Transfer pricing is essential for businesses to comply with tax regulations when operating across borders. Companies with branches in the UAE must ensure that transactions between local and international entities are priced fairly, following established rules to avoid penalties and ensure smooth operations.

In this blog, we will cover UAE transfer pricing regulations, how to stay compliant, and avoid penalties.

Overview of Transfer Pricing in UAE

The UAE transfer pricing governs the pricing of goods, services, and intellectual property transferred between related parties. This mechanism helps avoid profit shifting to low-tax jurisdictions and ensures that businesses pay fair taxes.

The UAE has aligned its transfer pricing regulations with the Organization for Economic Co-operation and Development (OECD) guidelines. These guidelines serve as the global standard for ensuring that transactions between related entities reflect market conditions. In practice, this ensures that multinational businesses operating in the UAE are taxed fairly and consistently with international norms.

Transfer Pricing Rules and Regulations in UAE

In the UAE, transfer pricing regulations are governed by the Federal Tax Authority (FTA) under the Economic Substance Regulations and UAE Corporate Tax Law, which came into effect on June 1, 2023. These regulations require businesses to apply the arm’s length principle to intercompany transactions, ensuring that prices are as if the parties were independent and under similar market conditions.

These regulations require businesses to comply with the arm’s length principle when conducting intercompany transactions, ensuring that prices are set, under comparable market conditions.

The UAE’s regulations include a framework for applying the arm’s length principle. They follow a structure similar to OECD guidelines, covering comparability analysis, methods for determining arm’s length prices, and documentation requirements.

To better understand the impact of transfer pricing regulations in the UAE, it’s important first to define the concept of associated enterprises. This definition forms the foundation for effectively applying these rules.

Definition of Associated Enterprises in UAE

Under UAE transfer pricing regulations, entities are considered related parties when they are under common ownership or control, which affects how transactions between them are priced.

Key Conditions for Associated Enterprises

  • Ownership Control: One entity owns at least 25% of another’s voting shares or equity, indicating significant influence or control over the business decisions of the other entity.
  • Common Management or Control: Entities share common management or executives who influence pricing, business decisions, or financial operations.
  • Intercompany Transactions: Transactions such as the transfer of goods, services, intellectual property, or financing between related entities must comply with the arm’s length principle under UAE transfer pricing regulations.

Example

If a UAE-based parent company owns 60% of a subsidiary in India and provides it with software licenses, the UAE tax authorities would require the pricing of those software licenses to align with the arm’s length principle to ensure proper taxation. Both the UAE and India would assess the pricing using appropriate transfer pricing methods.

Once entities are classified as related parties under UAE regulations, businesses must ensure that their intercompany transactions comply with the arm’s length principle. The FTA encourages businesses to apply commonly accepted methods.

Methods for Determining Arm’s Length Price in UAE

​Methods for determining the Arm’s Length Price in the UAE are outlined in the FTA guidelines, aligning with international standards. The approved methods recognized by the UAE’s tax authority include:

  1. Comparable Uncontrolled Price (CUP) Method: This method compares the price charged in a controlled transaction (between related parties) to the price charged in a similar transaction between independent parties.
  2. Resale Price Method (RPM): The RPM is based on the resale price of a product or service to an independent buyer. It deducts a gross margin, based on industry standards or comparable transactions, to determine the arm’s length price. 
  3. Cost Plus Method (CPM): The CPM starts with the costs incurred by the supplier in producing the goods or services and adds an appropriate markup. This markup reflects the profit margin that would have been expected in an uncontrolled transaction. It is often used for manufacturing and service industries.
  4. Transactional Net Margin Method (TNMM): This method compares the net profit margin of a controlled transaction to that of similar uncontrolled transactions.
  5. Profit Split Method: The Profit Split Method allocates the combined profits or losses from a transaction between related parties based on their relative contributions.

Commenda can help streamline UAE transfer pricing rules and compliance for your business by automating arm’s length price determination. Read more on Transfer Pricing.

Transfer Pricing Documentation Requirements in UAE

While the UAE follows international best practices aligned with OECD guidelines, it also has specific local documentation requirements, especially for larger multinational enterprises.

  • Transfer Pricing Documentation Report: The transfer pricing documentation report must outline the multinational group’s structure, intercompany pricing policies, and a functional and economic analysis of transactions.
  • Local File: The Local File is required for intercompany transactions within the UAE, including documentation of the UAE entity’s role, the transfer pricing method used for arm’s length compliance, and supporting evidence for pricing consistency.
  • Country-by-Country Reporting (CbCR): For multinational groups with consolidated revenue exceeding AED 3.15 billion (approximately USD 850 million) in the preceding fiscal year, the UAE requires Country-by-Country Reporting (CbCR). 
  • Tax Resident Return: Entities operating in the UAE must file a Tax Resident Return as part of their compliance obligations. This return reports on taxable income, including any transfer pricing adjustments made during the year. The return is used by the FTA to assess the overall tax liabilities of the company.

Note: Non-compliance can result in tax adjustments, and penalties of up to AED 500 per month within the first 12 months, increasing to AED 1,000 per month afterwards.

Next, let’s look at the risk factors and common challenges businesses face in UAE with regard to transfer pricing.

Risk Factors and Common Challenges in UAE

The UAE transfer pricing regulations require companies to maintain detailed documentation for compliance, with penalties for non-compliance, emphasizing the importance of good corporate governance.

Key Risk Factors

  • Domestic Transaction Complexity: The arm’s length principle applies to both cross-border and domestic transactions, complicating compliance.
  • Limited Data for Benchmarking: The scarcity of publicly available financial data in the UAE makes benchmarking difficult.
  • Complex Documentation: Preparing local and master files, and country-by-country reports can be resource-intensive.
  • Risk of Adjustments: Non-arm’s length transactions may lead to adjustments, double taxation, and additional liabilities.
  • Evolving Regulations: Constant updates to transfer pricing rules require businesses to stay informed.

Common Challenges

  • Regulatory Changes: Keeping up with evolving regulations is crucial to ensure compliance.
  • Domestic Transaction Compliance: The broad application of the arm’s length principle increases complexity.
  • Benchmarking Issues: Limited local data hinders accurate benchmarking.
  • Resource Demands: Maintaining required documentation is labor-intensive.
  • Risk of Double Taxation: Insufficient documentation can result in tax adjustments and double taxation.

Commenda helps businesses reduce audit risks by automating the UAE transfer pricing documentation for your business and ensuring compliance with OECD transfer pricing guidelines in UAE and other countries. Learn more about Compliance, Risks, and Best Practices for Transfer Pricing.

Advance Pricing Agreements (APAs) and Safe Harbor Rules in UAE

Advance Pricing Agreements (APAs) and Safe Harbor Rules are essential components of the UAE’s transfer pricing regime. These mechanisms provide businesses with clarity and security regarding their intercompany transactions. 

Advance Pricing Agreements (APAs) in UAE

In the UAE, an APA allows companies to agree on transfer pricing methods with tax authorities. There are three types:

  • Unilateral APA: Involves only the UAE FTA, ensuring compliance with local regulations.
  • Bilateral APA: Involves the UAE FTA and a foreign tax authority, reducing double taxation and jurisdictional conflicts.
  • Multilateral APA: Involves multiple tax authorities, ensuring consistent transfer pricing across all jurisdictions.

APAs provide certainty, avoid double taxation, and prevent disputes, streamlining compliance.

Safe Harbor Rules in UAE

Safe harbor rules in UAE transfer pricing simplify compliance by offering predefined guidelines for certain transactions, reducing administrative burden. These rules help smaller businesses or those with simpler intercompany dealings. Companies must still ensure their transactions follow the arm’s length principle, even when using safe harbor provisions.

Industry-Specific Transfer Pricing Considerations in UAE

Below are key industry-specific considerations for transfer pricing in the UAE:

  • Technology: Transactions involving R&D, software licensing, and cloud services must reflect market conditions. Functional analyses should document contributions and cost allocations for R&D and tech services.
  • Business Restructuring: Asset transfers, intra-group financing, and risk allocation during restructuring must adhere to arm’s length pricing. Proper documentation is needed for the valuation of transferred assets and financing terms.
  • Pharmaceuticals: Pricing for contract manufacturing, R&D services, and the transfer of product rights must follow market rates. Cost-sharing arrangements for R&D should reflect the contributions and risks of each party.
  • Intellectual Property (IP): IP transactions like licensing and royalties must follow the arm’s length principle. Cross-border IP transfers require careful pricing to ensure compliance with both local and international tax regulations.
  • Finance: Intra-group financing arrangements, such as loans and guarantees, must be priced with market interest rates. Proper debt allocation and documentation are critical for compliance.

Impact of Digital Economy on Transfer Pricing in UAE

The rise of the digital economy presents transfer pricing challenges in the UAE, especially regarding intangibles, data-driven transactions, cross-border e-commerce, and multi-sided digital platforms. Key considerations include:

  • Valuation of Intangibles: Ensuring digital assets are priced according to the arm’s length principle.
  • Data-Driven Transactions: Properly assessing and documenting the value generated from data and digital services.
  • Cross-Border E-Commerce: Allocating profits across jurisdictions and ensuring compliance with digital taxation rules.
  • Digital Platforms: Assessing value contributions from different user groups in multi-sided markets.

The UAE aligns with OECD guidelines to address these complexities and ensure fair taxation in the digital economy.

Dispute Resolution Mechanisms in UAE

The following table highlights the mechanisms for resolving transfer pricing disputes between businesses and tax authorities in UAE:

Mechanism Description
Advance Pricing Agreement (APA) Businesses agree with the FTA on transfer pricing methods in advance to avoid future disputes. It can be unilateral (with UAE FTA) or bilateral (with another country).
Mutual Agreement Procedure (MAP) Used under DTAs to resolve double taxation by having tax authorities from two countries collaborate on the issue.
Tax Ruling Requests Businesses request a tax ruling from the FTA to clarify transfer pricing matters, ensuring certainty on tax application.
Judicial Review and Appeal If disputes cannot be settled through APAs or tax rulings, businesses can appeal through the Tax Disputes Resolution Committee (TDRC) and UAE courts.
International Arbitration Cross-border disputes can be resolved through international arbitration, offering a flexible and impartial alternative to litigation.
Competent Authority Assistance The FTA cooperates with foreign tax authorities to resolve international transfer pricing disputes, ensuring fair tax treatment.

Commenda helps businesses prevent transfer pricing disputes in the UAE by automating documentation, compliance analysis, and dispute resolution support. This ensures alignment with FTA regulations and OECD guidelines, helping businesses minimize risks and stay compliant with local and international tax laws.

Penalties for Non-Compliance in UAE

Businesses in the UAE that fail to comply with transfer pricing regulations face tax adjustments, financial penalties, and increased scrutiny from the FTA. Transfer pricing audits and penalties are enforced under the UAE Corporate Tax Law.

  • Tax Adjustments: The FTA has the authority to reallocate income and adjust taxable profits, which can increase a company’s tax liability if the intercompany transactions do not meet the arm’s length principle.
  • Penalties for Mispricing: If transfer pricing deviates significantly from market rates, the FTA may impose penalties. Although the specific penalties for mispricing are not outlined in detail, like in other jurisdictions, businesses can face fines for incorrect transfer pricing reporting.
  • Failure to Maintain Documentation: Businesses must provide transfer pricing documentation upon request. Insufficient or inadequate records can lead to transfer pricing audits and penalties in the UAE, resulting in higher tax assessments.
  • Interest on Underpayments: The FTA charges interest on any tax underpayments resulting from improper transfer pricing, which can further increase the business’s financial burden.

Conclusion

Understanding the transfer pricing rules and compliance in the UAE is essential for businesses to avoid FTA audits, tax adjustments, and financial penalties. With increasing scrutiny on intercompany transactions, intangibles, and digital business models, companies must ensure that their transfer pricing strategies align with UAE regulations and OECD guidelines.

Maintaining thorough and up-to-date documentation is critical to demonstrate compliance and minimize the risk of audits and penalties.

Commenda simplifies transfer pricing compliance by automating documentation, risk assessments, and dispute resolution support, ensuring businesses meet arm’s length pricing standards while minimizing audit risks. Make transfer pricing easy. Schedule a free demo today.

Frequently Asked Questions (FAQs) on Transfer Pricing in UAE

Q. How does the arm’s length principle apply to intra-group financing transactions in the UAE?

Intra-group financing transactions must reflect terms that independent entities would agree to under similar circumstances, using methods like CUP or Cost Plus.

Q. Are there any specific transfer pricing requirements for transactions involving intangible assets in the UAE?

Yes, transactions involving intangible assets must comply with the arm’s length principle, requiring detailed documentation of terms, valuation, and profit allocation.

Q. What is the timeline for submitting transfer pricing documentation in the UAE?

Transfer pricing documentation must be submitted by the same deadline as the tax return filing, typically at the end of the financial year.

Q. How can businesses address transfer pricing adjustments made by the UAE tax authorities?

Businesses can challenge adjustments by providing additional evidence or reanalyzing transactions to demonstrate compliance with the arm’s length principle.

Q. What are the implications of not filing the Country-by-Country Report (CbCR) in the UAE?

Non-filing of the CbCR can result in significant penalties and increased scrutiny, especially for companies with revenues exceeding AED 3.15 billion.

Q. Do UAE transfer pricing regulations apply to both domestic and cross-border transactions?

Yes, transfer pricing regulations apply to both domestic and cross-border transactions between related entities, with required documentation for all.