Without proper documentation, businesses often fail to justify how its profits are shared across its group entities. The confusion often stems from one missing piece: a solid FAR analysis.
FAR analysis, short for Functions, Assets, and Risks, helps solve this problem. It shows exactly what each entity in a group does, what it owns, and what risks it takes. With that, businesses can justify how profits are shared and avoid problems with tax authorities.
Tax Gian has expert transfer pricing agents in the UAE who can assist you with proper FAR analysis for related-party transactions.
What is FAR Analysis?
FAR analysis is a process to examine what role each business entity plays in a related-party transaction. It stands for:
- Functions: What tasks are actually being performed? Who handles what part of the business, and how is it being handled; for example, as the functions such as sales, marketing, logistics, services, product development etc.?
- Assets: What are the resources, such as tools, equipment, intellectual property etc. do each entity own and deploy, while performing the aforesaid tasks?
- Risks: What are the challenges that each of the entities face while performing the tasks? These could be market risks, operational risks, technology risks, credit risks, or something else.
Thus, FAR analysis helps in identifying each entity’s contribution to value creation, in the overall business transaction cycle.
Why is FAR Analysis Important?
The UAE’s Corporate Tax Law now requires businesses to follow the Arm’s Length Principle. This means any business transaction that is entered into between related parties must be priced as if the two parties are independent of each other.
To follow this rule, businesses are now mandatorily required to demonstrate how the overall profits or returns in any given transaction, are fairly split across the various entities. FAR analysis helps in achieving this objective. The analysis gives clear reasons for deciding the pricing of each transaction, based on the actual roles and responsibilities of the involved parties.
Transfer pricing agents in the UAE can help you with conducting proper FAR analysis.
Without a good FAR analysis, an entity may face:
- Challenges during tax audits
- Non-compliance with local regulations
- Disputes with tax authorities
What Does the UAE Law Say?
According to Article 34 of the UAE Corporate Tax Law, businesses must perform a functional analysis for all related-party transactions. If the total revenue or assets cross AED 200 million, TP documentation must include FAR analysis. This is mandatory for creating the Local File and Master File.
How to Do a FAR Analysis?
Doing a FAR analysis is not just about filling forms. It takes real business understanding. Here’s how it’s done by professional transfer pricing agents in Dubai:
- Interviewing key people in the business to understand their respective roles
- Reviewing business processes and Standard Operating Procedures (SOPs) in place
- Studying intercompany agreements (ICAs)
- Analyzing financial data
- Researching on competitor performance and industry practices
- Going through the business website and relevant news releases
- Matching FAR with the group’s Master File and Country-by-Country Reporting (if applicable)
The goal is to paint a clear picture of how the entity operates and contributes to the overall business performance.
Who Needs a FAR Analysis?
All UAE-based businesses that have transactions with related parties or connected persons need to conduct FAR analysis, as an integral of its TP documentation, on an annual basis. This includes both mainland and free zone entities.
Whether you’re buying goods from a parent entity or offering services to an associated entity, you must document the function, assets, and risks of all the relevant parties involved.
Real-Life Example
Imagine a US-based parent company ‘A’ that owns the technology and handles Research & Development (R&D). Its UAE subsidiary ‘B’ handles sales in the EMEA (Europe, Middle-East, Asia) region. A takes higher risks and uses more assets; hence, A should ideally, get a larger profit share. B has a limited role and should only earn a modest return, commensurate with its own FAR.
As such, a FAR analysis would properly document and confirm the above setup. It supports the idea that each party’s reward matches its actual role. If B tries to shift more profit than it deserves, the tax authorities are likely to challenge the arrangement.
Common Problems in FAR Analysis
- Complex Corporate Structures
When there are many entities involved, it’s hard to track who does what. - Free Zone vs Mainland Entities
Allocation of profits can get tricky when some group entities operate under different tax rules. - Mismatch with VAT Records
If the FAR details don’t match with VAT filings, it may create red flags.
However, professional transfer pricing agents in Dubai always find a way to resolve such problems, so that the accuracy of the results is not compromised.
What Happens After the Analysis?
Once the FAR analysis is complete, the next steps include:
- Picking the most suitable transfer pricing method
- Choosing the “tested party”, the entity being reviewed for compliance
- Finding similar transactions in the market for comparison
- Documenting all findings in the Local and Master Files
This process also gives valuable business insights. It can help spot process gaps, inefficiencies, or areas for better risk management.
In Summation
- FAR analysis helps businesses set fair prices for related-party deals.
- It looks at functions performed, assets used, and risks taken.
- UAE law requires it for transfer pricing compliance.
- It must be backed by strong documentation and clear data.
- A poor FAR analysis can lead to tax troubles or penalties.
By doing it right, businesses not only stay compliant but also build stronger, more transparent operations.
How can Tax Gian Help?
Key transfer pricing procedures, including FAR analysis and benchmarking, should always be managed by professionals, not inexperienced individuals. Tax Gian experts are highly professional and experienced in their job. With our expertise, businesses can be rest assured that their key procedures are in the right hands.
