UAE Transfer Pricing Documentation Requirements and Key Methods

Introduction

Transfer Pricing (TP) plays a critical role in ensuring that transactions between related parties or connected persons are conducted in accordance with the Arm’s Length Principle (ALP). Under the UAE Corporate Tax Law, businesses engaged in controlled transactions are required to maintain specific documentation to demonstrate compliance with transfer pricing rules.

This article provides a comprehensive overview of:

• Transfer Pricing documentation requirements in the UAE

• Master File and Local File obligations

• Key Transfer Pricing methods recognised under UAE law

Transfer Pricing Documentation in the UAE

The UAE Corporate Tax Law prescribes five Transfer Pricing documentation requirements:

1. Transfer Pricing Disclosure Form

This form captures details of all controlled transactions undertaken during the relevant tax period and must be submitted along with the Corporate Tax return.

2. Master File

The Master File provides a high-level overview of the Multinational Enterprise (MNE) Group’s global operations and Transfer Pricing policies.

3. Local File

The Local File provides detailed information on the local entity’s controlled transactions and demonstrates compliance with the Arm’s Length Principle.

4. Country-by-Country Report (CbCR)

Applicable to MNE Groups with consolidated revenues exceeding AED 3.15 billion, the CbCR provides jurisdiction-wise financial and operational data.

5. Additional Supporting Information

Any additional information requested by the Federal Tax Authority (FTA) under Article 55(4) of the UAE Corporate Tax Law.

Local File – Overview and Content

Meaning

The Local File provides detailed information relating to specific controlled transactions undertaken by a local entity during the relevant tax period. It primarily covers transactions between local country companies and their associated enterprises.

Information Required in the Local File

1. Financial Information

• Financial statements

• Financial data used in applying the Transfer Pricing method

• Summary schedules of relevant financial information

2. Local Entity Information

• Management structure

• Local organisational chart

• Description of reporting lines and key managerial personnel

3. Controlled Transactions – Detailed Analysis

For each material category of controlled transaction:

• Description of the transaction

• Amount of intra-group payments and receipts

• Identification of associated enterprises involved

• Detailed functional and comparability analysis

• Identification of the tested party

• Summary of key assumptions applied in the Transfer Pricing methodology

Master File – Overview and Content

Meaning

The Master File provides a high-level overview of the MNE Group’s global business operations, Transfer Pricing policies, and key economic drivers. It serves as a “blueprint” of the MNE Group.

Key Components of the Master File

• MNE Group organisational structure

• Description of the Group’s business activities, including:

  • Major products and services by turnover

  • Important intercompany service arrangements

• Details of the MNE Group’s intangibles

• Intercompany financial activities within the Group

Transfer Pricing Methods

Transfer Pricing methods are used to assess whether controlled transactions are conducted at arm’s length. The UAE recognises internationally accepted TP methods, including the following:

1. Comparable Uncontrolled Price (CUP) Method

The CUP method compares the price charged in a controlled transaction with the price charged in a comparable uncontrolled transaction under similar circumstances.

Types of CUP:

• Internal CUP: Comparison with a similar transaction between a related party and an independent third party

• External CUP: Comparison with a transaction between two independent third parties

2. Resale Price Method (RPM)

The RPM is based on the price at which a product purchased from a related party is resold to an independent customer. The resale price is reduced by an appropriate gross resale margin and related costs to arrive at the arm’s length price.

RPM is commonly used for:

• Distribution and marketing activities

Key considerations:

• Operational comparability

• Functions performed, assets used, and risks assumed

• Impact of accounting practices

3. Cost Plus Method (CPM)

The CPM considers the direct and indirect costs incurred by a supplier in a controlled transaction and applies an appropriate mark-up to determine the arm’s length price.

Types of comparables:

• Internal Comparable: Based on the supplier’s transactions with independent parties

• External Comparable: Based on comparable transactions between independent parties

Key factors to consider:

• Product comparability

• Functional comparability

• Cost base comparability

• Impact of accounting practices

4. Transactional Net Margin Method (TNMM)

The TNMM examines the net profit margin earned from a controlled transaction relative to an appropriate base such as:

• Sales

• Costs or expenses

• Assets

The net margin is compared with margins earned in internal or external comparable uncontrolled transactions.

Although TNMM is preferably applied at a transactional level, it may be applied on an aggregated basis where transactions are economically or commercially interlinked.

Transfer Pricing Principles

What is Transfer Pricing?

Transfer Pricing refers to the pricing of transactions between related parties or connected persons, where the relationship influences the terms of the transaction. These transactions may include:

• Goods and services

• Intangible property

• Financial transactions

• Dealings involving a Permanent Establishment (PE)

Arm’s Length Principle (ALP)

The Arm’s Length Principle requires related parties to transact as independent parties would under comparable circumstances. Under the UAE Corporate Tax Law:

• Related parties must earn their fair share of profit

• ALP applies to both domestic and cross-border transactions

Conclusion

UAE Transfer Pricing regulations require businesses to maintain robust documentation and apply internationally recognised TP methods to demonstrate arm’s length compliance. Proper preparation of the Master File, Local File, and supporting documentation is essential to mitigate tax risks and ensure compliance with UAE Corporate Tax requirements.