Transfer Pricing

What is Transfer Pricing?

Transfer Pricing refers to the pricing of transactions between related parties (companies under common control). Under UAE Corporate Tax law, these transactions must be conducted at "arm's length" prices - the same prices that would apply between independent parties. Transfer pricing rules prevent profit shifting to low-tax jurisdictions and ensure fair tax collection.

Arm's Length Principle

Related Party Price = Independent Party Price

The price charged between related entities should reflect the market price that would be charged between unrelated third parties in comparable circumstances.

Documentation Requirements

UAE businesses must prepare transfer pricing documentation when related party transactions exceed AED 200 million in a tax period:

Master File

• Group organizational structure
• Business descriptions
• Intangible assets
• Intercompany financial activities
• Financial and tax positions

Local File

• Local entity description
• Related party transactions
• Comparability analysis
• Transfer pricing method
• Supporting documentation

Transfer Pricing Methods

1. Comparable Uncontrolled Price (CUP)

Compare the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction

2. Resale Price Method

Based on the price at which goods are resold to independent parties, less an appropriate gross margin

3. Cost Plus Method

Adds appropriate markup to the costs incurred by the supplier in a controlled transaction

4. Transactional Net Margin Method (TNMM)

Examines net profit margin relative to an appropriate base (e.g., costs, sales) realized from controlled transactions

5. Profit Split Method

Divides combined profits from controlled transactions based on relative value of functions performed

Common Related Party Transactions

Tangible Goods

Sale of inventory, raw materials, finished products between group companies

Services

Management, technical, administrative, or support services

Intangibles

Royalties for patents, trademarks, know-how, licenses

Financial Transactions

Intercompany loans, guarantees, cash pooling

UAE Transfer Pricing Regulations

OECD Alignment: UAE follows OECD Transfer Pricing Guidelines
Documentation Threshold: AED 200 million in related party transactions per tax period
Substance Requirements: Free Zone Persons must demonstrate adequate substance and comply with transfer pricing
Disclosure: Related party transactions must be disclosed in Corporate Tax returns

Penalties for Non-Compliance

Tax Adjustments: FTA can adjust taxable income if prices aren't at arm's length
Penalties: Up to 50% of understated tax amount
Documentation Penalties: Penalties for failure to maintain required documentation
Interest: Charged on unpaid tax resulting from adjustments
Reputational Risk: Increased scrutiny on future transactions

Best Practices

1 Conduct annual transfer pricing review
2 Maintain contemporaneous documentation
3 Perform benchmarking studies
4 Document intercompany agreements
5 Seek advance pricing agreements (APA) for certainty