In the dynamic marketplace of the UAE, both foreign and domestic corporations face the challenge of compliance with elaborate taxation laws to facilitate equitable transactions. One such issue is UAE transfer pricing, which determines how those who are involved in related party transactions price them to meet market norms. Following the implementation of corporate tax in 2023, these transfer pricing UAE corporate tax priorities has become increasingly important for businesses having cross border or group company business models. This blog discusses UAE transfer pricing breaches, penalties, and effective ways to avoid non-compliance.
What is Transfer Pricing in UAE?
Transfer pricing in UAE are the rules and methods for pricing personal transactions that take place between related parties such as divisions of the same company, legal entity parts within a group of companies or connected entities in a multinational corporation. In accordance with the UAE Corporate Tax Law, such transactions should also comply with the arm’s length standard. They must be conducted as if they are entered between independent parties. This is to ensure the appropriate allocation of profits and avoid any artificial shifting of income to low tax jurisdictions.
The regime applies to both in-bound and out-bound controlled transactions from the following perspectives: supply of goods, services, financial contributions, intangibles, etc. Key exceptions would be in the case of small businesses or individuals/entities not trading with related parties, however for most taxpayers it will apply if one wishes to avoid action by the FTA.
Documentation Requirements
To prove compliance with the arm’s length provision, companies need to satisfy the UAE transfer of pricing documentation standards. These comprise the preparation of a Master file for MNE groups with gross consolidated revenue equal to or greater than AED 3.15 billion, which should provide a high-level overview of the group’s organizational structure, business operations and transfer pricing policies.
Furthermore, a Local File is necessary for entities with gross income exceeding AED 200 million and all members of qualifying MNE groups. The paper contains the transactional information of a given entity, functional and comparability analysis, and selection of transfer pricing methodology. Country-by-Country Reporting is also mandatory for high revenue earning MNEs, with notifications required by the year end and detailed reports within 12 months.
A Transfer Pricing Disclosure Form is required to be accompanied by the corporate tax return if the transaction value exceeds a threshold as prescribed by FTA. With written documentation, anytime within 30 days, and prepared at the time of transaction presentation or tax return.
Common Transfer Pricing Violations
While there are clear rules, businesses often fall into compliance gaps. The most common transfer pricing violations in the UAE are:
Non-Compliance with Arm’s Length Pricing
Not pricing related party deals right is a common violation. This could be underpricing, overpricing, or a failure to carry out benchmarking studies.
Lack of Transfer Pricing Documentation
Companies may overlook or fail to prepare the Local File, Master File or disclosure forms particularly when operations grow rapidly.
Incorrect or Misleading Disclosures
False details that could damage your business are the last thing you want to complete in transfer of pricing forms which you submit to the Finance Tax Authority (FTA).
Absence of Benchmarking Analysis
It is necessary to benchmark in order to rationalize pricing. It is non-compliance to use outdated, incomparable or irrelevant benchmarks.
Lack of Financial Substance
TP scrutiny may be applicable for such businesses which are designed to move profits without real economic substance.
Penalties for Transfer Pricing Violations
Cabinet Decision No. 75 of 2023 also applies for violations of transfer pricing, as there are no specific fines for committing a transfer pricing violation in UAE. Some of the regulations which apply in relation to transfer pricing include:
Non-provision of Documents or Information:
Not providing requested information to the FTA will result in penalties from AED 10,000 for a first-time case. It adds up to AED 20,000 as a repetition or if caused by an ongoing delay, the penalty could be of AED 1,000 per month.
Fraudulent Tax Returns:
Providing incorrect transfer pricing information in a tax return or form constitutes AED 500 for the first time and AED 1,000 thereafter.
Country-by-Country Reporting Failures:
For large MNEs, discrepancies in CbCR notifications or declarations can incur fines from AED 10,000 to AED 1,000,000 based on the extent of non-compliance.
General Tax Evasion or Amendments:
If breaches result in a reduction of the tax due, further penalties include 4% monthly interest on amounts unpaid (up to a maximum of 300% of the tax due) and specific fines for evasion potentially exceeding AED100,000.
In addition to penalties, the FTA has the authority to reject non-commercial transactions, adjustment income and disallow tax exemptions such as Free Zone incentives resulting in serious monetary and reputational implications.
The Role of Transfer Pricing Advisory Services
Dealing with these complexities typically calls for professional expertise. Our range of UAE transfer pricing services include the provision of tailor-made support such as benchmarking studies and documentation to representing clients at FTA audits. Firms can provide visibility on OECD-compliant practices tailored to the UAE which assists them in complying with their transfer pricing requirements as well as providing an opportunity to optimize their positions for tax purposes. Advisors brought in early can avoid expensive violations and lead the company to long-term sustainability.
Advisory Services by CBM Consultants
CBM Consultants help in minimizing the likelihood of a transfer pricing breach in the UAE by making certain that you are meeting arm length standards. Also, we provide valid Local and Master Files and filing mandatory Transfer Pricing Disclosure Forms. Our experts carry out benchmarking, establish strong transfer pricing policies, and handle related party transaction risk at an earlier stage. Our firm keeps track of regulatory changes and provides audit assistance to businesses in order to stay compliant with the UAE Corporate Tax regulations and evade penalties.
Prevention Strategies
Proactive transfer pricing compliance can help prevent transfer pricing violations in UAE quite extensively. Here is a commonsense guide to transfer pricing that will enable businesses to stay on course:
- Conduct Functional Analysis: Discover the relevant parties, processes, and risks. Apply the six-step process to prepare a transaction analysis correctly.
- Select Methods: Choose the best available method on the basis of availability of data, compatibility, and relevance. Look at multi-year data and normalize for difference to generate an arm’s length range.
- Maintain Documentation: Update annually Master and Local Files for Robust Documentation including detailed analyses, comparison to bench marking studies, and financial schedules. Review comparables every three years.
- Internal Policies: Enact group-level transfer pricing policies in line with the rules in UAE, including the safe harbor for low value adding services such as a 5% markup.
- Apply For Advance Pricing Agreements: Complex transactions should seek APT from the FTA to ensure certainty on transfer pricing methods.
- Regular Inspections and Training: Conduct internal audits and train staff on United Arab Emirates regulation to catch problems early.
In adhering to this transfer pricing manual, companies reduce their risk and maintain the flow of business under a transfer pricing UAE company tax regime.
Conclusion
Transfer pricing violations in UAE are punishable with heavy fines. However, by complying with the UAE transfer pricing documentation requirements and taking a proactive approach to prevent these violations, businesses stand to benefit under the corporate tax system. By focusing on transfer pricing compliance and benefiting from the professional support of a transfer pricing advisory services provider, companies prevent penalties and optimize business processes. If you wish to become a transfer pricing specialist, stay updated, documented thoroughly, and take advice from experts for understanding the UAE model of transfer pricing. For FTA’s up to date information, please consult FTA’s official resources.
