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Transfer Pricing

Introduction of Transfer Pricing

In today’s global economic environment, cross-border taxation and Transfer Pricing issues 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 and 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 undertaking 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 transfer of 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)
  • Others method

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 members.
  • 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.

Offerings by MNR

  • Risk Assessment and functional Analysis
  • Assistance in TP compliance & documentations
  • Transfer Pricing Advisory & Planning
  • Profit Split Method (PSM)
  • Application of most appropriate method