Corporate Tax & Transfer Pricing Documentation

CORPORATE TAX & TRANSFER PRICING DOCUMENTATION

Transfer pricing, within the context of multinational enterprises (MNEs), involves establishing fair prices for transactions between related entities to ensure they reflect market conditions. This practice aims to uphold fairness and transparency, treating such transactions as if they were conducted between independent entities.

In 2023, the United Arab Emirates (UAE) implemented transfer pricing regulations as part of its new corporate tax framework. These regulations closely mirror the OECD Transfer Pricing Guidelines, providing UAE businesses with familiar methodologies and documentation requirements consistent with international standards. Compliance with transfer pricing rules is of paramount importance for UAE businesses, as non-compliance may result in financial penalties imposed by tax authorities.

THE IMPORTANCE

Understanding and adhering to transfer pricing regulations is crucial for businesses operating in the UAE to maintain compliance and avoid penalties. Here are essential considerations regarding transfer pricing in the UAE:

Establishing a Transfer Pricing Policy: Businesses must develop a clear transfer pricing policy outlining how they will determine transaction prices with related parties.

Maintaining Documentation: It's imperative for businesses to maintain comprehensive documentation supporting their transfer pricing policies, ensuring transparency and accountability.

Potential for Audits: There exists the possibility of undergoing a transfer pricing audit conducted by tax authorities, emphasizing the importance of meticulous documentation and adherence to regulations.

To navigate these complexities effectively, seeking professional advice on transfer pricing is highly recommended for businesses in the UAE. This ensures a proactive approach to compliance and minimizes the risk of facing penalties.

DECODING TRANSFER PRICING DOCUMENTATION

Transfer pricing documentation is a vital component for businesses in the UAE to substantiate their transfer pricing policies and ensure compliance with arm's length principles accepted by tax authorities. Here's an overview of the key aspects of transfer pricing documentation in the UAE:

Legislative Framework: Transfer pricing documentation requirements in the UAE are outlined in Ministerial Decision No. 97 of 2023 on Maintaining Transfer Pricing Documentation. This decision applies universally to businesses across all sectors and sizes.

Essential Documentation:

Transfer Pricing Policy: Businesses must articulate their transfer pricing policies and procedures, detailing related party transactions, methodologies for determining arm's length prices, and the documentation supporting these prices.

Master File: Providing an overview of the business's transfer pricing policies and practices, including group structure, related party transactions, and methodologies employed for pricing.

Local File: Offering detailed insights into transfer pricing policies and practices specific to the tax period, encompassing related party transactions, methodologies used for pricing, and supporting documentation.

Additional Requirements: Tax authorities may request supplementary documentation based on specific circumstances. Businesses are advised to retain all relevant documentation securely for a minimum of five years.

Criteria and Thresholds for Maintaining Master File and Local File:

The Master File and Local File are the primary types of transfer pricing documentation, each serving distinct purposes. These files are obligatory for entities meeting any of the following criteria:

Constituent entities of a multinational enterprise group (MNE Group) with a total consolidated group revenue surpassing AED 3.15 billion in the relevant tax period.

Taxpayers with a revenue exceeding AED 200 million in the relevant tax period.

Inclusions and Exclusions in the Local File:

Inclusions:

• Transactions involving related parties categorized as non-resident entities.

• Transactions with exempt entities.

• Transactions with entities subject to a different tax rate.

• Transactions with entities that have opted to be treated as small businesses.

Exclusions:

• Transactions with resident entities not falling under the aforementioned criteria.

• Transactions with entities subject to the same tax rate.

• Transactions involving individuals if parties operate independently.

• Transactions involving unincorporated partnerships if parties operate independently.

• Transactions involving Permanent Establishments (PEs) subject to the same tax rate.

Criteria for Independent Status:

Parties are considered independent if transactions occur within the ordinary course of business and parties do not exclusively transact with each other.

Detailed instructions or extensive control between parties nullify independent status.

Determining Independent Status:

Tax authorities consider all relevant facts and circumstances to ascertain the independent status of parties involved in a transaction.

In essence, thorough transfer pricing documentation is crucial for multinational corporations operating in the UAE to reduce tax liabilities and minimize the risk of tax audits. AL WAHAT advisors offer extensive experience in preparing transfer pricing studies for UAE clients, ensuring compliance and mitigating transfer pricing risks. Our comprehensive tax consulting services aim to maintain an efficient tax structure for your organization, facilitating smooth operations and regulatory adherence.