In the wake of the commencement of corporate tax in the UAE, Multinational Enterprises (MNEs) are required to develop a strategy for transfer pricing for cross-border transfer or exchange of goods or property or services among the related entities. MNEs often have divisions or subsidiaries that are located in different tax jurisdictions. When products or services are exchanged between these associated enterprises, the price of that transaction should be at arm’s length.
It means the MNEs need to treat these transactions between their associated enterprises the same way they would between unrelated companies in comparable circumstances. The process of setting the prices at arm’s length is referred to as transfer pricing and businesses need to do a comparability analysis for that. This analysis is fairly complex, which necessitates the advice of transfer pricing advisers in Dubai.
In this blog, we will walk you through certain best practices that can be adopted to properly perform a comparability analysis. Let us dive in:
What is a comparability analysis?
The Glossary of the OECD Guidelines defines the process of comparability analysis as a comparison of a controlled transaction with an uncontrolled transaction or transactions. A comparison implies examining two terms: the controlled transaction under review and the uncontrolled transactions that are regarded as potentially comparable.
A controlled transaction is a transaction between two enterprises that are associated enterprises with respect to each other. On the other hand, an uncontrolled transaction is a transaction between independent enterprises with respect to each other.
Typical Process of Performing Comparability Analysis
The OECD Guidelines describe a process that can be adopted while performing a comparability analysis. This is accepted as a good practice but the OECD doesn’t consider the process as a mandatory one. OECD also suggests that any other search process leading to the identification of reliable comparables can be accepted as the reliability of the outcome is more important than the process. The following is a typical process for performing comparability analysis:
Step 1: Determine the years to be covered
Step 2: Carry out a broad-based analysis of the taxpayer’s circumstances
Step 3: Understand the controlled transaction under examination
Step 4: Review the existing internal comparables, if any.
Step 5: Determination of available sources of information on external comparables where such external comparables are needed taking into account their relative reliability.
Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method).
Step 7: Identification of potential comparables: determining the key characteristics to be met by any uncontrolled transaction in order to be regarded as potentially comparable, based on the relevant factors identified in Step 3 and in accordance with the comparability factors (contractual terms of the transaction, functional analysis, characteristics of property transferred, or services provided, economic circumstances of the parties and of the market in which the parties operate, and business strategies pursued by the parties).
Step 8: Determination of and making comparability adjustments where appropriate
Step 9: Interpretation and use of data collected, determination of the arm’s length remuneration.
Good Practices for Comparability Analysis
OECD recommends carrying out Steps 5 to 7 repeatedly until a satisfactory conclusion is reached. It means that the most appropriate method is selected, especially because the examination of available sources of information may in some instances influence the selection of the transfer pricing method.
To ensure transparency, it is a good practice for taxpayers and tax administrations to provide appropriate supporting information for the other interested party (i.e. tax auditor, taxpayer or foreign competent authorities) so that they can assess the reliability of the comparables used. Transfer pricing advisers in Dubai can advise you on recommended practices related to comparability analysis.
Speak with Tax Gian’s Corporate Tax Experts in Dubai, UAE
Carrying out a comparability analysis is critical for identifying the most appropriate transfer pricing method. This can be a complex process for MNEs, which warrants the availing of the best transfer pricing advisory services in Dubai, UAE. Transfer pricing advisers in Dubai such as Tax Gian, a brand of Jitendra Tax Consultants (JTC), provide reliable transfer pricing assistance for businesses.
Tax Gian’s team of tax experts in Dubai offers top-notch corporate tax advice for all businesses. 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. Avail of our transfer pricing consultation services in Dubai to ensure seamless compliance.