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Impact of transfer pricing rules on corporate tax in UAE

transfer pricing

Transfer pricing is a term used to describe how transactions within and between businesses are valued. We will help you gain a basic comprehension of transfer pricing laws.

A new corporate tax system incorporating a transfer pricing scheme will go into effect in the UAE in June 2023. (TP).

Transactions involving connected parties and related parties are subject to transfer pricing restrictions and tax laws. The trades may be both domestic and global.

Impact of Transfer Pricing Rules on Corporate Tax in UAE

The UAE Corporate Tax Law will include a transfer pricing legislation with various transfer pricing techniques, rigorous annual documentation, and severe penalties for non-compliance.

To ensure that related party transactions show independent pricing, taxpayers should use the arm’s length concept. This price represents the market cost of the good or service in question.

Businesses operating in the UAE must abide by the documentation standards and transfer pricing regulations established by the OECD Transfer Pricing Guidelines.

Latest Observations

Although UAE groups frequently engage in intercompany sales and financing services, in the past, compensation for these activities has not been a top priority because the transactions would probably be deleted upon financial consolidation.

Intercompany transactions would have to be carried out at arm’s length and generally be supported by sufficient documentation under the new tax regime which would be implemented.

Strict tax laws will have been imposed, and businesses must therefore assess their current setups and consider how the corporate income tax policy may affect domestic and international transactions.

What is Arm’s Length Price?

ALP is the price that would be paid if the transaction had taken place between two comparable independent and unrelated parties, where the consideration is purely commercial.

Transfer Pricing Documentation:

The documentation as per the OECD Transfer Pricing Guidelines includes Master file, Local file and Country by Country Report (CbCR).

Overview of CbCR in UAE

Extensive Impact

With the new changes, intangible transactions, such as loans, are more challenging to identify, but tangible transactions may be easily recorded and tracked against normal market rates. As a result, the “Arm’s Length” principle will be part of every transaction covered by the UAE’s transfer pricing policy. Accordingly, business dealings involving related parties must be conducted under the same conditions as those involving unrelated parties and must be recorded.

Impact on Business with Multiple Branches

businesses with multiple branches need to change some of their activities to comply with the transfer pricing requirements because of their disproportionate prominence in the region and because they comprise the bulk of private sector companies.

Regional family firms typically work together to assist one another and use their connections to the community to foster an advantageous business environment. Offering favorable terms to a connected firm might be seen as base erosion or profit shifting under the new corporate tax framework, even though businesses were not utilizing these techniques to avoid regulation, according to the experts.

Future Possibilities

Organizations have the option of creating a tax group, which would allow subsidiary enterprises to be considered as a single taxable entity. The UAE government, however, hasn’t hesitated to emphasize that regional companies with minimal expertise in corporate tax systems should continue to use regular accounting procedures to stay in compliance.

The levy on corporations will change how businesses operate from a legal and accounting perspective, but its introduction is anticipated to help the business climate. This includes permitting tax organizations to be created and maintaining the tax holidays provided to free zone businesses.

How can AM Audit Help?

Even though the introduction of the corporation law is new to everyone, AM Audit is competent in audit, accounting, and tax-related issues. We would be happy to help your firm through the new era. Our accounting services can assist your company with the transfer pricing and corporate tax calculations required by the Ministry of Finance. It can be challenging but we are here to support you while you go through it.

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