In a global trading hub like the UAE, multinational enterprises (MNEs) often deal with cross-border transactions with their own divisions. In such transactions, MNEs need to adhere to regulations of transfer pricing, which is the pricing of goods, services, and intellectual property transferred between entities of the same corporate group that are located in different jurisdictions.
To ensure fairness and prevent tax avoidance, tax authorities require MNEs to adhere to the arm’s length principle, which stipulates that transactions between related entities should be priced as if they were between unrelated entities. Corresponding adjustments, a critical aspect of transfer pricing, come into play to address any deviations from this principle.
Tax administrations may consider requests for corresponding adjustments to eliminate double taxation in transfer pricing cases. Transfer pricing consultants in Dubai can help you with corresponding adjustments when a transfer pricing case occurs.
In this blog, you can learn more about the concept of corresponding adjustments. Read ahead to gain more valuable insights:
What are the corresponding adjustments in transfer pricing?
A corresponding adjustment is often undertaken as part of the mutual agreement procedure. It is useful for mitigating or eliminating double taxation in cases where one tax administration increases a company’s taxable profits as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second tax jurisdiction.
However, the corresponding adjustment is not intended to provide a benefit to the MNE group greater than would have been the case if the controlled transactions had been undertaken at arm’s length conditions in the first instance.
How does corresponding adjustment work?
As per the OECD, a corresponding adjustment can be made by a Contracting State either by recalculating the profits subject to tax for the associated enterprise in that jurisdiction using the relevant revised price or by letting the calculation stand and giving the associated enterprise relief against its own tax paid in that State for the additional tax charged to the associated enterprise by the adjusting State as a consequence of the revised transfer price. The first method is more common among OECD member countries.
Benefits of Corresponding Adjustments
Corresponding adjustments offer MNEs relief from double taxation resulting from transfer pricing adjustments. OECD member countries generally strive in good faith to reach an agreement whenever the mutual agreement procedure is invoked.
Through the mutual agreement procedure, tax administrations can address issues in a non-adversarial proceeding, often achieving a negotiated settlement in the interests of all parties. It also allows tax administrations to take into account other taxing rights issues, such as withholding taxes.
The non-mandatory nature of corresponding adjustments
Since tax administrations are not obliged to reach an agreement under the mutual agreement procedure, corresponding adjustments are not mandatory. A tax administration should make a corresponding adjustment only insofar as it considers the primary adjustment to be justified both in principle and in amount.
The non-mandatory nature of corresponding adjustments is necessary so that one tax administration is not forced to accept the consequences of an arbitrary or capricious adjustment by another State. It also is important to maintain the fiscal sovereignty of each OECD member country.
Hire the Best Transfer Pricing Advisers in Dubai, UAE
Navigating the intricate landscape of transfer pricing and corresponding adjustments is crucial for both MNEs and tax authorities. A transparent and cooperative approach can help mitigate the risk of transfer pricing disputes. As the global economy continues to evolve, the importance of a standardized and coordinated approach to transfer pricing becomes increasingly apparent, ensuring a fair distribution of taxable income and fostering a competitive yet equitable business environment.
The best transfer pricing consultants in Dubai such as Tax Gian can guide you in this process. Tax Gian, a brand of Jitendra Tax Consultants (JTC), has a team of highly qualified tax experts in Dubai who can advise you on any corporate tax or transfer pricing issues. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including transfer pricing solutions in Dubai, UAE to its clients globally. We can help you navigate the complex provisions of transfer pricing. Call us today to avail yourself of comprehensive transfer pricing advisory services in Dubai, UAE.