The UAE transfer pricing guide defines business restructuring as the reorganization of the commercial or financial relations between related parties, which are typically accompanied by the reallocation of profit potential among the members of the MNE Group, either immediately after the restructuring or over a period.
Taxpayers who restructure their business operations must ensure that their pricing arrangements are in line with the arm’s length principle. It means the transactions must be conducted at open market value as would be the case between independent parties.
The determination of arm’s length price for transactions related to business restructuring can be challenging for companies. The following blog will enlighten you in this aspect:
Understanding Business Restructuring
In order to apply the Arm’s Length Principle to a Business Restructuring, it is essential to identify the commercial or financial relations between the Related Parties or Connected Persons involved in the Business Restructuring and the conditions and economically relevant circumstances in relation to those relations. Transfer pricing advisers in Dubai can assist you in understanding the concept of business restructuring.
Accurate determination of transactions
In the next step, entities must identify the Controlled Transactions occurring between the restructured entity and one or more other members of the multinational enterprise (MNE) Group.
A Functional Analysis must be performed to identify the economically significant activities and responsibilities undertaken, assets used or contributed, and risks assumed before and after the restructuring by the parties involved.
The business reasons and expected benefits
Maximising synergies and economies of scale are key reasons why MNE groups opt for business restructuring. If a taxable person states expected synergies as an important business reason for a restructuring, the person is expected to document, at the time the restructuring is decided upon or implemented, what these synergies are, and the assumptions on which these synergies are based.
It is essential to ensure that the Related Parties or Connected Persons contributing to the synergistic benefit after the restructuring are appropriately remunerated. Transfer pricing consultants in Dubai can advise you further in this regard. Transfer pricing consultants in Dubai can assist you in this regard.
Determination of other options
It is not sufficient to ensure the business structuring makes commercial sense to the Group in general. However, while applying the arm’s length principle, the arrangements must be at arm’s length at the level of each individual taxable person.
Understanding the options realistically available to the Related Parties or Connected Persons is an important part of understanding the reason for the Business Restructuring from an arm’s length perspective.
Reallocation of profit potential
Business Restructurings have an impact on the profit potential (expected future profits) of a Person. The profit potential is often used for valuation purposes while finding the arm’s length charge of intangibles or determining the arm’s length indemnification for the termination or substantial renegotiation of existing arrangements.
The taxpayers must understand the restructuring, including the changes that have taken place, how they have affected the functional analysis of the parties, what the business reasons for and the anticipated benefits from the restructuring were, and what options would have been realistically available to the parties. This will help to determine whether, at arm’s length, the restructuring itself would give rise to a form of compensation.
Indemnification of restructured person
Indemnification refers to any type of compensation paid for detriments suffered by the restructured entity. It could be an up-front payment, of a sharing in restructuring costs, of lower (or higher) purchase (or sale) prices in the context of the post-restructuring operations, or of any other form.
The termination or renegotiation of contractual relationships during a Business Restructuring might cause the restructured entity to suffer determinants.
One must determine whether, at arm’s length, indemnification should be paid to the restructured entity, and if so, how much and calculated by what method. For this, it is important to assess the legal arrangements and determine whether the legal arrangements include conditions that reflect arm’s length circumstances. Transfer pricing firms in Dubai can help you with this.
In certain situations, it will be hard to identify reliable Comparable Uncontrolled Transactions for a transfer of one or more intangibles or in the case of a Business Restructuring of a business, that involves both tangible and Intangible assets. In those cases, we can use valuation techniques to estimate the arm’s length price for the determined Controlled Transaction. Transfer pricing advisers in Dubai can advise you on applying valuation techniques.
Hire the Best Transfer Pricing Advisers in Dubai, UAE
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 firms 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.