UAE businesses are very concerned about transfer pricing (TP) rules these days. The pressure is real: tax authorities can ask for detailed proof that your pricing with related parties is fair. Some are required to prepare detailed documentation, such as the Local File or the Master File.
The frustration grows when businesses don’t know what needs to be in the Local File. They collect endless papers but still miss key details.
Once you understand what to include in a Local File, preparing it becomes a structured process. Let’s go through what the Local File is, when it is required, and what information it must contain.
Meanwhile, Tax Gian has expert TP agents in the UAE who can help businesses in preparing key TP documentation.
What is the Local File?
The Local File is one part of transfer pricing (TP) documentation. It works in conjunction with the Master File and, for larger groups, Country-by-Country reporting.
The Master File gives a global overview of a multinational group. The Local File, however, delves deeper into the activities of the specific entity in a particular country. It explains local business operations, related party transactions, and financial results.
The purpose is simple: to prove that transactions with connected persons or related parties follow the arm’s length principle. In other words, the prices should match what independent companies would agree on in a similar situation.
Who Must Prepare a Local File?
Not every company is required to prepare this document. In the UAE, the requirement applies in two situations:
- If the business is part of a multinational group with consolidated revenue of AED 3.15 billion or more.
- If the company’s own revenue in the relevant tax period is AED 200 million or more.
There is one exception. If a business is part of a UAE-headquartered group that operates only within the country and not abroad, it does not need to maintain a Master File. Still, it must prepare a Local File if it meets the revenue thresholds.
Smaller businesses below these limits don’t need to maintain a Local File. However, they should still keep records that prove their related party transactions are arm’s length. The Federal Tax Authority (FTA) can request such records and expects them within 30 days. TP agents in the UAE can help you in such a case.
Key Parts of the Local File
- Local Entity Information
This section introduces the company and its structure. It should include:
- A description of the management structure and organisation chart.
- Details of who the management reports to and where those individuals are based.
- A clear explanation of the business strategy. Mention any restructurings or transfer of intangibles that affect the entity.
- Identification of main competitors in the market.
- Controlled Transactions
This section is the heart of the Local File. It covers all material transactions with related parties. Important elements are:
- Description of each controlled transaction, such as sale of goods, services, loans, or licensing of intangibles.
- Amount of payments and receipts for each type of transaction, broken down by jurisdiction.
- Identification of related parties involved and their relationships.
- Copies of intercompany agreements.
- A comparability and functional analysis explaining roles, assets, and risks of each party.
- Chosen transfer pricing method and reasons for using it.
- Selection of the tested party, if relevant, and explanation of why it was chosen.
- Assumptions made in the analysis.
- Any multi-year analysis, if applied, and the reasons for it.
- List of comparable transactions used in benchmarking, plus details on how they were selected.
- Explanation of adjustments made during analysis.
- Conclusion on why transactions are at arm’s length.
- Financial data relied upon in the TP method.
- Copies of any advance pricing agreements (APAs) or rulings relevant to the transactions.
- Financial Information
The last section links everything to the company’s accounts. It must include:
- Annual financial statements (audited if available).
- Allocation schedules showing how TP data ties to the accounts.
- Summary of financial data for comparables and sources used.
This ensures that the analysis connects to real, verifiable financial numbers.
Why the Local File Matters for UAE Businesses
The Local File is not just a formality. It protects businesses during audits and disputes. A complete file shows the FTA that the company has priced transactions fairly. It reduces the risk of adjustments, penalties, and long investigations.
Without proper documentation, a company is exposed. Even if its prices are arm’s length, the absence of proof can cause major trouble. You can also seek help from TP agents in Dubai in preparing proper TP documentation.
Practical Tips for Businesses
- Start preparing early instead of waiting for a tax authority request.
- Keep your intercompany agreements updated and signed.
- Store benchmarking studies and comparables in an accessible format.
- Ensure that financial data in the Local File ties directly to your audited accounts.
- Review your Local File each year to reflect changes in business or group structure.
- Seek assistance from TP agents in Dubai for a foolproof preparation of TP documents.
How can Tax Gian help businesses?
Tax Gian can help businesses prepare their essential TP documentation, such as Master File, Local File, CbC report, etc, with the expertise of professional TP agents in the UAE. Our services are comprehensive and are not limited to TP documentation. Our TP agents also provide TP benchmarking, due diligence, and advisory services.
