UAE and Transfer Pricing – The Way Forward
23 August 2022
In this update, Aditi Mehra, Transfer Pricing Manager at AGA member firm in Delhi, Coinmen Consultants, and a member of AGA’s Transfer Pricing Global Practice Group updates us on the applicability of Transfer Pricing (TP) in the UAE.
The introduction of a transfer pricing regime by the UAE can be considered an important step towards strengthening its position as an attractive investment destination and regional hub.
Transfer pricing is becoming increasingly relevant and important for businesses across the globe due to the rapid expansion of global markets. As experts in this field, our extensive range of transfer pricing services include provision of transfer pricing planning services, advisory services, and compliances etc.
The UAE Ministry of Finance (“MoF”) has released a consultation paper (“draft”) to provide insight on the potential Corporate Tax (“CT”) regime in UAE which shall be applicable after 1st June 2023. The consultation paper brings out a separate discussion on the applicability of Transfer Pricing (TP) in the UAE. Accordingly, introducing the TP regime in the UAE would be a matter of time.
Corporate tax and transfer pricing disciplines are intertwined with each other in such a manner that no effective international tax strategy is complete without an in-depth understanding of the transfer pricing life cycle within Multinational Corporations (MNC).
In this article we offer an overview of the transfer pricing regime introduced by UAE and the corporate tax considerations that may affect the UAE TP regime. We also talk about what the UAE may consider in its “soon to be a reality” TP laws.
Overview of UAE Transfer Pricing Laws
A. TP documentation
The consultation document proposes the introduction of a TP regime in line with the internationally recognised “arm’s length” principle. The Consultation Paper suggests maintenance of documentation as per Action plan 13 of the Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Cooperation and Development (OECD). The documentation requirements accordingly would include three-tier documentation to be maintained.
Tier 1 - Local File or TP Study Report, justifying the transactions entered by the enterprise.
Tier 2 - Master File, highlighting the group level happenings, group financial details, intellectual properties, necessary financial arrangements etc.
Tier 3 - Country by Country Reporting (CbCR) for large multinational group (same is already in place effective 1 January 2019).
Key areas expected to be addressed under the final TP regulations shall include applicability thresholds, requirement for any TP returns, criteria to determine related parties, and applicability of TP rules to domestic related party transactions, etc.
B. Corporate tax and transfer pricing
There are certain corporate tax aspects that may impact TP provisions under the new regime. It is to be noted that, their impact on the TP regime shall be assessed once final guidelines are issued. Some aspects are discussed below:
B.1. Tax Grouping
As per the FAQs, UAE Group companies shall be allowed to form a tax group i.e., a fiscal unity and file a consolidated tax return provided certain conditions are met. However, there is no clarity regarding the applicability of the fiscal unity concept under TP regime. In other words, it will be seen whether the UAE Group companies that file a consolidated tax return will be allowed to maintain consolidated TP documentation as well.
B.2. Withholding tax
As per the FAQs, no withholding tax is expected to be applicable on domestic and cross-border payments of any nature under the corporate tax regime. Given the same, UAE based MNC’s payments to related parties (and non -related parties) shall not be subject to withholding taxes which will provide MNCs relief from double taxation. However, from a transfer pricing perspective, no analysis of withholding taxes on related party transactions is required.
B.3. Qualifying intra-group transactions
As per the FAQs, qualifying intra-group transactions and reorganizations will not be subject to UAE CT provided the necessary conditions are met. Accordingly, it remains to be seen which category of transactions will fall under the purview of qualifying intra-group transactions and how the same shall be analysed from a transfer pricing perspective.
B.4. Free zone regimes
Free zone businesses are expected to be subject to UAE CT. However, according to the information published by the UAE MoF, the UAE CT regime will continue to honour these tax incentives for free zone entities that comply with the relevant regulatory requirements and do not conduct business with mainland UAE.
Considering that applicable free zone businesses will continue to benefit from CT incentives, there could be a requirement for certain TP considerations to be analysed. In addition, the expected TP rules may also need to address situations where the Free Zones based entities conduct business with mainland UAE related ones.
It should be noted that, just like in India, TP rules can apply to domestic intra-group transactions, especially those that could potentially confer an overall tax advantage to the group. Hence, the possibility of the above discussed transactions being subject to the new TP rules cannot be ruled out.
C. What UAE may adopt from evolved transfer pricing regimes around the world
TP was introduced more than two decades ago, and the UAE may consider adopting the best TP practices from around the world and implement the same for an effective TP regime. Several are discussed below:
C.1. Guidance notes:
UAE may take advantage of the experiences of countries such as Singapore, Australia etc. that have implemented a TP regime and consider issuing guidance notes on various issues that MNCs may face. The guidance notes may include methodology, documentation requirements etc. that may be used for various transactions or issues such as low value-added services, inter-group financing arrangements, inter- company receivables or payables, guidance on functional classification, use of multiple year data, and filters for data analysis, etc.
C.2. Safe Harbour Rules (SHR):
SHR provides a window for taxpayers wherein in the case of defined circumstances the income-tax authorities shall accept the TP declared by the taxpayer. SHR are designed to provide clarity and ease to the taxpayer. Difficulties that may arise in applying the arm’s-length principle may be avoided by providing defined circumstances in which MNCs may elect to follow a simpler set of prescribed TP rules. Accordingly, UAE may consider introducing SHR to ease compliance requirements for MNCs.
C.3. Effective and timely Dispute Resolution – Advanced Pricing Agreement Mechanism
The effectiveness of any tax regime is dependent on effective dispute resolution. One such method is APA. APA is an effective tool to avoid potential TP disputes in advance and in a cooperative manner. Though the public consultation document does not talk about APA or any dispute resolution mechanism, we expect it to be a part of UAE Laws to minimise the potential disputes and implement.
The correct implementation of the above will strengthen UAE’s position as an attractive investment destination and a regional hub.
D. Concluding remarks:
With a TP regime in line with the OECD TP guidelines, the UAE will be part of long list of countries that will adopt the arm’s length principle.
The introduction of the new tax regime would be a “a game changer.” UAE’s infrastructure, political and economic stability and strategic location has always made UAE an attractive destination for investments and a strong candidate for a regional hub for MNCs. The implementation of a TP regime with a corporate tax rate set at 9%, (with a carve out for pillar two companies having minimum global rate of 15%) strengthens UAE’s position as regional hub.
From a MNC’s perspective, it is recommended that before the implementation of the new regime, they must perform an initial high-level impact assessment of the TP arrangements, which are at the core of any MNC’s international tax policy. Once the new regime is implemented, they should undertake an optimization exercise to align their existing TP policies with the OECD principles and implement the same.
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Founded in 2010, Coinmen is a financial and business consulting firm established by three visionary Partners Vikrant Suri, Mohit Aggarwal, and Nitin Garg, following their respected careers in the Big 4 accounting firms and successful individual paths. Eleven years later, they now have a team of 75 and 5 Partners. Based in Delhi and Gurugram, the firm has a strong consulting practice and international orientation, with Japanese, Italian, Korean, and Spanish desks