Transfer Pricing

Transfer Pricing (TP) refers to the pricing of transactions between related entities within multinational enterprises (MNEs). These transactions can include the transfer of goods, services, intellectual property, loans, and other financial arrangements. TP regulations aim to ensure that such transactions are conducted at arm’s length—meaning they reflect the price that would be charged between unrelated parties under similar conditions.

Global Perspective on Transfer Pricing

Globally, Transfer Pricing regulations are governed by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which provide a framework for establishing arm’s length pricing. Many countries have adopted these guidelines, either as part of their domestic tax legislation or as a reference for tax authorities when assessing intercompany transactions. The Base Erosion and Profit Shifting (BEPS) Action Plan, introduced by the OECD and G20, further strengthens TP compliance by requiring businesses to document their related-party transactions, align profits with economic substance, and comply with Country-by-Country Reporting (CbCR) obligations.

To counter tax avoidance and profit shifting, jurisdictions worldwide, including the United States, United Kingdom, European Union, and emerging markets, have introduced stringent TP regulations, requiring businesses to maintain contemporaneous documentation and ensure that intercompany pricing aligns with market conditions.

Transfer Pricing Regulations in the UAE

The UAE Transfer Pricing framework has evolved in recent years, aligning with international best practices. The introduction of Corporate Tax (CT) Law through Federal Decree-Law No. 47 of 2022 and related regulations has made TP compliance mandatory for businesses operating in the UAE. The key aspects of UAE Transfer Pricing regulations include:

✅ Arm’s Length Principle: UAE businesses engaged in related-party transactions must ensure that pricing reflects market conditions and complies with the arm’s length standard.

✅ Transfer Pricing Documentation: Businesses meeting specific revenue thresholds must maintain Master Files, Local Files, and supporting TP documentation in accordance with the OECD guidelines.

✅ Country-by-Country Reporting (CbCR): Multinational enterprises (MNEs) with consolidated global revenues of AED 3.15 billion (€750 million) or more must comply with CbCR regulations, ensuring transparency in global tax reporting.

✅ Compliance and Disclosure Requirements: UAE companies must disclose related-party transactions in their corporate tax returns and be prepared for potential audits by the Federal Tax Authority (FTA).

✅ Transfer Pricing Methods: The UAE adopts internationally accepted TP methodologies, including Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Transactional Net Margin Method (TNMM), and Profit Split Method (PSM).

Why Transfer Pricing Compliance is Critical

• Avoidance of Tax Penalties: Non-compliance with TP regulations can lead to tax adjustments, penalties, and increased scrutiny from tax authorities.
• Reduced Risk of Double Taxation: Proper TP documentation ensures that businesses avoid disputes with tax authorities in multiple jurisdictions.
• Improved Business Efficiency: Transparent and well-documented TP policies help optimize internal pricing strategies, enhancing financial and operational efficiency.