As one of the world’s largest trading hubs, the United Arab Emirates (UAE) has established itself as a key player in the global economy. With a growing number of multinational corporations operating within its borders, the country has become increasingly focused on ensuring that businesses operating within its jurisdiction comply with international tax laws, including transfer pricing regulations. In this blog post, we will explore the UAE’s transfer pricing outlook, including recent developments and the implications for businesses operating in the country.

Transfer pricing refers to the pricing of goods and services transferred between related parties, such as subsidiaries and parent companies, within a multinational corporation. The goal of transfer pricing regulations is to ensure that transactions between related parties are conducted on an arm’s length basis, meaning that the prices charged are similar to those that would be charged between unrelated parties. This is important because transfer pricing can be used to shift profits from high-tax jurisdictions to low-tax jurisdictions, thereby reducing a multinational corporation’s overall tax liability.

In recent years, the UAE has taken steps to strengthen its transfer pricing regime. In 2018, the country introduced a transfer pricing framework in accordance with the recommendations of the Organisation for Economic Cooperation and Development (OECD). The framework requires multinational corporations to prepare and maintain transfer pricing documentation, which should include a master file, a local file, and a country-by-country report. The master file should contain information on the multinational corporation’s global business operations, while the local file should provide detailed information on transactions between related parties in the UAE. The country-by-country report should provide an overview of the multinational corporation’s global operations, including its revenue, profits, and taxes paid in each jurisdiction.

The UAE’s transfer pricing framework is largely in line with international best practices, and it has been praised by the OECD for its transparency and consistency. However, the country’s tax authorities have also taken steps to enforce the framework, and they have been increasingly active in conducting transfer pricing audits. In 2019, for example, the UAE’s Federal Tax Authority (FTA) issued a transfer pricing assessment on a multinational corporation operating in the country, marking the first time that the FTA had issued such an assessment.

The FTA has also taken steps to provide guidance to taxpayers on transfer pricing compliance. In 2020, the authority issued a guide on transfer pricing documentation requirements, which provides detailed information on the information that should be included in a multinational corporation’s master file, local file, and country-by-country report.

The United Arab Emirates (UAE) released the Federal Decree-Law No. 47 of 2022, on the Taxation of Corporations and Businesses (CT Law) on 9 December 2022. The CT Law implements the arm’s length principle, which requires related parties to conduct transactions as if they were unrelated, in line with the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines (TPG).

Article 34 of the CT Law provides guidance on the transfer pricing (TP) methods that can be used to determine appropriate arm’s length prices for different types of transactions, such as transfer of tangible or intangible assets, provision of services, or loans. The CT Law does not prescribe any particular methodology or preference for the order in which methodologies should be applied. The objective is to allow the greatest possible scope to use methodologies appropriate in the circumstances. The most appropriate methodology should be adopted based on the facts and circumstances of the case, and all factors that might affect comparability must be evaluated prior to acceptance of any method.

The comparability analysis under the CT Law is consistent with the OECD TPG, and all factors that might affect comparability must be considered, such as functions, contractual terms, risks, economic conditions, business strategies, and the property or services that are the subject of the transaction. To be comparable means that none of the differences between the situations being compared would materially affect the condition being examined in the methodology, or that reasonably accurate adjustments can be made to eliminate the effect of any such differences.

If the results of a transaction or arrangement between related parties do not fall within the arm’s length range, the Federal Tax Authority (FTA) shall adjust the taxable income by performing an adjustment to ensure that the result in the controlled transaction reflects the best facts and circumstances of the transfer price. To ensure transparency on domestic adjustments, where the FTA or a taxable person adjusts the taxable income for a transaction or arrangement to ensure that it complies with the arm’s length standard, the FTA will make a corresponding adjustment to the taxable income of the related party that is on the other side of the transaction or arrangement.

The UAE TP rules define related parties under Article 35 as a natural person or juridical person who has, directly or indirectly, a relationship through ownership, control, or kinship. The ownership and control definitions are generally aligned with the OECD TPG and the OECD Model Tax Convention definitions. Still, the UAE introduced a threshold of 50% for ownership and defined the criteria of ‘control’ to mean the ability to receive or exercise voting rights, profits, rights in liquidation of more than 50%, along with the composition of 50% or more of the board of directors or the ability to exercise significant influence on the Board of Directors (BOD).

The UAE has a stricter definition than the OECD TPG, as the latter only refers to ‘participates directly or indirectly in the management, control or capital of an enterprise,’ without any reference to percentages. In addition, the UAE introduced the concept of kinship as part of its related party definitions for individuals. The definition of kinship or affiliation is established by the relationship of two or more individuals who are related to the fourth degree of kinship or affiliation, which refers to the number of steps between two persons determined by counting the generations separating one person from a common ancestor. The fourth degree of kinship would include great-great-grandparents, great-great-grandchildren, nieces, and nephews. This may have broad consequences for the businesses operating in the UAE as there are many family-owned businesses in the UAE.

Permanent establishments or branches, and partners in the same unincorporated partnerships are also considered as related parties to the UAE TP rules. Related party definitions also include a trustee, founder, settlor, or beneficiary of a trust or foundation.

The definition of a connected person is given as an individual who has an ownership interest in or controls the taxable person, as well as directors, officers, and partners in the same unincorporated partnership. To ensure that payments to connected persons are deductible, the transactions must be priced on an arm’s length basis and correspond with the market value of the service provided, and the payments must be incurred wholly and exclusively for the taxpayer’s business. Any payments / benefits provided by a business to its Connected Persons will be deductible only if the business can demonstrate that the payment / benefit corresponds with the market value of the services provided and the same is incurred wholly and exclusively for the purpose of a taxpayer’s business.

Transfers of assets and liabilities within a group may also qualify for relief under certain conditions based on Article 26. The CT Law provides guidance that for transfers within the same qualifying group, it must be transferred at its net book value/market value at the time of the transfer, and neither a gain nor a loss arises on an arm’s length basis. Article 27 of the CT Law states that transfers or restructurings within a group could qualify for relief under certain conditions.

In relation to the taxable income of a tax group, Article 42 of the CT Law states that transactions between members of a tax group are eliminated in the consolidation of the group’s financial statements, and hence there is no need to comply with the TP rules under such circumstances. However, if a member of a tax group needs to compute its standalone taxable income for the purpose of utilizing tax losses incurred before joining the group and/or when leaving the group, the TP rules would apply. The arm’s length principle provisions under Article 34 may be relevant if the group cannot maintain the qualification conditions specified under paragraph 2, and a potential clawback of the relief could be applied.

Furthermore, the UAE CT Law also provides that taxpayers are required to maintain contemporaneous TP documentation to support their arm’s length pricing. Such documentation should demonstrate that the pricing of transactions between related parties complies with the arm’s length principle. The FTA may request such documentation within five years from the end of the relevant tax period. The contemporaneous documentation should include a detailed functional analysis of the parties involved, an analysis of the economic conditions affecting the transaction, and the selection of the TP method applied to determine the arm’s length price. Taxpayers who fail to comply with these requirements may face penalties and fines.

In addition to the above, the UAE CT Law also provides that taxpayers may apply for an advance pricing agreement (APA) with the FTA. An APA is a binding agreement between the taxpayer and the tax authority that determines the appropriate TP methodology to be used and the arm’s length pricing for a particular transaction or series of transactions. An APA provides certainty to taxpayers and reduces the risk of potential disputes with the tax authority. The APA program in the UAE is currently in its initial stages, and further guidance from the FTA is expected in due course.

It is important to note that the UAE CT Law applies to all corporations and businesses, regardless of their size or industry sector. The TP provisions under the CT Law are in line with international best practices and are consistent with the OECD TPG. The introduction of the CT Law is part of the UAE’s ongoing efforts to diversify its economy and enhance its attractiveness as a destination for foreign investment. The CT Law is expected to increase transparency, encourage voluntary compliance, and reduce the risk of double taxation.