Benchmarking is a highly significant aspect of transfer pricing, and conducting benchmarking studies is crucial for UAE businesses to ensure compliance with transfer pricing regulations. The goal of this study or assessment is to identify whether or not the selected related party transactions of the company meet the arm’s length standards. This is done by comparing companies’ information, such as margins and prices.
There are various factors and considerations involved in the process, making it challenging for transfer pricing agents in the UAE. However, TP agents like Tax Gian can reduce your benchmarking costs significantly over the years. The following is how it is beneficial for businesses to choose multiple-year benchmarking plans to reduce costs over the years.
Initial Benchmarking Costs Are Generally High
Benchmarking in the very first year costs more than it would in subsequent years, and there are reasons behind this. In the initial year of benchmarking, a comprehensive study is conducted by your transfer pricing agent in the UAE. This involves various time-consuming considerations, including:
- In-Depth Analysis
The TP agent conducts a detailed functional, asset and risk analysis (FAR) in the first year of benchmarking.
- Detailed Benchmarking Using Market Data & Licensed Database
For benchmarking, TP agents use licensed databases and commercial databases that provide data information on unrelated parties’ transactions. Comparable transactions can be identified easily with the help of market data provided by these databases. TP agents choose the most reliable data sources so that the study is defensible and robust.
- Documentation Preparation
UAE TP regulations and OECD’s guidelines require businesses to prepare detailed documentation to verify that the intercompany transactions and charged prices meet the arm’s length standard. This analysis and evidence are provided by a detailed benchmarking study.
- Consistent TP Practices
For multinational companies, it is important to be consistent in their TP practices across different countries where they operate. Benchmarking ensures that the TP practices are consistent. This saves them from legal disputes and double taxation.
- Defence against audits
In case of audits by tax authorities, benchmarking reports play an important role by providing evidence of the fair prices according to the market rates. This saves the business from the risk of penalties and adjustments.
- Comparing Transactions
Benchmarking includes identifying comparable transactions with tested related-party transactions. This involves looking at factors like business functions, market conditions, and similar services or products. By this comparison, transfer pricing agents in Dubai find numerous acceptable prices that match the arm’s length price.
In addition, there are challenges involved in conducting the initial benchmarking study:
- Finding similar transactions or businesses can be a difficult and time-consuming operation.
- To guarantee that the comparables are actually comparable in terms of their roles, risks, and resources, the criteria for selection must be precisely specified.
- Reliable statistics on uncontrolled transactions comparable to controlled transactions might not always be readily available.
- It can be challenging to make comparison adjustments when necessary.
All this adds up to the time, resource, research and compliance efforts for proper benchmarking by transfer pricing agents in Dubai. As a result, the cost of benchmarking in the first year becomes naturally high.
Benchmarking Costs Lower in the Second & Third Year
In contrast to the first year of benchmarking, the time, resource, research and compliance efforts are generally low, unless there are significant changes in the related party transactions or business model.
- Your transfer pricing agent in the UAE,who conducted your initial year benchmarking, can update the financial margins of the comparables from the last benchmarking study.
- The same comparables can be used for the second and third year; only margin update is required if the economic and functional profile remains the same and comparable companies remain relevant.
- When it comes to documentation, only necessary adjustments will be required in the documentation.
All of this results in lower efforts by the TP agents to put in, as a result, lowering the overall cost naturally. However, if there are any changes in the business model or transactions, new benchmarking will be required from scratch.
How can Tax Gian Help?
Our expert transfer pricing agents can help you with proper benchmarking studies. Moreover, our professionals can also review and prepare your TP documentation and ensure it aligns with the TP UAE and OECD requirements. We offer multiple-year benchmarking plans, making our services high-quality yet affordable. Contact our experts and get your plan today.
