Best Practices for MNEs to minimize Transfer Pricing Risk

The introduction of corporate tax in the UAE has prompted businesses to examine their transfer pricing profile (TP). It means entities must ensure the prices charged in an intercompany transaction are comparable to the prices charged by two unrelated parties if they engage in a similar transaction under similar circumstances.

In other words, the prices must meet the arm’s length standard. However, Multinational Enterprises (MNEs) may soon face increased scrutiny from the Federal Tax Authority (FTA) as the authority needs to ensure the companies are paying their fair share of taxes.

In light of a likely TP audit from the FTA, MNEs need to assess their TP risks and take necessary actions to reduce such risks. Tax risk is one of the key areas of analysis for any taxpayer to safeguard its tax position and tax authority to be able to challenge and pose good questions to the taxpayer during any audit. Transfer pricing risk if not analyzed and taken into consideration would result in huge tax penalties for taxpayers, hence it is one of the most important areas to consider.

In this blog, we will help you with some best practices MNEs can follow to reduce TP risks:

Put Effective ICAs in Place

The FTA, in the event of a tax audit, may ask for Inter Company Agreements (ICAs). However, most companies either may not have ICAs in place or may draft a one-page agreement that does not detail the related party transaction.

ICAs are legal contracts that outline the terms and conditions governing transactions between related parties within the MNE Group. ICAs become highly relevant when it comes to intercompany financing arrangements, licensing of intangible property and intragroup services. It is also essential to review and update the ICAs periodically to reduce TP risks.

Assess Pricing Outcomes Before Closing Books

You must review your group entities’ financial data and operating results before closing the books for the year. Such a practice will help the companies to assess whether the operating results for the related party transactions meet the intended year-end results in line with their functional profile.

Create Tax Efficient TP Policies

Every MNE Group needs to have a TP Policy that outlines how the prices will be fixed for related party transactions such as management and technical services, secondment of staff, shared services, intercompany loans and guarantees, royalty, sale of goods or transfer of assets etc. However, you need to review your TP policy to see if it is tax-efficient.

Maintain Proper TP Documentation

Regardless of the level of risk, taxpayers should consider preparing TP documentation. The TP documentation can help taxpayers justify the rationality of its related party arrangements during the ATO review process. This will mitigate transfer pricing risks, provide for a reasonably arguable position and demonstrate stronger tax governance and controls.

Identify Intangibles

Intangibles include trademarks, copyrights, patents, trade secrets, know-how and other intangible assets that have value and can be controlled. MNE groups need to properly identify and adequately document all intangibles to avoid increased scrutiny from the FTA.

Hire a Specialist to Review your TP Framework

Ensuring TP compliance requires you to avoid a quick and dirty approach. Meticulous planning is required to avoid the likelihood of TP controversies. Experienced transfer pricing specialists in Dubai can review your TP risks and save you from TP disputes and litigation.

Hire the Best TP consultants in Dubai, UAE

Reviewing your TP policies and risks is essential to avoid TP disputes and litigation. The best transfer pricing consultants in Dubai such as Tax Gian can help you with that. Tax Gian, a brand of Jitendra Tax Consultants (JTC) can help you enhance your transfer pricing compliance measures. Tax Gian and its associate firm – Jitendra Chartered Accountants (JCA) have been serving their clients in the UAE for over two decades. Associating with a highly experienced firm like Tax Gian, which provides specialized and professional transfer pricing services in the UAE, can help you navigate the complex tax landscape of the UAE, with ease and confidence.

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