How transfer pricing helps you avoid tax risk

If your business deals with a sister company, a parent, a branch abroad, or its own owners and directors, the UAE Corporate Tax Law requires those dealings to be priced as if the parties were independent. This is the arm’s-⁠length principle, and getting it right protects you from adjustments, penalties and double taxation.

What the law requires

The UAE Corporate Tax Law adopts the arm’s-⁠length principle (Article 34). The Transfer Pricing Guide issued by the Federal Tax Authority (FTA) takes the OECD Transfer Pricing Guidelines into account, but UAE law and the FTA guide come first; the OECD Guidelines are a reference only for points they do not cover. The rules cover two groups:

• Related parties, such as group companies under common ownership or control.
• Connected persons, such as owners, directors and their relatives. Payments to them are deductible only to the extent they reflect market value, and only if they are incurred wholly and exclusively for the business (Article 36).

If a transaction does not meet the arm’s-⁠length standard, the FTA can adjust your taxable income.

Who needs transfer pricing documentation

• A transfer pricing disclosure form must be filed with the Corporate Tax return if transactions with related parties exceed AED 40 million in total in the tax period (each category above AED 4 million is reported), or if payments or benefits to any one connected person, such as an owner or director, exceed AED 500,000. Dividends declared between related parties are left out of the AED 40 million and AED 4 million totals.
• Businesses that elect Small Business Relief file a simplified return without this form.
• A master file and local file are required where the business has revenue of AED 200 million or more, or belongs to a multinational group with consolidated revenue of AED 3.15 billion or more.
• Every business must be able to support its pricing if the FTA asks, even below these thresholds.

How arm’s-⁠length prices are tested

The main methods set out in the law are the comparable uncontrolled price (CUP) method, the resale price method, the cost plus method, the transactional net margin method (TNMM) and the transactional profit split method. The right one depends on the transaction and on the comparable data available.

Practical first steps

1. Map every transaction with related parties and connected persons: goods, services, loans, guarantees, management fees and salaries.
2. Put written intercompany agreements in place that match what actually happens.
3. Set a pricing policy and support it with a benchmark or cost analysis.
4. Invoice consistently with the policy, and make any adjustments before the year end.
5. Keep the file up to date each year, not only when the FTA asks.

Why it matters

Good transfer pricing does more than avoid penalties. It clarifies which entity earns which profit, supports decisions on where to hold assets and staff, and makes audits and group reporting far easier.