On October 23, 2023, the UAE Federal Tax Authority (FTA) published its comprehensive Transfer Pricing Guide (TP Guide), offering valuable insights and practical guidance for taxpayers navigating the Transfer Pricing (TP) regulations under the UAE Corporate Tax Law (UAE CT Law).
This new TP Guide closely aligns with the OECD Transfer Pricing Guidelines while providing UAE-specific clarifications and examples to help businesses comply with local requirements. At HayyaTax, we’ve analyzed the guide to bring you the most critical updates and implications for your business.
Key Highlights from the FTA’s Transfer Pricing Guide
1. Related Parties Definition under UAE Transfer Pricing Guide
The UAE Transfer Pricing Guide outlines scenarios in which a Person may exert control over another, thereby qualifying as Related Parties for Transfer Pricing (TP) purposes. These scenarios include:
- Significant influence through debt: When a third party provides financing that accounts for 50% or more of a borrower’s total capital.
- Key management and strategic influence: When a minority shareholder (holding less than 50% of shares) plays a pivotal role in managing daily operations, shaping business strategies, and making critical market decisions.
These examples expand the scope of the Related Party definition under the UAE Corporate Tax Law.
Additionally, the UAE has established agreements with various jurisdictions to prevent double taxation, which refer to the concept of “Associated Enterprises.” The UAE Transfer Pricing Guide clarifies that in cases where there are discrepancies between the UAE’s Related Party definition and provisions in an international agreement in force, the terms of the international agreement will take precedence for cross-border transactions.
2. Substance over Form
The UAE Transfer Pricing Guide emphasizes that the actual economic conduct between parties takes precedence over written contracts, as contracts alone may not provide sufficient information for a comprehensive Transfer Pricing analysis. Factors such as functions performed, characteristics, economic conditions, and business strategies play a crucial role in understanding the true nature of a Controlled Transaction.
While there is no strict requirement to maintain written contracts from a Transfer Pricing perspective, businesses may consider a practical approach based on materiality thresholds, transaction significance, and specific arrangements. Ensuring that written agreements align with actual conduct is essential. For more significant transactions, it is strongly recommended to have formal contracts in place, as these documents establish transaction parameters, serve as a key reference during TP audits, and act as the first line of defense for taxpayers. However, it is equally important that the economic reality reflects the contract terms, as contracts alone are insufficient to determine the actual behavior of the parties involved.
Additionally, in cases of business restructurings (as outlined in Chapter IX of the OECD Guidelines and Section 7 of the UAE Transfer Pricing Guide), legal agreements are crucial in assessing whether termination clauses adhere to the arm’s length principle.
3. Transaction Aggregation Guidance
The guide indicates a preference for applying the Transactional Net Margin Method (TNMM) on a transaction-by-transaction basis rather than a company-wide approach. However, TNMM may be applied on an aggregate basis when activities or transactions are economically or commercially interlinked, such as similar sales functions for products in similar product lines.
Businesses can also use company-wide TNMM to verify results from separate transactional analyses, but careful evaluation of comparability factors is essential before adopting an aggregated approach.
4. Arm’s Length Range in the UAE Transfer Pricing Guide
The UAE Federal Tax Authority (FTA) supports the use of the interquartile range as a reliable method for determining an arm’s length range, as it provides a more accurate measure of central tendency in transfer pricing (TP) analysis.
Any point within the arm’s length range can be used to establish an arm’s length price for a controlled transaction. However, the selection of the most appropriate point depends on the taxpayer’s functional profile:
- A position closer to the lower quartile may be suitable for businesses with simpler functional structures.
- A position near the upper quartile may be more appropriate for businesses with complex functions and higher risks.
The UAE Transfer Pricing Guide does not specify whether the FTA will adjust to a particular point within the interquartile or full range if a taxpayer’s results fall outside the range. As a result, businesses must stay informed and monitor how the FTA’s stance evolves through future TP audits.
5. Handling Extreme Results in Comparable Analyses
Special attention should be given to extreme results in comparability analyses, particularly regarding loss-making entities. The guide advises further investigation to determine whether loss-making companies can serve as valid comparables.
Loss-making transactions or entities should be excluded from comparables when:
- Losses don’t reflect normal business conditions
- The level of risk in third-party losses is not comparable to risks assumed by the Taxable Person
6. TP Disclosure Requirements
The FTA will require Taxable Persons engaging in transactions with Related Parties or Connected Persons to prepare and submit a TP disclosure form. The guide introduces a materiality threshold for this requirement, though the specific threshold amount has not yet been determined.
A sample TP disclosure form is expected to be published on the FTA website in the near future.
7. Master File and Local File Documentation
Taxable Persons meeting certain thresholds must prepare both a Master File and a Local File. However, UAE-headquartered groups without international operations are exempt from maintaining a Master File, though they must still prepare a Local File for Controlled Transactions.
The guide permits preparing the Master File by business line when justified (e.g., for independently operating or newly acquired business segments), but centralized functions and inter-business line transactions must still be adequately described, and a comprehensive Master File covering all business lines must be maintained.
8. Financial Transactions Guidance
The guide provides additional clarity on pricing intra-group financial transactions with illustrative examples on:
- Applying the arm’s length principle to intra-group financing
- Making comparability adjustments when sufficient comparables are lacking
9. Simplified Approach for Intra-Group Services
To reduce compliance burdens, certain low value-adding intra-group services may be charged at cost plus a 5% markup without detailed benchmarking. To qualify for this simplified approach, services must meet the criteria for low value-adding services.
Taxpayers must maintain documentation on:
- Services rendered
- Recipients’ identity
- Benefits received
- Methodology and calculation of service charges
- Rationale for allocation key selection
This documentation must be available upon FTA request and incorporated into TP documentation for each relevant Tax Period.
10. Comparables Selection in the UAE Transfer Pricing Guide
The UAE Transfer Pricing Guide emphasizes using local and/or regional comparables in TP policies and benchmarking studies when available. When local comparables aren’t available, other geographies may be considered.
Group-wide TP policies may be used for UAE TP purposes if they:
- Apply to similar transactions and arrangements
- Consider local/regional comparables in determining arm’s length results
In practice, finding suitable UAE and Middle East comparables can be challenging, often requiring expanded searches to include North African and Eastern European companies while carefully evaluating comparability factors.
11. Business Restructuring Considerations
The guide addresses both cross-border and domestic business restructurings, making certain modifications to the OECD Guidelines to align with FTA requirements for TO. Businesses undergoing restructuring should carefully assess whether compensation is required.
12. Intercompany Settlement Timeframes
The arm’s length principle requires reasonable mechanisms and governance for raising intercompany invoices and settlement processes. When actual settlement periods regularly exceed agreed timeframes, the extended credit period may be considered a loan advancement requiring arm’s length interest.
13. Burden of Proof According to the UAE Transfer Pricing Guide
The UAE Transfer Pricing Guide clarifies that taxpayers bear the burden of maintaining sufficient documentation and making timely submissions to the FTA to support positions taken in tax returns regarding Controlled Transactions. Robust TP documentation serves as a critical line of defense and shifts the burden of proof to the FTA.
Outstanding Questions and Next Steps
Several critical areas remain unclear pending further guidance:
- The threshold determining which taxpayers must prepare and file TP disclosure forms
- Whether transactions between Taxable Persons subject to the same corporate tax rate can be excluded from disclosure requirements
- If transactions occurring in the ordinary course of business can be excluded from disclosure
- Whether benchmarking studies supporting markups other than 5% can be used for low value-adding services
- Acceptable valuation techniques for intangible transfers or business restructurings
- How to characterize intra-group funding based on debt capacity analysis
How HayyaTax Can Help
As UAE businesses prepare for compliance with these transfer pricing requirements for financial years starting on or after June 1, 2023, HayyaTax’s team of tax specialists can help you:
- Review and adapt global group-wide TP policies to meet local requirements
- Prepare required documentation, including Master Files and Local Files
- Develop defensible positions for your controlled transactions
- Navigate the complexities of the new TP regime
Contact our TP specialists today to ensure your business is fully prepared for these new compliance requirements.