With the introduction of Transfer Pricing (TP) regulations in the UAE, businesses now have to justify the pricing of transactions entered by them with their related parties. This includes payments between owners, directors, and even local entities in the same group. Hence, understanding TP compliance and making the requisite changes within the business structure being followed, would be the key.
This blog explains the compliance rules, common issues and how to prepare for the changes. If you’re operating from or within the UAE, Tax Gian can help you stay compliant with the relevant TP regulations and avoid risks.
TP Rules Apply to Domestic transactions as well
TP in the UAE does not apply only to international transactions with foreign related parties; it also includes transactions between related local parties. This means that transactions with owners, directors or connected persons, must be so priced, as if they were done with an independent entity.
These domestic transactions inter alia, include:- Management salaries
- Rent or lease agreements
- Commissions
- Dividends
- Loans and interest payments
The Federal Tax Authority (FTA) expects these to follow the arm’s length principle, meaning the price should be similar to what unrelated parties would agree on. TP consultants in Dubai can assist you further on this.
Why This Is a Big Shift for UAE Businesses?
Many UAE groups are made up of closely linked companies. These structures were built before any tax or TP laws existed. As a result, transactions were done freely without worrying about pricing or reporting.
Now, these same businesses must look back and assess their intercompany deals. They have to figure out which ones fall under the new TP rules and then prepare documents to show that the prices are fair.
This can lead to major changes in how they operate and charge each other.
The Data Problem: No Easy Access to Comparables
To show that their pricing is fair, companies usually compare their deals to same or similar ones done by unrelated companies. But in the UAE, this is a significant challenge, as there is scarce public financial data that is available for use as a benchmark, especially for smaller industries like IT or back-office services.
If local data is not available, businesses are advised to:- Search for Middle East region data;
- Thereafter, if needed, search for data from global sources.
However, using foreign comparables may still not be a perfect fit, as the market, size, currency etc. can all be very different. This makes documentation more complex and less accurate. TP consultants in the UAE can help you cope with this problem by familiarizing you with better documentation strategies.
Managerial Remuneration: High Risk, High Scrutiny
One of the most sensitive areas under TP rules is management pay. This includes salaries, bonuses, and other benefits paid to:- Owners or shareholders
- Board members
- Connected Persons
- CEOs and CFOs
- Family members involved in leadership
Since personal income is currently not taxed in the UAE, businesses often might try to claim high salary payments as deductions, so as to reduce their overall taxes. The FTA is aware of this play and pays close attention to such practices.
To stay safe, businesses need to prove that what they pay is fair. Two common ways to do this are:- Profit Margin Testing: Compare your entity’s profit margins to that of similar business entities. If your margin is reasonably higher than that of the comparables, it would suggest that the management pay in your case, is likely to be acceptable.
- Employee Cost Ratio: Look at the percentage of ‘employee costs’ against ‘total expenses’ and compare it with that of others in the same industry. If it falls within the standard range, then it is likely to be acceptable.
Stay Ready for Audits and Disputes
UAE TP rules are still new and evolving. In the coming years, audits are likely to focus on whether businesses have:- Filed the requisite TP Disclosure forms
- Maintained a Local Fileand Master File, if required
- Properly documented intercompany transactions
How can Tax Gian Help?
TP compliance in the UAE is no longer optional. Businesses must understand the rules and act on time. This means reviewing internal deals, collecting data, keeping detailed records and an eye on details. Sounds difficult? Don’t worry; Tax Gian can do it for you. Our tax experts and TP agents can help you comply with TP regulations by keeping the focus on it while you are busy doing business.
Don’t wait for an audit to start preparing. Fixing things afterwards is always more complicated and expensive. Get the best assistance from our TP consultants in the UAE today and make sure your prices are fair, your records are strong and your business is safe.
