If you own a business in the UAE, you may be familiar with the term “transfer pricing,” particularly after corporate tax regulations were implemented. As a business owner, you might be wondering what transfer pricing is and how it affects your company. To answer your question, let’s break it down and understand how the process works and what you need to do to stay compliant with its intricate rules and regulations.

What Is Transfer Pricing?

The pricing of transactions between businesses that belong to the same corporate group is known as ‘transfer pricing’. To understand this fully, imagine your business operates in Dubai and Abu Dhabi, with branches in both cities. When your Dubai brand sells any goods or services to your Abu Dhabi branch, the price at which these goods and services are transferred is called the ‘transferred price’.
The UAE government wants to ensure that these internal prices are set fairly as they would be to an outside customer. This phenomenon is termed the “arm’s length principle”. These rules and guidelines are outlined to stop companies from moving profits to low-tax areas.

UAE Corporate Tax And Transfer Pricing UAE Guidelines

The UAE implemented a federal corporate tax (CT) on business profits starting from June 1, 2023. Alongside this tax, a set of transfer pricing rules were set forth, in accordance with international standards outlined by OECD (Organization for Economic Co-operation and Development).
According to the UAE’s transfer pricing regulations, companies doing business there are required to abide by specific rules when dealing with related companies, whether they are based in the UAE or another nation. The following companies are to abide by these laws:

• UAE incorporated companies: Companies that are lawfully registered and incorporated in the United Arab Emirates are classified as UAE-incorporated companies. Whether they are international entities, subsidiaries of multinational corporations, or call businesses, they typically operate under and adhere to UAE law.
• Foreign Companies having managerial control in the UAE: Companies that are not formally formed in the United Arab Emirates but are successfully managed there are considered foreign companies with management control in the country. This would also include strategic planning, decision-making, and day-to-day management that takes place within the United Arab Emirates, subject to transfer pricing and corporate tax regulations.
• Natural persons involved in UAE business activities: Individuals operating enterprises in the United Arab Emirates are referred to as “natural persons” rather than “corporations.” This group includes individual proprietors and people who are actively partners in UAE-based partnerships.

Key Transfer Pricing Methods

To comply with UAE legislation, businesses must set pricing for internal transactions using specific processes that determine what is referred to as an “arm’s length” price. The following lists a few of the main transfer pricing strategies:

• Comparable Uncontrolled Price (CUP): When comparable transactions between unrelated parties occur, the Comparable Uncontrolled Price (CUP) is applied. Think of it as determining the transfer price by examining market pricing.
• Resale Price Method (RPM): Frequently used in trading operations, the Resale Price Method (RPM) is appropriate for buy-sell transactions with little added value.
• Cost Plus Method (CPM): When cost details are known, the Cost Plus Method (CPM) is best suited for semi-finished items or services.
• Profit Split Method (PSM): Ideal for intricate deals, particularly including intangibles like trademarks or patents. Profits are divided using this strategy according to the contributions made by each party.
• Transactional Net Margin Method (TNMM): When the resale price approach is ineffective, the transactional net margin method (TNMM) is frequently employed in manufacturing and services. It calculates a reasonable profit margin that can be applied to the deal.

Every technique has a distinct use case, and the type of transaction and the data at hand determine which option is best.

Documentation Requirements: Disclosure And Reports

Companies must have the necessary supporting documentation to adhere to the UAE transfer pricing guidelines. If there are related-party transactions between the companies, you must file a TP disclosure form. The UAE government uses this form to obtain information regarding the kinds of transactions, quantities, and pricing strategies you employ.
Larger companies that engage in related-party transactions must submit more documentation. The UAE uses the OECD’s three-tiered documentation system for this purpose:

• Local File: This file includes information about your prices and commercial transactions in the United Arab Emirates. To demonstrate adherence to the arm’s length principle, this document should explicitly describe the different kinds of transactions, the pricing strategies employed, and the rationale behind these prices.
• Master File: The master file provides an overview of the complete corporate group’s structure and financials. It includes an organizational chart that details the company’s worldwide financial operations and discusses the general business plan.
• Country-by-Country Report (CBCR): It enumerates every location in the world where your business generates revenue and pays taxes. In nations where they conduct substantial business, the CbCR assists authorities in ensuring that corporations are not shifting profits to low-tax areas to evade tax obligations.

To demonstrate that companies are setting prices for transactions fairly, as they would with an independent business, this documentation is essential.

Getting Help: Transfer Pricing Services: 

To easily navigate the detailed and complex UAE transfer pricing rules and requirements and in order to stay compliant; companies can also opt for advisory services. Specialist advisors can assist with:

1. Establishing pricing policies by the UAE regulations.
2. Conducting market research to find comparable pricing for your industry.
3. Drafting inter-company agreements to document transactions accurately.
4. Preparing documentation that meets audit standards.

While working with professionals, companies need to ensure that their pricing strategies comply with UAE rules and regulations.
Although ‘transfer pricing UAE’ may seem complicated, it all comes down to price equity and openness in taxation. You can better handle internal transactions and steer clear of possible problems with tax authorities if you are completely aware of the fundamentals of UAE transfer pricing procedures and requirements. More so you can also opt for professional help to abide by regulations and stay compliant while also being able to defend oneself if an audit takes place.