What is Transfer Pricing?
Transfer pricing refers to the pricing of goods, services, or intangibles between related parties, such as a parent company and its subsidiaries. The main purpose of transfer pricing regulations is to prevent tax avoidance and ensure that transactions between related parties are conducted at arm’s length, i.e., market prices similar to those agreed upon by independent parties.
In the UAE, transfer pricing rules are governed under Economic Substance Regulations and Corporate Tax Law, ensuring businesses pay their fair share of taxes on intercompany transactions.
Why Transfer Pricing Matters
- Tax Compliance: Avoid penalties from the UAE Federal Tax Authority (FTA) by maintaining proper transfer pricing documentation.
- Risk Management: Minimizes disputes with tax authorities.
- Profit Allocation: Ensures that profits are reported accurately across jurisdictions.
- Business Transparency: Demonstrates adherence to international accounting and tax standards.
Transfer Pricing Methods
The UAE recognizes several internationally accepted methods for determining arm’s length pricing:
- Comparable Uncontrolled Price (CUP) Method
- Definition: Compares the price of goods/services in a controlled transaction with the price in a comparable transaction between unrelated parties.
- Use Case: Most reliable when there is a highly similar transaction in the market.
- Resale Price Method (RPM)
- Definition: Determines transfer price by subtracting an appropriate gross margin from the resale price of goods purchased from a related party and sold to an independent party.
- Use Case: Suitable for distributors without significant value addition.
- Cost Plus Method (CPM)
- Definition: Adds an appropriate mark-up to the cost incurred by a supplier in transactions with a related party.
- Use Case: Best for manufacturing or service companies with predictable costs.
- Transactional Net Margin Method (TNMM)
- Definition: Examines net profit margin relative to an appropriate base (e.g., sales, costs, or assets) in controlled transactions.
- Use Case: Commonly used when reliable comparables for gross profit are hard to find.
- Profit Split Method
- Definition: Splits combined profits from related-party transactions based on each party’s contribution.
- Use Case: Useful for highly integrated operations or joint ventures.
Comparable Analysis in Transfer Pricing
A comparable analysis involves identifying similar uncontrolled transactions to justify the pricing of related-party transactions. Key steps include:
- Identify Potential Comparables: Transactions between unrelated parties in the market.
- Adjust for Differences: Consider functional differences, risk profiles, contractual terms, and economic conditions.
- Benchmarking Study: Perform statistical analysis to determine the arm’s length range.
- Documentation: Maintain records to demonstrate compliance if audited.
Tip: UAE companies often rely on OECD guidelines and international databases to perform benchmarking studies.
Transfer Pricing Documentation Requirements
The UAE follows OECD-aligned transfer pricing documentation standards, requiring two main types of reports: Master File and Local File. The exact requirement depends on the company’s setup, size, and type of transactions.
- Master File
The Master File provides a high-level overview of the multinational group and its global business operations. It is generally required for:
- UAE-based parent companies with foreign subsidiaries.
- Local companies part of a multinational group engaged in cross-border transactions.
Contents include:
- Organizational structure and ownership details
- Description of business activities
- Intangibles and intellectual property management
- Intercompany financial activities and funding arrangements
- Consolidated financial statements
- Local File
The Local File focuses on UAE-specific related-party transactions and is mandatory for:
- Companies with related-party transactions above the FTA threshold
- UAE entities in mainland or freezone operating with cross-border related parties
Contents include:
- Details of all related-party transactions (sales, services, loans, royalties)
- Functional and risk analysis of the UAE entity
- Selection of transfer pricing method for each transaction
- Benchmarking study supporting arm’s length pricing
- Financial information specific to UAE entity
Business Setup Considerations:
Business Setup | Master File Required | Local File Required |
Mainland LLC | Yes, if part of multinational group | Yes, if related-party transactions exceed threshold |
Freezone Company | Yes, if part of multinational group | Yes, if related-party transactions exceed threshold |
Small Local Company | No, unless FTA thresholds exceeded | Yes, if related-party transactions exceed threshold |
Branch of Foreign Company | Yes | Yes |
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Penalties: Failure to maintain accurate documentation can result in fines, adjustments to taxable income, and increased scrutiny from FTA.
Why Choose Taxoryx Accounting & Bookkeeping Services LLC?
At Taxoryx, we are a team of qualified CAs, CPAs, and ACMA professionals dedicated to providing accurate, reliable, and timely transfer pricing services. Our services include:
- Transfer pricing studies and reports
- Comparable analysis
- Method selection guidance
- Master file and local file preparation
- Corporate tax compliance support
Ensure your UAE business remains fully compliant and tax-efficient with our expert guidance.
FAQs – VAT Accounting in UAE
Q1: Which companies need to comply with transfer pricing rules?
Companies with related-party transactions and taxable income above the threshold specified by UAE Corporate Tax law must comply.
Q2: How often should transfer pricing documentation be updated?
Annually or whenever there is a significant change in business operations or related-party transactions.
Can transfer pricing methods differ across transactions?
Yes, companies can apply different methods for different types of transactions, provided they comply with arm’s length principles.
Are freezone companies subject to transfer pricing rules?
Yes, if they engage in related-party transactions and benefit from UAE corporate tax regimes.
How does Taxoryx Accounting help with transfer pricing?
We provide comprehensive services including benchmarking studies, documentation, method selection, and compliance advisory to ensure full adherence to UAE transfer pricing laws.
