In today’s global economic environment, cross-border
taxation and Transfer Pricing
have become more prominent. Today, almost every major economy has enacted Transfer
Pricing legislation and has dedicated significant resources to identify, assess and secure their
share of taxes in relation to cross-border taxation. It is important to align the results of each
company in the group with the actual value it creates and with the relevant level of substance
as if you are dealing with a third party.
On 31 January 2022, the United Arab Emirates, Ministry of Finance announced the
implementation of a
federal corporate tax regime including transfer pricing regulations. The UAE CT regime will become
effective for the financial year starting on or after 1 June 2023, so transfer pricing regulation is
also applicable from this date. UAE businesses will need to comply with the transfer pricing rules
documentation requirements as per the OECD transfer pricing guidelines.
The concept of transfer pricing primarily
revolves around the following three pillars :
Associated Enterprise: an enterprise participates directly or
indirectly in the management,
control or capital of another enterprise
Controlled Transaction: Controlled transaction is a transaction
between two (or more)
enterprises that are “associated enterprises” with respect to each other.
Arm’s length price: Entities that are related via management,
control or capital in their
controlled transactions should agree the same terms and conditions which would have been
agreed between non – related entities for comparable uncontrolled transactions.
Arm’s length principle
The Proposed CT regime requires ‘Arm’s Length’ principle to be followed while
transactions between “Related Parties” and with “Connected Persons”. The Arm’s Length Principle is
agreed upon by all the OECD member countries and adopted as an objective guideline for use by
multinational companies and tax administrators in cross border taxation. The principle is embodied
under Article 9 of the OECD MC. It's objective is to avoid erosion of the tax base or the
profits to low tax jurisdictions.
Transfer Pricing Methods
Comparable Uncontrolled Price (CUP)
Resale Price Method (RPM)
Cost Plus Method(CPM)
Transactional Net Margin Method (TNMM)
Profit Split Method (PSM)
As per the OECD guidelines on transfer pricing, authorities adopt a three-tier approach for transfer
pricing documentation consisting of:
Master File: Containing standardized information for all MNE group
Local File: Material transaction of local taxpayers
Country by Country Report: Global allocation of the MNE groups’
income and tax paid, indicators of
the location of economic activity within the MNE group.