Transfer pricing is one of the top concerns of multinational enterprises (MNEs) having divisions of subsidiaries (associated enterprises) in various countries involving cross-border transactions. It involves setting prices for transactions between associated enterprises operating in different tax jurisdictions. MNEs need to ensure that transactions between these entities must meet the arm’s length standard, which means the transactions should be priced as if they were conducted between unrelated parties in an open market.
However, disputes with tax authorities can still arise due to differences in interpretation or methodologies. In such cases, it is essential to have mechanisms for dispute resolution in place. Transfer pricing advisers in Dubai can help MNEs effectively deal with transfer pricing disputes.
In this long-form blog, we will explore the options available for resolving transfer pricing disputes and provide insights into their effectiveness and best practices.
Options for Transfer Pricing Dispute Resolution
Transfer pricing disputes occur when tax authorities question the pricing of intercompany transactions within a multinational corporation. These disputes may arise from differences in transfer pricing methods, the choice of comparables, or the pricing of intangible assets, among other factors.
However, when a transfer pricing dispute arise arises, MNEs can opt for the following options to navigate it:
Mutual Agreement Procedure
Under the Mutual Agreement Procedure (MAP), tax authorities from two or more countries engage in discussions to resolve a transfer pricing dispute. The goal is to reach a mutual agreement on the appropriate pricing of intercompany transactions. You can have bilateral and multilateral MAPs for effectively resolving the transfer pricing disputes.
Moreover, many countries have incorporated an arbitration option into their MAP processes. This mechanism allows the resolution of disputes when competent authorities cannot reach an agreement. Arbitration ensures a final, binding decision to avoid prolonged disputes.
Engaging in MAP discussions should be a priority when a transfer pricing dispute arises. It is essential to provide comprehensive documentation and evidence to support your position. Collaborative and transparent communication with tax authorities is also key.
Advance Pricing Agreements
Advance Pricing Agreements (APAs) are pre-negotiated agreements between taxpayers and tax authorities that determine the acceptable transfer pricing methods and pricing for specific transactions. There are Unilateral, Bilateral, and Multilateral APAs that can be used to resolve transfer pricing disputes.
Pursuing APAs can be a proactive approach to preventing transfer pricing disputes. Timely submission of a well-documented APA request is essential. Regular compliance with the terms of the APA is equally important to avoid disputes.
Compliance and Documentation
Maintaining comprehensive and contemporaneous documentation of transfer pricing methodologies, supporting data, and the arm’s length nature of transactions is critical to successfully resolving disputes.
As per the UAE transfer pricing regulations, taxpayers that are part of an MNE group with consolidated revenues of more than or equal to AED 3.15 billion or taxpayers with more than or equal to AED 200 million revenues in the relevant tax period are required to maintain UAE transfer pricing documentation.
However, it does not mean that taxpayers are free to transfer goods or products or provide services to associate enterprises at will and charge prices that are not at arm’s length. Since the UAE is a member of the OECD, hence UAE tax administration (FTA) and taxpayers have to follow the OECD guidelines for transfer pricing transactions.
Why Transfer Pricing Disputes are Complex?
Transfer pricing often involves potential income adjustments in millions of dollars. Due to the cross-border nature of the transactions, multiple parties are involved in transaction. Mainly the parties include the taxpayer and the two tax jurisdictions affected by a change in transfer price.
The involvement of multiple parties makes it difficult to resolve transfer pricing cases. Most transfer pricing cases involve large amounts, which contributes substantially to the difficulty of resolution. Given the complexity of these disputes, it is advisable to seek advice from leading transfer pricing advisers in Dubai, UAE.
Hire the Best Transfer Pricing Consultants in Dubai, UAE
Transfer pricing disputes are a significant concern for multinational corporations, as they can result in financial and reputational damage. It is crucial for companies to proactively manage their transfer pricing strategies, engage in dispute resolution mechanisms when necessary, and comply with international tax regulations. By understanding the various options for dispute resolution, MNEs can effectively resolve disputes and avoid costly litigation.
MNEs can also seek help from the leading Transfer pricing advisers in Dubai such as Tax Gian, a brand of Jitendra Tax Consultants (JTC). Tax Gian’s team of tax experts in Dubai offers top-notch corporate tax advice for all businesses. 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. Contact us today to ensure corporate tax compliance in Dubai, UAE.