbCR): Required for multinational enterprises (MNEs) meeting revenue thresholds.
4. Benchmarking Analysis: Justification for transfer pricing methodologies used.
5. Intercompany Agreements: Contracts detailing the terms of related-party transactions.

Transfer Pricing Compliance in the UAE

• Mandatory disclosure of related-party transactions in corporate tax filings.
• Penalties for non-compliance include fines and tax adjustments.
• Advance Pricing Agreements (APAs) may be available to provide certainty on pricing methodologies.

Conclusion

Transfer Pricing rules are essential for corporate tax compliance in the UAE. Businesses must adhere to OECD guidelines, maintain proper documentation, and apply the appropriate pricing methodology to avoid penalties and ensure tax compliance.

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