Transfer Pricing Ensures Fair Pricing For Transactions Between Related Companies

What has been covered in this blog?

• TP Study
• Benchmarking
• Local and Master Files
• TP Disclosure Form
• TP Compliance links to CT returns

The UAE’s corporate tax framework, introduced under Federal Decree-Law No. 47 of 2023 and effective from June 1, 2023, includes comprehensive transfer pricing (TP) regulations aligned with the OECD’s Base Erosion and Profit Shifting (BEPS) standards. These rules are aimed at ensuring transactions between related parties (Controlled Transactions) adhere to the arm’s length principle, thereby preventing tax base erosion and ensuring transparency.

TP Study

At the heart of compliance lies the Transfer Pricing (TP) Study, which serves as the foundation for assessing whether transactions between related entities are priced fairly. The study involves identifying Controlled Transactions (domestic or cross-border), selecting the appropriate TP method—such as the Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Transactional Net Margin Method (TNMM), or the Profit Split Method (PSM)—and determining the Arm’s Length Price.

Benchmarking Study

A Benchmarking Study forms a crucial part of the comparability analysis. It compares the terms and financial outcomes of Controlled Transactions with those of similar independent transactions. This involves analyzing the functions performed, assets used, risks assumed, and economic circumstances of the transactions. The results of the benchmarking analysis are typically incorporated into the Local File, with updates mandated every three years and annual financial updates.

Local File and Master Files

Local File

The Local File is a detailed documentation report that includes an overview of the local entity, a functional analysis, a comparability analysis (including benchmarking), and the application of the selected TP method. It is mandatory for Multinational Enterprise (MNE) Groups with consolidated revenue of at least AED 3.15 billion or for any Taxable Person with revenue of at least AED 200 million. Exemptions exist for transactions with Natural Persons acting independently. The Local File must be prepared contemporaneously, retained, and provided to the Federal Tax Authority (FTA) within 30 days upon request. It follows the format prescribed in OECD Transfer Pricing Guidelines.

Master File

The Master File, on the other hand, provides a global overview of the MNE Group’s operations, TP policies, and intercompany transactions. It is required only for MNE Groups with revenue equal to or exceeding AED 3.15 billion. Like the Local File, it must be prepared contemporaneously and furnished to the FTA within 30 days upon request.

TP Disclosure Form

For entities not meeting the Master File or Local File thresholds, the TP Disclosure Form acts as a simplified reporting tool. It captures essential details such as the Taxable Person’s identity, nature and value of Controlled Transactions, and the identity of related parties and connected persons. This form must be filed along with the annual Corporate Tax Return and serves to ensure transparency while reducing the compliance burden for smaller businesses.

Corporate Tax Return

All TP documentation is closely linked to the Corporate Tax Return. The return is due within nine months after the end of the relevant tax period. While the TP Disclosure Form must be submitted with the return, the Master File and Local File are not filed but must be retained and presented to the FTA upon request. Compliance with TP obligations is particularly important for Qualifying Free Zone Persons, who must meet specific conditions (including TP compliance) to enjoy the 0% tax rate. Failure to comply with documentation requirements can result in penalties, adjustments to taxable income, and other enforcement actions by the FTA.

To manage compliance effectively, businesses should follow a systematic approach: first, identify Controlled Transactions; then determine documentation requirements based on revenue thresholds. Following this, a robust TP Study should be undertaken, including a benchmarking analysis. Once documentation is prepared, the TP Disclosure Form should be submitted with the tax return, while the Local and Master Files should be maintained for future audits. Given the complexity of TP rules, especially for MNEs, it is advisable to consult qualified tax professionals or TP advisory firms familiar with UAE-specific regulations.