The Arm’s Length Principle: A Business Owner’s Guide to Transfer Pricing in the UAE
With the introduction of corporate tax in the UAE, a new term has entered the vocabulary of business owners: Transfer Pricing. While it may sound complex, it is a concept that every business owner with related companies needs to understand. The UAE’s new tax law includes specific rules on transfer pricing, and non-compliance can lead to significant penalties.
This guide from the tax and corporate structuring experts at Smart Stack Accounting and Nour Attorneys, core members of the SKP Business Federation, explains what transfer pricing is and what you need to do to be compliant.
What is Transfer Pricing?
Transfer pricing refers to the prices that related companies charge each other for goods, services, or the use of property. These are known as “controlled transactions.”
Examples:
- A parent company in the UK provides management services to its subsidiary in the UAE.
- A free zone company in the UAE sells goods to a related mainland company.
- A UAE-based company pays a royalty to a related offshore company for the use of a brand name.
The Arm’s Length Principle
The core principle of transfer pricing is the “arm’s length principle.” This means that the price for a transaction between related companies must be the same as the price that would have been charged between two unrelated, independent companies for the same transaction under the same conditions.
Why is this important? Governments are concerned that multinational companies can use transfer pricing to shift profits from high-tax countries to low-tax countries to reduce their overall tax bill. The arm’s length principle is designed to prevent this.
Transfer Pricing in the UAE
The UAE’s corporate tax law fully incorporates the arm’s length principle. This means that if your UAE business has transactions with any of the following, you need to comply with the transfer pricing rules:
- Other businesses you own (in the UAE or abroad).
- Your family members who own other businesses.
- Any other “Related Party” as defined in the law.
Your Compliance Obligations
If your business engages in controlled transactions, you have two main compliance obligations:
1. The Transfer Pricing Disclosure Form:
You must complete and submit a disclosure form with your annual corporate tax return. This form provides the FTA with information about your controlled transactions.
2. Transfer Pricing Documentation:
You must prepare and maintain detailed transfer pricing documentation. This documentation is your evidence to prove that your transactions with related parties are at arm’s length. The documentation generally includes:
- A Master File: This provides a high-level overview of your global business operations.
- A Local File: This provides detailed information about your specific controlled transactions in the UAE.
You are not required to submit the documentation with your tax return, but you must have it ready to provide to the FTA within 30 days if they request it.
Exemptions: There are some exemptions from the requirement to prepare full transfer pricing documentation for small businesses with revenues below a certain threshold.
The SKP Business Federation: Your Partner in Transfer Pricing Compliance
Transfer pricing is one of the most complex areas of international tax law. Getting it wrong can be costly. The SKP Business Federation provides an integrated team of experts to help you navigate the rules:
- Smart Stack Accounting are experts in UAE transfer pricing. They can help you:
- Assess whether your business is subject to the transfer pricing rules.
- Develop a compliant transfer pricing policy.
- Prepare your annual transfer pricing documentation (Master File and Local File).
- Complete the transfer pricing disclosure form.
- Nour Attorneys can provide legal advice on the corporate structure of your related companies.
- SKP Consultancy can conduct a benchmarking analysis to help you determine the correct arm’s length price for your controlled transactions.
Navigating International Tax Complexities
Transfer pricing is no longer just a concern for large multinational corporations. With the introduction of corporate tax in the UAE, it is a reality for any business with related party transactions. By understanding the arm’s length principle, preparing your documentation, and working with professional advisors, you can ensure that your business is fully compliant with the new rules. Proactive transfer pricing management is a critical component of good corporate governance in the new UAE tax environment.
Do you have transactions with related companies? Contact Smart Stack Accounting for a complimentary consultation on your transfer pricing obligations.
About SKP Business Federation
SKP Business Federation is an exclusive alliance of independent, market-leading companies working in unison to provide seamless, integrated business solutions in the UAE. We help you navigate the complexities of international tax.
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