With the introduction of the new Corporate tax law, the UAE proposes to comply with the OECD transfer pricing rules and the documentation requirements.
Any transactions with related parties or connected persons would be required to comply with transfer pricing rules and arm’s length principle as set out in the OECD transfer pricing guidelines, which requires the transactions between related parties to be conducted at arms length price.
Various transfer pricing methods have been prescribed to calculate arm length price. it can also be computed using a different method where the management of the taxable entity opines that the specified methods cannot be applied.
The following methods are prescribed under OECD guidelines for transfer pricing regulations:
Comparable Uncontrolled Price Method (CUP)
Resale Price Method (RPM)
Cost plus Method (CPM)
Transactional Net Margin Method (TNMM)
Transactional Profit Split Method (PSM)
For the purposes of the UAE corporate tax law, the following shall be treated as related parties:
1. Two or more individuals are related to the fourth degree of kinship or affiliation, including by birth, marriage, adoption, or guardianship.
2. An individual and a legal entity where alone, or together with a related party, the individual directly or indirectly owns a 50% or greater share in, or controls, the legal entity,
3. Two or more legal entities where one legal entity alone, or together with a related party, directly or indirectly owns a 50% or greater share in, or controls, the other legal entity,
4. Two or more legal entities if a taxpayer alone, or with a related party, directly or indirectly owns a 50% share of each or controls them,
5. A taxpayer and its branch or permanent establishment,
6. Partners in the same unincorporated partnership, or
7. Exempt and non-exempt business activities of the same person.
As there is no income tax in the UAE, the owners of taxable businesses may take undue advantage by making excessive payments to themselves or to connected persons, thereby eroding the corporate tax liability.
Therefore, any payments made to the connected persons would be deducted only if the business can exhibit that such payment:
corresponds with the market value of the service provided; and
is incurred wholly and exclusively for the purposes of the taxpayer’s business.
In respect of a business that is under the scope of corporate tax, the following persons would be considered as connected with the business:
1. An individual who directly or indirectly has an ownership interest in, or controls, the taxable person.
2. A director or officer of the taxable person.
3. An individual is related to the owner, director, or officer of the taxable person to the fourth degree of kinship or affiliation, including by birth, marriage, adoption, or guardianship.
4. Where the taxable person is a partner in an unincorporated partnership, any other partner in the same partnership.
5. A Related Party of any of the above.
Transfer Pricing documentation requirements
The businesses would be required to submit a disclosure that shall contain information relating to the transactions with Related Parties and Connected Persons. Where the arm length’s price exceeds the threshold value, a master file and local file would be required to be maintained by the business.