Dubai has taken notice of the current increase in interest surrounding a novel approach to transfer pricing, largely due to its growing significance in the corporate income tax system. The goal is to create rules that states may employ to prevent multinational firms from manipulating their earnings to take advantage of differences and inconsistencies in tax regulations across various regions. This framework would streamline the nation's entire tax structure, benefiting both the government and industry.
Transfer Pricing in UAE
Transfer pricing, by the Organization for Economic Cooperation and Development (OECD), relates to the cost at which a firm transfers tangible assets, tangible items, or renders services to associated businesses.
To bring its tax procedures in line with international norms, the United Arab Emirates (UAE) has embraced the OECD's comprehensive Base Erosion and Profit Shifting (BEPS) model. By implementing this approach, the country has consciously decided to abide by BEPS criteria, especially those concerning Transfer Pricing Documentation. Transfer Pricing rules will also have a proportionate effect on customs duties, withholding taxes, excise taxes, value-added taxes, and numerous other government charges when corporate taxation is implemented, which is expected to start in June 2023.
For Example, When a subsidiary business established in the UAE sells or provides services to its controlling company or a sister company situated in Bahrain, the price at which this transaction takes place is referred to as the transfer price.
Transfer Pricing Regulations in UAE
In recent years, the United Arab Emirates (UAE), supported by its oil revenue, has undergone a spectacular economic transformation, developing into a strong and vibrant economic and commercial hub that has been successful in attracting global investors. The UAE's Ministry of Finance (MoF) has made an important statement to consolidate its vision of becoming a worldwide economic powerhouse. It said that the UAE will implement the Federal company Tax (CT) on company income starting with fiscal years that begin on or after June 1, 2023.
Additionally, on April 28, 2022, the Ministry published a Public Consultation Document (PCD) that was filled with thorough details regarding the planned UAE CT system. Before the implementation phase, this action was taken to aggressively solicit feedback from interested parties and stakeholders. Businesses operating in the UAE must comply with transfer pricing laws and meet documentation requirements that are in line with the standards specified in the OECD Transfer Pricing Guidelines as part of this new taxing environment.
The UAE's transfer pricing regulations were developed to ensure that business dealings between related parties take place on an "arm's length" basis. This simply means that the prices at which these connected parties deal with one another must be comparable to those that would be anticipated in analogous transactions between unrelated parties. In other words, the goal is to prevent any artificial manipulation of pricing or profits to minimize tax obligation, ensuring that these intercompany contacts are conducted under fair and market-based circumstances.
Arm's Length Price
An Arm's Length Price (ALP) is the price that would have been agreed upon if the identical transaction had been carried out between two comparable, independent, and unrelated businesses, taking only commercial considerations.
The idea of an "arm's length price" is based on the idea that deals between connected parties ought to be made at costs that resemble those that would apply in a free-and-open market where supply and demand set the conditions of the deal.
The Arm's Length Principle is incorporated into the transfer pricing regulations under UAE corporate tax legislation, by the OECD Transfer Pricing Guidelines. This implies that to maintain fairness and prevent price or profit manipulation for tax purposes, all transactions between related parties must follow the transfer pricing standards and adopt the arm's length principle.
Increasing Financial Compliance in UAE
- The UAE is seeing an increase in financial compliance because of:
- Global Pressure: In response to OECD-led efforts to combat tax evasion under the BEPS framework, the UAE is reacting to global pressure.
- Economic Substance Regulations (ESR): The UAE implemented ESR to prevent profit shifting and tax evasion.
- Country-by-Country Reporting (CbCR): MNEs in the UAE are required by regulations to provide financial information, increasing transparency.
- Transfer Pricing Rules: To avoid profit manipulation between connected parties, the UAE has implemented OECD transfer pricing rules.
Benefits of Transfer Pricing Regulations for Governments in the UAE
In the UAE, governments can profit from transfer pricing by:
- Promoting Economic Growth: By guaranteeing equitable taxes in cross-border commerce, transfer pricing policies assist economic growth at several levels, including unilateral, bilateral, and multilateral.
- Managing Double Taxation: Governments may more successfully combat the problem of double taxation on foreign transactions with the use of transfer pricing rules, which also makes cross-border activity more seamless.
- Facilitating International Flow: These rules promote the unrestricted flow of people, capital, products, and services across international boundaries, which supports the expansion and stability of the world economy.
Application of Transfer Pricing to Businesses in the UAE
Businesses operating in the UAE will be greatly impacted by the adoption of transfer pricing regulations. As a result, businesses of all kinds, from small to large, are starting to evaluate potential effects on their operations. These factors consist of:
- Analyzing how transfer pricing aligns with earlier positions expressed about the Economic Substance Regulations.
- Planning for the new compliance standards imposed by these rules.
- Assessing the effects on current free zone arrangements and the requirements to be eligible for the 0% Corporate Tax (CT) rate.
- Make sure that present transfer pricing practices and supporting documents comply with the new rules.
- Determining which business-to-business transactions involving linked parties are subject to transfer pricing regulations.
- Examining current operational models and the pricing of pertinent transactions to evaluate whether any changes are required to satisfy the arm's-length requirement.
Transfer Pricing Process in the UAE
- Analyze deals involving many legal entities, such as Free Zone, Mainland, or International businesses.
- Determine if the transaction involves connected or related parties by doing a related party assessment.
- Evaluate the effects and make the required changes to develop strong and long-lasting transfer pricing regulations.
- Examine current intercompany transfer pricing regulations and papers.
- Verify that the UAE's transfer pricing requirements are being followed.
- Prepare a master file, a local file, and a country-by-country report for reporting.
- If the organizational structure changes, assess the influence on transfer pricing.
Consequences of TP Non-Compliance in the UAE
- Risk of Loss of 0% CT Rate: Businesses operating under Qualified Free Zone Privilege (QFZP) may lose their right to the 0% Corporate Tax (CT) rate if certain requirements are not met.
- Penalties for Country-by-Country Reporting (CbCR) and Notification Violations: Penalties for disregarding CbCR and notification requirements can run from 10,000 to 1,000,000 AED.
- Potential Tax Base Expansion: If the Federal Tax Authority (FTA)'s (TP) modifications are not complied with, the taxable revenue of the UAE firm may rise.
- Economic Substance Regulations (ESR) Non-Compliance Fine: Economic Substance Regulations (ESR) non-compliance may result in administrative fines that range from 10,000 to 300,000.
- Corporate Tax Law Penalties: Failure to keep contemporaneous TP documents may result in additional fines under corporate tax rules and regulations.
To negotiate corporate tax and TP rules successfully, get advice from experienced tax advisors like BMS. This will ensure compliance and customized solutions.
The Role of a Tax Consultant in the Implementation of Tax Compliance
- Support for Efficient Compliance: Tax advisors in Dubai have extensive knowledge of tax regulations, assisting both firms and individuals in effective compliance. The experienced staff at BMS is committed to assisting you in successfully managing and adhering to transfer pricing requirements, avoiding fines and penalties.
- Optimizing TP Policies: We'll help you with transfer pricing calculations and master and local file preparation for a variety of situations, including new product launches, mergers, acquisitions, and the purchase of intellectual property rights. Our solutions are customized to meet the unique demands of your company.
- Representation before Tax officials: Transfer pricing specialists can offer crucial assistance when federal tax officials examine your tax records. The audit procedure will go smoothly with our legal competence, and BMS is dedicated to providing top-notch service.
- Securing Favorable Results: Early tax experts' engagement is essential to build confidence and increase your chances of receiving favorable results from tax authorities. Count on BMS for thorough help and successful compliance.
How BMS Auditing Helps the UAE Comply with Transfer Pricing Laws
BMS, based in the United Arab Emirates, is a well-known auditing and taxation consultancy service committed to assisting both businesses and individuals with their tax compliance needs. We place a high value on professionalism, openness, and accuracy while aiding businesses with their tax obligations. In addition to ensuring compliance with Dubai's tax rules, our knowledgeable staff at BMS will also walk you through the following transfer pricing guidelines.
Assessment: We carefully review the real business operations and activities of your organization. About your current transfer pricing agreements, our specialists identify and evaluate any possible hazards.
Implementation Process: We match your particular business model and transaction scenarios with the appropriate tax regulations and transfer pricing procedures. By doing this, you can be confident that your transfer pricing techniques adhere to local laws.
Post-Implications: In this stage, we address any remaining questions and provide solutions. to ensure complete compliance, our staff aids in the creation of transfer price documents. Furthermore, we provide strong assistance in settling any potential tax disputes.
In conclusion, BMS is your reliable advisor for negotiating the complex transfer pricing regulations in the UAE. With the help of our experience, your company may minimize risks while maintaining compliance and being well-prepared to fulfill tax and transfer pricing obligations.