Corporate Tax in the UAE: Transfer Pricing – Corporate Tax

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When the Ministry of Finance (MOF) announced the implementation of corporate tax, it announced that it will follow the model of the Organization for Economic Co-operation and Development (OECD). In doing so, it would also introduce a well-established principle of business taxation, namely the principle of transfer pricing. Transfer pricing will come under closer scrutiny of transactions and financial support between related companies (even if they are in free zones).

This article will briefly and simply examine the concept of transfer pricing.

What is transfer pricing and who does it affect?

The concept of transfer pricing focuses specifically on business transactions between related companies, common in the region, particularly between multinational corporations and, in some cases, large family businesses within the UAE who are able to control a certain amount of market.

Ultimately, the concept prevents a company from paying less tax by exploiting a tax loophole and charging a related company a much lower or much higher fee for a transaction, thereby distorting the amount of taxable income and reporting a much lower income than it really is. in practice.

A simple example of this would be if Company A and Company B are owned by the same person or company. Company A is located in the United Arab Emirates, while Company B is located in another country and provides management services to Company A. Company A earns AED 10,000,000 in taxable income. To reduce this, Company B charges Company A a management fee of AED 8,000,000 (whereas the actual fee would be much lower), reducing the taxable income to just AED 2,000,000 compared to what should have been a much higher taxable income.

It does not only apply to services, but will also apply to goods transferred between related entities.

OECD guidelines

Although we will have to wait to see exactly what the corporate tax legislation will dictate once it is finalized, as mentioned above, the Ministry of Finance has announced that it will align itself with the principles of the OECD.

The OECD uses the “arm’s length principle” when examining transfer pricing. It simply means that all transactions between related companies are made under the same conditions as if the companies were not related. Consequently, no special treatment is granted by one company to another.

The OECD provides detailed guidance on how a valuation should be determined, but essentially five methods are used, namely:

1) Comparable uncontrolled prices method
2) Resale price method
3) Cost plus method
4) Profit split method
5) Transactional net margin method.

The OECD further requires that certain key documents be kept by companies, the most relevant of which are a master file and a local file.

The main file covers the group of related companies as a whole, while the local file focuses specifically on the company within the local jurisdiction (in this case, the UAE).

What can businesses do to prepare?

Until the current legislation is finalized, multinational companies are not advised to make major changes until they know exactly what to change. What companies can do is take into account the OECD concepts and principles and then self-assess their current position and way of operating, particularly with regard to their transfer pricing policy, to ensure that they are prepared to exit the legislation and to properly comply with ce. Failure to prepare the property can lead to non-compliance with the legislation and risk the penalties that will undoubtedly be applied in such cases.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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