Understanding Transfer Pricing and its Implications for Businesses in the UAE 

In light of the implementation of Corporate Tax in the UAE, the concept of Transfer Pricing (TP) has gained significant attention, prompting the Ministry of Finance (MoF) to release pertinent documents such as Questions and Answers and Public Consultation papers. For many locally-owned businesses, Transfer Pricing may be a novel concept, raising numerous considerations and implications for implementation. This article aims to delve into the intricacies of Transfer Pricing and its relevance to businesses in the UAE.

Transfer pricing, in its essence, refers to the prices of goods and services exchanged between entities with associated parties. Associated parties are those with a prior relationship to a company, whether through control, ownership, or familial ties. This aspect is crucial as related party transactions may create opportunities for profit manipulation. Thus, Transfer Pricing assumes particular significance in the context of the UAE's introduction of corporate tax, aimed at curbing potential abuses.

The arm's length principle serves as the cornerstone of Transfer Pricing regulations. This principle dictates that prices charged for goods and services in related party transactions should mirror those in transactions between unrelated parties. The objective is to prevent pricing mismatches and deliberate manipulation of transfer prices for tax advantage across related entities.

Transfer pricing directly impacts corporate taxation by influencing the allocation of profits and losses among taxed entities. Notably, improper transfer pricing practices can have immediate repercussions on a nation's tax revenues, especially in jurisdictions with disparate corporate tax rates. Companies may be incentivized to set transfer prices to allocate profits to jurisdictions with lower tax rates, thus reducing their overall tax burden.

For instance, consider a scenario where Company A, based in Bangladesh, sells electronic goods to Company B, a UAE-based entity, at a price below market value. Company B then resells these goods in third markets, earning substantial profits due to the lower acquisition cost. This manipulation of transfer prices can lead to tax revenue losses for Bangladesh while benefiting the UAE-based company.

To address such concerns, countries often enact transfer pricing laws and establish administrative capacities to manage transfer pricing adjustments. Additionally, ensuring alignment with international transfer pricing standards is crucial to maintaining consistency across jurisdictions.

In the UAE, businesses are required to comply with transfer pricing regulations and documentation requirements outlined in the Transfer Pricing Guidelines, particularly in the context of the forthcoming corporate tax regime. This entails adherence to the arm's length principle as delineated in the OECD Transfer Pricing Guidelines for all transactions between related parties.

Related parties encompass individuals or entities with existing connections to a business through control, ownership, or familial ties. The UAE's Corporate Tax Consultation Document defines related parties based on various criteria, including kinship relationships, ownership thresholds, and control mechanisms.

Connected persons, distinct from related parties, refer to individuals or entities associated with a business in the context of the UAE's corporate tax regime. This includes individuals with ownership interests, officers or directors of taxable entities, and members of unincorporated partnerships, among others.

Compliance obligations regarding transfer pricing typically place the burden of proof on taxpayers, requiring them to document intercompany transactions exceeding specified thresholds to demonstrate compliance with the arm's length principle. The UAE's forthcoming Corporate Tax Legislation is expected to clarify the threshold for intercompany transactions and the associated documentation requirements.

Mandatory transfer pricing documentation typically includes a Local File and a Master File, aligning with international standards such as those outlined in OECD BEPS Action 13. Companies must also confirm the arm's length nature of intercompany transactions using internationally accepted transfer pricing methods or alternative approaches supported by substantial evidence.

Moreover, companies are required to submit a Transfer Pricing disclosure form containing information about intercompany transactions, although the exact submission requirements remain to be clarified.

In conclusion, Transfer Pricing is poised to have a significant impact on businesses in the UAE following the implementation of corporate tax legislation. Understanding and adhering to transfer pricing regulations and documentation requirements are imperative for businesses to navigate the evolving tax landscape effectively. By ensuring compliance with international standards and aligning with regulatory expectations, businesses can mitigate risks and uphold their tax obligations in the UAE.