Transfer pricing is the pricing of transactions or arrangements between Related Parties or Connected Persons that are influenced by the relationship between the transacting parties. Transactions that occur between Related Parties or Connected Persons may include but are not limited to the trade of services, tangible goods, intangibles, financial transactions as well as certain transactions involving a Permanent Establishment (PE). The prices should meet the arm’s length range, which means the transactions be conducted at open market value as would be the case between independent parties.
The UAE follows the OECD Guidelines for applying the arm’s length principle on the transactions between the Related Parties or Connected Persons of an MNE group. However, specific provisions in the corporate tax law, cabinet decisions and the transfer-pricing guide form the basis for the UAE transfer pricing regulations.
The UAE transfer pricing guide provides us with the key steps essential for applying the arm’s length principle on transactions between Related Parties or Connected Persons. Transfer pricing advisers in UAE can help you further navigate the complexities of the process.
Read ahead to learn about the key steps in determining the arm’s length range of transactions:
Application of Arm’s Length Principle
The UAE transfer pricing guide throws light on the three key steps in applying the arm’s length standard on controlled transactions. The three steps in applying the arm’s length principle are:
- Identify Related Parties, Connected Persons, relevant transactions and arrangements and perform a comparability analysis accordingly.
- Selection of the most appropriate Transfer Pricing method.
- Determination of the Arm’s Length Price
- First Step in Applying Arm’s Length Principle
In the first step, you have to identify Related Parties, Connected Persons, relevant transactions and arrangements and perform a comparability analysis accordingly.
- A comparability analysis involves comparing a Controlled Transaction with a Comparable Uncontrolled Transaction. This involves two key aspects:
- Identifying the Related Parties, Connected Persons, commercial or financial relations between the Related Parties or Connected Persons and the conditions and economically relevant circumstances attaching to those relations so that the Controlled Transaction is accurately delineated.
Comparing the conditions and the economically relevant circumstances of the Controlled Transaction as accurately delineated with the conditions and the economically relevant circumstances of Comparable Uncontrolled Transactions
Second Step in Applying Arm’s Length Principle
The second step in applying the arm’s length principle on a controlled transaction is all about choosing the most appropriate transfer pricing method. The five transfer pricing methods explained in the UAE transfer pricing guide are in line with the internationally accepted Transfer Pricing methods detailed in the OECD Transfer Pricing Guidelines and Article 34(3) of the Corporate Tax Law.
The five transfer pricing methods are:
- Comparable Uncontrolled Price (CUP) Method,
- Resale price Method (“RPM”)
- Cost plus Method (“CPM”)
- Transactional Net Margin Method (“TNMM”)
- Profit Split Method (“PSM”)
The first three are referred to as traditional transaction methods and the TNMM and PSM are considered transactional profit methods. Article 34(4) of the Corporate Tax Law stipulates that the Arm’s Length Price may be calculated using methods other than the five Transfer Pricing methods listed in the Corporate Tax Law if none of the five recognised methods can be reasonably or reliably applied, and provided these other methods satisfy the Arm’s Length Principle. Transfer Pricing advisers in the UAE can help you choose the most appropriate transfer pricing method.
Third Step in Applying Arm’s Length Principle
In this step, you need to determine the arm’s length price. It is an elaborate process consisting of the following steps:
- Choosing the tested party (the party to the transaction for which a financial is tested)
- Compare economically relevant characteristics of the Controlled Transaction with those of uncontrolled transactions
- Performing comparability adjustments
- Determining the arm’s length range
- Consult with the UAE’s Top Transfer Pricing Advisers
Multinational Enterprises and related entities must carefully tread the complex landscape of transfer pricing in the UAE. The UAE transfer pricing guide issued by the government provides valuable insights for making the compliance process smooth. However, the guide is just a foundation as applying the principles like arm’s length standards can be quite tricky.
This hurdle can be removed by seeking the advice of the best transfer pricing advisers in Dubai such as Tax Gian, a brand of Jitendra Tax Consultants (JTC). Tax Gian and its associate Jitendra Chartered Accountants (JCA) have been revolutionising the UAE regulatory compliance landscape for over two decades. We have a team of highly qualified tax experts who can guide businesses on all aspects of the UAE transfer pricing regulations. Call us today to avail yourself of comprehensive transfer pricing advisory services in the UAE.