What is a Transfer Pricing Policy and Why It is Important?

The UAE is home to many multinational enterprises (MNEs) having subsidiaries (related parties) in other tax jurisdictions. When these entities engage in cross-border inter-company transactions between their related parties concept of transfer pricing comes into play.

A transfer pricing policy is required in such cases to justify their transfer pricing arrangements. You can set up a transfer pricing policy with the help of the best transfer pricing consultants in Dubai. 

This blog explains “what a transfer pricing policy is and why is it significant for businesses”.

What is the concept of Transfer Pricing?

Transfer pricing refers to the pricing of goods, services, and intangibles transferred between related parties of an MNE. The pricing must be at arm’s length to avoid the scrutiny of tax authorities such as the Federal Tax Authority (FTA). The arm’s length principle means that the prices between related party transactions should be similar to those between independent parties in similar circumstances. Transfer pricing advisers in Dubai can further advise you in this regard.

Components of a Transfer Pricing Policy

Businesses should understand the key components of a transfer pricing policy to create one. An effective transfer pricing policy must have the following elements:

  • Arm’s Length Principle

The OECD mandates that the pricing of intercompany transactions should be at arm’s length. 

  • Documentation

The transfer pricing policy should consider documents to justify transfer prices. The mandatory transfer pricing documentation includes local files, master files, and country-by-country reports. 

  • Methodologies

The transfer pricing methods are Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method, Transactional Net Margin Method (TNMM), and Profit Split Method.

  • Compliance

The companies should adhere to both the UAE transfer pricing regulations as well as the guidelines set by the Organisation for Economic Co-operation and Development (OECD).

  • Risk Management

MNEs need to identify the risks associated with transfer pricing adjustments and find a way to mitigate them to avoid litigation and disputes.

Why setting a Transfer Pricing Policy is important?

Helps you comply with regulations

 By setting an effective transfer pricing policy, companies can comply with international and local tax laws. Compliance failure may result in penalties, adjustments, litigation, and double taxation. Transfer pricing experts in Dubai can help you comply with the transfer pricing regulations.

  • Tax Optimization

 MNEs can allocate profits among their related parties in a tax-efficient manner by setting appropriate transfer prices. In this way, a transfer pricing policy plays a key role in reducing tax burden. 

  •  Accurate Financial Reporting 

 By creating a robust transfer pricing policy, MNEs can ensure the accuracy and transparency of financial reporting. Stakeholders, including investors, tax authorities, and auditors will give importance to transparency of financial reporting.

  • Avoidance of Double Taxation

 MNEs operating in multiple jurisdictions can avoid the risk of double taxation by creating a well-documented transfer pricing policy. Transfer pricing services in Dubai can help you in this regard.

  •  Risk Mitigation

 If the FTA makes a transfer pricing adjustment, it can cause you major financial and operational disruption. Such risks can be avoided by creating and maintaining transfer pricing policies. 

Helps in Taking Business Decisions

Transfer pricing policies can be used to make critical business decisions related to supply chain management, market entry, etc. 

Hire the Best Transfer Pricing Consultants in Dubai, UAE

As your business goes global with subsidiaries in different countries, setting up a robust transfer pricing policy becomes critical. By understanding and implementing effective transfer pricing strategies, companies can navigate the intricate web of international tax laws, minimize risks, and enhance their overall business efficiency.

The best transfer pricing consultants in Dubai such as Tax Gian can be your trusted adviser in creating effective transfer pricing policies in the UAE. Tax Gian, a brand of Jitendra Tax Consultants, has more than two decades of experience in the UAE. Call us today for a useful transfer pricing consultation in the UAE. 

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