A federal corporate tax (CT) in the UAE was announced by the UAE Ministry of Finance (MoF) on 31 January 2022. The new CT will come into effect after 1 June 2023.
In the MoF’s press release and the Federal Tax Authority’s FAQs, UAE CT regime details are provided.
Our previous blogs have been about the MoF’s announcement and FAQs in detail. In this article, we will be speaking about one of the major principle brought alongside the corporate tax: The Transfer Pricing.
What Is Transfer Pricing (TP)?
It is a process that determines whether related party transactions are priced in accordance with arm’s length principles, i.e. what a third party would pay for a comparable transaction.
Essentially, transfer pricing refers to a method of accounting that allows the valuation of internal transactions within organizations and between subsidiaries operating under the same control.
What Is an Arm’s Length Transaction?
A transaction that is at arm’s length takes place when buyers and sellers act independently without any influence from either party. An arm’s length transaction implies that both parties act in their own self-interest, regardless of the other’s pressure, and act independently of one another as much as possible.
As well as this, they ensure that the buyer and seller are not colluding in any way.
What Are Transfer Pricing Implications?
As mentioned earlier, the UAE will be subject to OECD Transfer Pricing Rules with the introduction of corporate income tax.
There would be documentation requirements and transfer pricing rules that every company would have to follow. Domestic transactions would also be subject to these transfer pricing rules, which would be mandatory.
Do UAE businesses need to worry about this?
It will be the multinational enterprises that bear the brunt of transfer pricing. The issue of transfer pricing is particularly important and significant for these businesses.
It is a complex and time-consuming process to draft or prepare transfer pricing policies or studies for large transactions, and most businesses would need professional guidance.
According to the OECD TP Guidelines, documentation includes a Master file, a Local file, and a Country by Country Report (CbCR). CbCR requirements are already in effect in the UAE. They are effective since 2019.
Authorities follow OECD guidelines on transfer pricing documentation, which consist of three tiers:
- Master file – contains information for all members of the Multinational Enterprises (MNE) group
- Local file – taxpayer transactions that are material
- Country by Country Report – Indicators of the location of economic activity within the MNE group, on the basis of global allocations of the MNE group’s income and tax obligations
Keeping up with the compliance requirements can also be a challenging task, since the Master File and the Local File require up-to-date information that requires time and effort to prepare. Failure to comply will definitely result in heavy penalties.
Impact of other transfer pricing aspects
Free zone regimes
According to the MoF FAQs, free zone businesses will be subject to UAE CT. There is no intention of changing any aspect of the UAE CT regime, which means CT incentives will continue to be available to businesses operating within free zones. As long as they are complying with all regulatory requirements but do not do business in mainland Emirates.
In light of the CT incentives that will continue to benefit the applicable businesses in free zones, certain transfer pricing considerations may need assessing. Once the detailed transfer pricing rules become available, it will be necessary to analyze whether the arm’s length principle will apply to such free zone businesses. Furthermore, free zone entities may have to deal with mainland UAE entities when developing their TP rules.
Withholding tax
From MoF FAQs, domestic and cross-border payments are unlikely to be subject to withholding tax.
Therefore, given this fact, UAE businesses may not have to withhold any tax from dividends, interest, royalties, or other similar payments made by UAE businesses to related parties or non related parties, which would be helpful from a double taxation perspective.
Tax Grouping
It appears from MoF FAQs that UAE Group companies are likely to be given permission to form a group tax structure. Tax groups are also known as fiscal unity. If certain conditions exist, they can file a single tax return.
Qualifying intra-group transactions
Qualifying intra-group transactions and reorganizations will not be subject to UAE CT provided the necessary conditions apply.
It is to be seen as to which category of transactions will fall under the definition of ‘Qualifying intra-group transactions and reorganizations’ and the applicability of arm’s length principle for the same.
Next steps
Groups and companies that have a presence in the UAE face challenges with the introduction of TP requirements. Businesses must proactively deal with TP implications in order to ensure compliance and minimize transfer pricing costs.
Finally, businesses must plan for smooth implementation of UAE CT and transfer pricing regimes early on.
If you need any assistance with your tax requirements, write to us at [email protected].
