Transfer Pricing Documentation Under UAE's Corporate Tax

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Transfer pricing documentation is a critical aspect of multinational business operations, ensuring compliance with tax regulations and demonstrating the arm's length nature of transactions between related entities. Article 55 of the UAE's tax laws emphasizes the importance of maintaining detailed transfer pricing documentation to support the pricing of transactions between associated enterprises. 

Here's an elaborate overview of Transfer Pricing Documentation in the UAE, aligned with Article 55. 

1. Legal Framework

The UAE follows the Organization for Economic Co-operation and Development (OECD) guidelines on transfer pricing. 

Article 55 of the UAE Executive Regulations requires entities to maintain comprehensive documentation related to their controlled transactions. 

2. Documentation Requirements

Master File: This includes an overview of the group's global business, its organizational structure, intangibles, intercompany financial activities, and transfer pricing policies. 

Local File: Specific to UAE operations, detailing local transactions, intercompany agreements, financial data, and comparability analysis. 

Country-by-Country Report (CbCR): For multinational enterprises meeting specific revenue thresholds, providing a breakdown of key financial and tax information on a country-by-country basis. 

The UAE Ministry of Finance on 11 May 2023 published Ministerial Decision No. 97 of 2023 on the requirements for maintaining transfer pricing documentation under the UAE corporate tax law. 

The guidance provides that a taxable person must maintain a Local file and a Master file if during the relevant tax period: 

• The taxable person is a constituent entity (i.e., mainland or freezone subsidiary, branch or permanent establishment of a multinational enterprise group, as defined under Cabinet Decision No. 44 of 2020, with annual consolidated group revenues exceeding AED 3.15 billion) 

• The taxable person’s revenues exceed AED 200 million 

In order to be considered as “acting independently,” a transaction must be undertaken in the ordinary course of business and the parties to the transaction may not exclusively or almost exclusively transact with each other. In addition, the activities of one of the parties may not be subject to detailed instruction or control of the other party. The tax authority will consider all relevant facts and circumstances when considering if parties are independent. 

3. Content of Documentation

Business Overview: Description of the entity's business activities, organizational structure, and value chain analysis. 

Transfer Pricing Policies: Explanation of methodologies used, comparable considered, and rationale for selecting the most appropriate method. 

Functional and Risk Analysis: Detailed analysis of functions performed, risks assumed, and assets employed by each entity in controlled transactions. 

Financial Information: Documentation of financial data of related party transactions, comparable uncontrolled transactions, and economic analysis supporting the arm's length nature of pricing. 

Intercompany Agreements: Copies of agreements between related entities outlining terms and conditions of transactions. 

4. Timing and Compliance

Documentation should be contemporaneous, prepared annually, and kept up-to-date in accordance with the UAE tax regulations. 

Penalties may be imposed for non-compliance or insufficient documentation. 

5. Penalties for Non-Compliance

Failure to maintain adequate transfer pricing documentation might lead to penalties, adjustments, or potential disputes with tax authorities. 

Penalties could range from fines to potential adjustments to taxable income based on tax authority assessments. 

6. Transfer Pricing Audits and Dispute Resolution

Tax authorities in the UAE have the right to audit transfer pricing documentation to ensure compliance. 

Dispute resolution mechanisms, such as advance pricing agreements (APAs) or mutual agreement procedures (MAPs), are available to resolve conflicts between taxpayers and tax authorities. 

Given the UAE's strategic location as a global business hub and its evolving tax landscape, transfer pricing documentation holds immense importance for both multinational corporations (MNCs) operating in the UAE and the government. 

• Compliance with Tax Regulations: The UAE has been steadily enhancing its tax framework to align with international standards. Proper transfer pricing documentation helps companies demonstrate compliance with the arm’s length principle, ensuring that transactions between related entities are conducted at fair market prices. This is crucial for avoiding penalties, audits, and disputes with tax authorities. 

• Risk Mitigation: Comprehensive transfer pricing documentation serves as a shield against potential tax risks. By providing clear evidence of the rationale behind intra-group pricing policies and the methodologies used, companies can reduce the likelihood of disputes and challenges from tax authorities. 

• Avoidance of Double Taxation: Clear and well-documented transfer pricing policies help in avoiding double taxation issues that may arise when profits are allocated inconsistently among different tax jurisdictions. This is particularly relevant for UAE-based companies with global operations. 

• Enhanced Transparency: With increased emphasis on transparency and accountability in international taxation, robust transfer pricing documentation demonstrates a company's commitment to transparency. This can foster a positive relationship with tax authorities and mitigate suspicions of profit shifting or tax avoidance. 

• Support for Business Strategies: Transfer pricing documentation goes beyond tax compliance; it also aids in making informed business decisions. By analysing and documenting the value chain, companies can better understand the profitability of different segments, optimize resource allocation, and develop more effective business strategies. 

• Preparation for Audits and Inquiries: In the event of a tax audit or inquiry, having comprehensive transfer pricing documentation readily available can expedite the process. It showcases the company's commitment to compliance and facilitates a smoother dialogue with tax authorities. 

• Global Best Practices: As the UAE continues to align its tax regulations with international standards, having robust transfer pricing documentation in line with global best practices can ensure that companies stay ahead and remain competitive in the global market. 

In conclusion, adherence to Article 55's transfer pricing documentation requirements in the UAE is crucial for multinational enterprises operating in the region. Detailed and accurate documentation helps mitigate the risk of non-compliance, ensures transparency, and supports the arm's length principle in related party transactions. 

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.