Optimizing Transfer Pricing

Transfer pricing regulations have become critical for businesses since the introduction of corporate tax in the UAE. Multi-national enterprises (MNEs) need to ensure that the prices charged on the transfer of products or services between divisions located in different tax jurisdictions need to be at arm’s length. It means the transactions between associated enterprises must be treated the same way they would between unrelated companies.

To prove the transactions are priced at arm’s length, MNEs need to apply transfer pricing methods that are mainly divided into two categories: Traditional Transaction Methods and Transactional Profit methods. The OECD recommends the use of the most appropriate transfer pricing method to prove the prices are at arm’s length. However, a major question arises: can the MNEs use more than one transfer pricing method to prove the prices are at arm’s length?

This can be challenging for most businesses but the OECD guidelines on transfer pricing contain useful information regarding the pertinent question. Transfer pricing consultants in Dubai can assist you further with selecting the most appropriate method. Read ahead to learn more insights:

Does the OECD Recommend Multiple TP Methods?

The OECD guidelines on transfer pricing state that the arm’s length principle does not necessitate the requirements of applying more than one transfer pricing method for a given transaction or a set of transactions that are appropriately aggregated.

Why the OECD doesn’t Recommend Multiple TP Methods?

The taxpayers may face a significant burden due to undue reliance on multiple transfer pricing methods. Therefore, the OECD does not require either the tax examiner or the taxpayer to perform analyses under more than one transfer pricing method. Even in cases where choosing one method appears to be not straightforward and multiple methods are initially considered, it will be possible to select one method that is appropriate to provide the best estimation of an arm’s length price. Transfer pricing advisers in Dubai can advise you about whether or not it is wise to choose more than one transfer pricing method.

Use of Multiple TP Methods in Difficult Cases

There are difficult cases where no one approach is conclusive. In such circumstances, it is advisable to adopt a flexible approach that would allow the evidence of various methods to be used in conjunction. In such cases, MNEs must try to reach a conclusion consistent with the arm’s length principle that is satisfactory from a practical viewpoint to all the parties involved, taking into account the facts and circumstances of the case, the mix of evidence available, and the relative reliability of the various methods under consideration.

Arm’s Length Range when Multiple Methods Applied

When you use more than one method to evaluate a controlled transaction, a range of figures will arise. For example, two methods that attain similar degrees of comparability can be used to evaluate the arm’s length character of a controlled transaction. Each method may produce an outcome or a range of outcomes that differs from the other because of differences in the nature of the methods and the data, relevant to the application of a particular method, used.

However, each separate range potentially could be used to define an acceptable range of arm’s length figures. Data from these ranges could be useful for purposes of more accurately defining the arm’s length range, for example when the ranges overlap, or for reconsidering the accuracy of the methods used when the ranges do not overlap. No general rule may be stated with respect to the use of ranges derived from the application of multiple methods because the conclusions to be drawn from their use will depend on the relative reliability of the methods employed to determine the ranges and the quality of the information used in applying the different methods.

List of OECD Recommended Transfer Pricing Methods

The OECD recommends five transfer pricing methods that come under the Traditional Transaction Methods and Transactional Profit methods. MNEs can avail of transfer pricing services in Dubai to select the most appropriate of the five. The OECD-recommended transfer pricing methods are

  1. Traditional Transaction Methods: Comparable uncontrolled price (CUP) method, Resale price method, and Cost plus method
  2. Transactional Profit Methods: Transactional net margin method and Transactional profit method

Tax Gian can Advise you on Choosing TP Methods

The OECD recommends five transfer pricing methods, and each of them may yield a different arm’s length range for the same transaction. Using the most appropriate method and demonstrating why it is the most appropriate one is paramount to a successful analysis. The leading providers of transfer pricing services in Dubai, such as Tax Gian, a brand of Jitendra Tax Consultants (JTC), can help you choose the most appropriate method.

We offer bespoke transfer pricing consulting services in Dubai in line with regulatory expectations and aligned with our client’s global business goals. Tax Gian’s team of tax experts can deliver transfer pricing models that are consistent with our client’s value chain. Our highly qualified transfer pricing advisors in Dubai can help companies ensure that all related party transactions are documented to position their Transfer Pricing model in compliance with regulatory provisions. Tax Gian’s corporate tax professionals can guide you through complex areas of international tax to mitigate the risk of non-compliance.

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