The UAE’s status as a global trading hub has made the country a haven for multinational enterprises (MNEs) that frequently carry out cross-border transactions. However, transfer pricing rules in the UAE can be challenging for MNEs engaging in cross-border transactions.
Transfer pricing refers to the pricing of transactions among the divisions of an MNE located in different tax jurisdictions. The prices of the products, services or IP transferred between these associated enterprises should be at arm’s length. It means the transactions must be priced as if they were conducted between unrelated parties in an open market.
This blog sheds light on the complexities of transfer pricing in cross-border transactions and explores strategies to navigate the challenges that arise. Transfer pricing consultants in Dubai can help MNEs ensure transfer pricing compliance while carrying out cross-border activities. Read ahead for more insights:
Challenges of Arm’s Length Principle
To ensure that the Arm’s Length Standard has been met, associated enterprises must price the transactions as if they were carried out between independent and unrelated companies. Cross-border transactions pose Arm’s Length challenges owing to differences in market conditions, regulations, and economic factors across jurisdictions.
This challenge can be navigated by conducting functional and economic analyses to identify the contributions, risks, and assets of each entity involved in the transaction.
Using comparable data from similar transactions in the open market also helps MNEs determine the arm’s length price. Engaging transfer pricing experts in Dubai can provide valuable insights in conducting the analysis.
Selection of Transfer Pricing Methods
Transfer pricing methods recommended by the OECD include the comparable uncontrolled price method (CUP), resale price method, cost-plus method, comparable profits method and profit split method.
Selecting the most appropriate transfer pricing method is critical to accurately determining the arm’s length price range.
However, MNEs need to consider the pros and cons of each transfer pricing method. The selection of the best transfer pricing method depends on factors such as the nature of the transaction, the availability of comparable data, and the specific circumstances of the business.
Valuation of Intangible Assets
Valuation of intangible assets such as copyrights, patents, trademarks, and trade dress can be challenging in cross-border transactions. MNEs need to establish effective methodologies to value intangible assets.
They need to consider factors including the uniqueness, economic benefits, market comparability, and legal rights of the IP assets. It is advisable to utilise robust valuation techniques, engage independent experts, and document the valuation process and assumptions.
Many tax authorities demand extensive documentation to support their transfer pricing policies. Incomplete or inadequate documentation can lead to penalties.
As per the UAE transfer pricing regulations, taxable persons with revenue exceeding AED 50 million must prepare and maintain audited financial statements during the relevant Tax Period. Keeping the threshold at AED 50 million in revenue for audited financials is likely to give great compliance relief to small and medium enterprises (SMEs).
MNEs need to maintain thorough documentation that justifies the pricing strategy. This includes benchmarking studies, intercompany agreements, and documentation of the decision-making process.
Diverse Tax Jurisdictions
Each country has its own tax laws, regulations, and interpretations. Navigating this complex landscape is essential to avoid legal implications. This challenge can be navigated by developing a deep understanding of tax regulations in each jurisdiction involved and staying abreast of changes.
Establish a global transfer pricing policy that aligns with local regulations. Transfer pricing advisers in Dubai can help you develop such a policy.
Managing Intercompany Transactions
MNEs often carry out several intercompany transactions spanning multiple tax jurisdictions. It will be tough for businesses to manage these transactions while complying with transfer pricing rules.
This challenge can be overcome by establishing effective intercompany policies and guidelines that define pricing methodologies, transaction terms, and documentation requirements.
Hire the Best Transfer Pricing Consultants in Dubai, UAE
Ensuring transfer pricing planning in the UAE will be challenging for companies dealing with cross-border transactions. Transfer Pricing Advisers in Dubai such as Tax Gian can help MNEs to develop an effective transfer pricing strategy.
Tax Gian is a brand of Jitendra Tax Consultants (JTC) consisting of a team of highly experienced tax experts. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. We can help you navigate the complex provisions of transfer pricing. Call us today to avail yourself of comprehensive corporate tax advisory services in Dubai, UAE.