How to Prepare for Transfer Pricing Audit?
Being subject to the Federal Tax Authority’s (FTA) transfer pricing audit does not augur well for UAE businesses carrying out intercompany transactions. Multinational Enterprises (MNEs) in the UAE may find transfer pricing highly challenging in terms of compliance and tax planning.
Most businesses subject to transfer pricing regulations in the UAE may wish to avoid the audit. However, there is no magic bullet to dodge FTA’s transfer pricing audits. The best you can do is prepare to face transfer pricing audits with the help of transfer pricing advisers in Dubai.
They can help MNEs to be ready with reports and supporting documents that may help them defend their transfer pricing arrangements when the FTA scrutinize their documentation during an audit.
This blog will provide you with some useful tips to ensure transfer pricing audit readiness. Let us dive in to understand how to prepare for transfer pricing audits:
Carry out a self-assessment
You can start your preparation for a transfer pricing audit by carrying out a self-assessment of your transfer pricing structure and risk. Performing an assessment will help you ensure your transfer pricing structure is sensible.
Use the below points for doing a self-assessment:
- Ensure newly formed entities are appropriately compensated
- All analyses must be up to date
- Outcomes of different entities must match your expectations
- If benchmarks are used, conduct a sensitivity analysis
- Draft and implement a transfer pricing policy guide (Our transfer pricing consultants offer this service for companies in Dubai, UAE)
- Review and assess your level of risk with the help of a transfer pricing adviser
- Review intercompany agreements (ensure they are prepared, unexpired, and accurately reflect the nature of the transactions)
- Compare actual price and legal agreements
Ensure Regulatory Compliance
All the documents must be ready with you as they will defend you from penalties in the event of an imminent audit. Any mandatory disclosure form or transfer pricing documentation must be filed on time.
Outline Options and Approaches
If all the facts are ready with you, then start outlining the options and approaches that you can adopt to support the transfer pricing results for the tax year. This may include:
- Steps to be taken to analyze the approaches
- Estimated outcome
- Benefits and risks associated with each approach
- Make a decision regarding the approach to be taken (method, adjustments, potential impact)
Present your Facts Confidently
Tax authorities will first request to present the transfer pricing documentation during an audit. You must be confident about the accuracy of the facts outlined in your documentation. Ensure the following:
- The transfer pricing method you have chosen is still the most appropriate method
- Explain why you skipped the other transfer pricing methods
- You have updated economic analyses
- You have recently reviewed or updated the facts in the functional analysis
Stay Consistent
All the information you provide to the UAE FTA during a transfer pricing audit must be consistent. Your narrative should be cohesive across the country-by-country report (CbCR), master file, local file, and intercompany agreements.
Put Special Focus on IP Transfers
FTA, the tax authority in the UAE, may scrutinize the transfer of Intellectual Property (IP) between related parties during the transfer pricing audit. You can minimize IP-related transfer pricing audit risk by properly documenting all the IP transfers.
You should also carry out a valuation with the help of a professional and include a planning report that outlines the methodology and assumptions.
Be Ready to Give Supporting Information
You should be ready to provide the tax authority with the supporting documents and financial records to defend the facts presented in the transfer pricing documentation.
Make sure in advance your accounting systems can provide the information required to demonstrate the outcomes of the intercompany transactions.
We can Help you Prepare for Transfer Pricing Audits
Transfer pricing audits can be scary for UAE entities engaging in intercompany transactions across multiple tax jurisdictions. However, it doesn’t have to be that way. Tax Gian, a brand of Jitendra Tax Consultants (JTC), helps you prepare for transfer pricing audits.
We are a Dubai-based company comprising transfer pricing advisors and tax experts. Our transfer pricing consultants are the best in Dubai when it comes to technical expertise and industry experience.
Tax Gian’s Transfer Pricing Services provides you with practical and effective solutions to navigate any challenges. Please contact us as soon as possible for transfer pricing consultations.
