Transfer Pricing aspects of Business Restructurings

Business restructuring usually refers to the change in a multinational enterprise’s (MNE) organisational structure or business model. In terms of transfer pricing, business restructuring refers to the cross-border reorganisation of the commercial or financial relations between associated enterprises, including the termination or substantial renegotiation of existing arrangements.

Transfer pricing involves setting the prices of transactions when products, services or IP are transferred between the associated enterprises of an MNE located in different tax jurisdictions. These prices should be at arm’s length range, meaning the MNEs must ensure that transactions are priced as if they were conducted between unrelated parties in an open market.

Transfer pricing advisers in Dubai can help you develop an effective transfer pricing strategy for your business. In this blog, we shed light on the major pricing aspects governing business restructurings. Read ahead for more insights:

Transfer Pricing Impact on Business restructurings

A business restructuring often generates transfer pricing implications as it may involve cross-border transfers of something of value such as tangible or intangible assets. It may also or alternatively involve the termination or substantial renegotiation of existing arrangements, e.g. manufacturing arrangements, distribution arrangements, licences, service agreements, etc.

Therefore, MNEs need to determine whether the transfer of such assets or activities warrants an arm’s length payment. Transfer pricing consultants in Dubai can advise you on how to carry out a transfer pricing analysis of business restructuring.

How to determine the arm’s length range for the business restructuring?

The OECD Guidelines recommend the following methodology to determine the arm’s length conditions of business restructuring:

  1. Understanding Restructuring Itself

Start with the identification of the commercial or financial relations between the associated enterprises involved in the business restructuring and the conditions and economically relevant circumstances attached to those relations. This helps to ensure that the controlled transactions comprising the business restructuring are accurately delineated.

  1. Reallocation of profit potential as a result of a business restructuring

If there is a transfer of something of value or a termination or substantial renegotiation of existing arrangements, that transfer, termination or substantial renegotiation must be compensated between independent parties in comparable circumstances.

  1. Transfer of something of value

This includes tangible assets, intangible assets as well as business activities. It is necessary for taxpayers to analyse whether something of value has been transferred along with determining the arm’s length price of such a transfer.

  1. Indemnification of the restructured entity for the termination or substantial renegotiation of existing arrangements

It is necessary to analyse whether the restructured entity, at arm’s length, should receive compensation, in the form of indemnification, upon the termination or substantial renegotiation of its existing arrangements, which may or may not involve a transfer of something of value.

Indemnification, in this context, means any type of compensation that may be paid for detriments suffered by the restructured entity.

Transfer pricing documentation for business restructurings

Taxpayers need to include the following information in the transfer pricing documentation as per the OECD Guidelines:

The Master File should contain information on any important business restructuring transactions occurring during the year

The Local File should indicate whether the local entity has been involved in or affected by business restructurings occurring during the year or immediately past year and explain the aspects of such transactions affecting the local entity

The OECD recommends that the MNE groups must document their decisions and intentions regarding business restructurings, before the relevant transactions occur, and document the evaluation of the consequences on profit potential of significant risk allocations resulting from the restructuring

Transfer Pricing Advisers in Dubai Can Help You

Understanding the implications of transfer pricing on business restructuring is essential to ensuring compliance. Taxpayers need to plan and carry out the entire restructuring process diligently for which transfer pricing consultants in Dubai such as Tax Gian can assist them. Tax Gian is one of the top transfer pricing advisers in Dubai with years of experience. 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. Call us today for any matter related to transfer pricing in the UAE.

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