Many businesses in the UAE work with related companies in other countries. The prices set between these companies for goods or services can affect how much tax they pay. When these prices are not fair, or too low or high on purpose, companies can shift profits to low-tax countries.
To stop this kind of profit shifting, the government has introduced regulations on transfer pricing in the UAE. Knowing and applying these rules properly is key to staying compliant and avoiding penalties.
Tax Gian helps businesses as a tax agent in the UAE, simplifying tax matters and facilitating compliance.
What Is Transfer Pricing in the UAE?
Transfer pricing refers to the prices set for goods, services, or the use of property between related businesses (related parties). These could be different branches of the same company or businesses under common control.
In simple words, if two companies are connected and do business with each other, they must charge each other prices that are similar to what they would charge someone else in a normal market. This is called the arm’s length principle.
Why Does It Matter?
Multinational companies usually operate in more than one country. If they set unfair prices between their own branches, they can shift profits to countries where tax rates are lower. This is known as tax arbitrage.
For example, if a company in a high-tax country sells goods to its own branch in a low-tax country at a low price, more profit is reported in the low-tax country. This lowers the total taxes paid by the group.
The UAE transfer pricing guidelines aim to stop this kind of action. The goal is to make sure that each company pays the correct amount of tax in the country where the actual profit is made.
Scope of Transfer Pricing in UAE
The UAE transfer pricing regulations apply to:- Cross-border transactions (with related parties in other countries)
- Domestic transactions (between related companies in the UAE, including free zone entities)
Arm’s Length Principle
The UAE follows the arm’s length standard. This means:- Transactions must be priced as if the parties were not related.
- The terms should match what independent parties would agree upon.
- Any conditions, such as payment terms or business risks, should also reflect real market conditions.
This standard is written in Article 34 of the UAE Corporate Tax Law. It states that if a related-party transaction does not meet this condition, the tax authority can adjust the profit to what it should have been.
How to Determine the Right Price
To verify whether a deal satisfies the arm’s length principle, businesses should compare it with similar deals made by independent businesses. This involves two steps:- Understand the business relationship and the conditions of the deal.
- Find similar deals between unrelated companies and compare the pricing.
There are five common methods to calculate fair transfer prices, and businesses can choose the most suitable one based on their situation. Transfer pricing consultants in Dubai can also help in this.
Example to Understand: Cost Recovery Without Added Value
Company A in the UAE pays hotel and travel bills for employees of Company B, whose related party is from another country. These are paid directly to vendors, and the exact cost is recovered from Company B. No profit or extra service is added.
In this case, the cost-to-cost recovery meets the arm’s length standard because Company A did not earn anything extra from the deal. The transaction reflects how unrelated companies would likely operate under similar terms.
Documentation Requirements
Under UAE law, companies must keep records to prove that they followed transfer pricing rules. This includes:- Details of all controlled transactions
- Supporting evidence that the pricing was fair
- Comparisons with similar market transactions
These documents must be available if requested by the tax authority. Keeping them up to date is critical. If unsure about documentation requirements, transfer pricing consultants in Dubai can help.
How can Tax Gian Assist?
Transfer pricing in the UAE is not only significant for big multinational firms; even small and medium enterprises in the UAE dealing with related parties must know and implement these rules. Tax Gian helps businesses abide by these rules keeping them compliant and reliable as well as making business operations run smoothly. Our qualified professionals are just a click away!
