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- The United Arab Emirates (UAE) currently has no specific local transfer pricing rules in place. At present, transfer pricing related requirements in the UAE consist only of Country-by-Country Reporting (CbCR) and Economic Substance Reporting (ESR) obligations, as part of adoption of minimum BEPS standards.
- However, in May 2018, the UAE joined the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion Profit Shifting (BEPS) and committed to implementing the following four BEPS minimum standards:
- Action 5: Countering harmful tax practices (ESR).
- Action 6: Countering tax treaty abuse.
- Action 13: Country-by-country (CbC) reporting.
- Action 14: Improving dispute resolution mechanisms.
- In response to UAE’s commitment to align with the OECD objectives, the Ministry of Finance (MoF) in the UAE through its Cabinet of Ministers Resolution No. 31 of 2019 as amended by Cabinet Decision No. 57 introduced the Economic Substance Regulations (ESR) on 30 April 2019. The purpose of the ESR is to ensure that UAE entities undertaking certain activities, report and substantiate actual profits that are commensurate with the economic activity undertaken within the UAE.
- CbCR rules for multinational group of enterprises (MNE) under the Cabinet Resolution No. 32 (CR 32) in 2019. However, CR 32 was superseded by Cabinet Decision No. 44, published in 2020. The UAE CbCR rules are broadly consistent with the OECD Model Legislation. UAE-resident Ultimate Parent Entities (UPE) are required to submit a CbCR notification, latest by the last day of the financial year and submit a duly compiled CbC Report no later than 12 months from the financial year-end. Constituent Entities in the UAE, who are members of a foreign headquartered MNE are not required to submit a CbCR notification.
- In October 2021, the UAE joined over 130 members of the BEPS IF in agreement of a landmark deal for major reform of the international tax system under a Two-pillar solution to address the tax challenges arising from the digitalisation of the economy.
- There are no dedicated TP rules in the UAE. However, following the recently implemented CbCR regulations, the UAE MoF has activated a number of exchange mechanisms with tax authorities and competent authorities in other tax jurisdictions. The UAE filed CbCR will be shared by the MoF with the relevant competent authorities who along with the MoF can review the CbCR for the following purposes:
- assessing high-level transfer pricing risks.
- assessing other base erosion and profit shifting related risks.
- for economic and statistical analysis.
- No specific guidance on transfer pricing methods has been introduced in the UAE. Hence OECD guidance are expected to be followed in principle.
- No self-assessment regime from a transfer pricing perspective is currently in place in the UAE. However, considering the TP aspects of the recent CbCR regulations in the UAE, it is recommended that the value of supply or import of services between connected parties should be equal to the market value/ at arm's length even though TP hasn’t been formally introduced in the UAE.
- Further, with respect to the ESR in the UAE, UAE businesses are expected to assess whether they carry out a Relevant Activity under the ESR. A ‘substance over form’ approach is required to determine whether or not they undertake a Relevant Activity and, as a result, are within the scope of the ESR. Such determination would require UAE businesses to not only consider the activities stated under their commercial license or registration certificate but also to assess the activities carried out during a financial period.
- The UAE CbCR regulations in the UAE are effective for fiscal years starting on or after 1 January 2019 for multinational groups with revenues over AED 3.15 billion (approx. USD 858 million).
- The notification must be submitted by the UAE-tax resident UPE, on behalf of the UAE Constituent Entities, to the UAE Ministry of Finance to indicate that it is the entity responsible for submitting the CbC Report and identifying the UAE Constituent Entities no later than the last day of the group's reporting year.
- The CbC Report shall be filed within 12 months following the end of the reporting fiscal year of the MNE in line with the standard template set out in Annex III of Chapter V of the OECD Transfer Pricing Guidelines.
- Currently, transfer pricing documentation (i.e. Local File and Master File) are not required in the UAE
- Master File or Local File requirements are not recognised in the UAE.
- Multinational companies engaged in intragroup transactions that do not maintain appropriate transfer pricing policies may be exposed to transfer pricing risks if transfer pricing regulations are implemented in the UAE.
- UAE business reporting high profits in the UAE where the entity has little or no economic activity in the UAE will trigger assessment by the relevant Regulatory Authority.
- UAE businesses engaged in High-Risk Intellectual Property Business are subject to higher reporting requirements.
- Non-compliance with CbCR and Notification requirements can draw penalties ranging from AED 10,000 to AED 1,000,000.
- An administrative fine ranging from AED 10,000 to AED 300,000 can be imposed for non-compliance with ESR requirements.
- No specific guidance has been introduced in the UAE. Hence OECD guidance are expected to be followed in principle.
- No APAs, dispute avoidance and resolution guidance in the UAE.
- Multinational companies that do meet the revenue threshold for UAE CbCR purposes, ie Consolidated Group Revenue of AED 3.15 billion during the preceding financial year, are not required to comply with the CbCR legislation in the UAE.
- The ESR law provides for some specific instances of exemptions. However, such exemptions are not automatic and need to be earned by presenting an appropriate technical analysis and prescribed documentation in support of the exemptions.
- No digital services tax has been introduced in the UAE.
In September 2020, the UAE’s MoF issued a COVID 19 Industry Advisory Notification, confirming that the UAE will take into consideration the impact of COVID-19 on usual operations of Licensees when deciding whether a Licensee has demonstrated sufficient economic substance in the UAE. However, these considerations would only apply with respect to those substance requirements that are directly affected by COVID-19 measures (e.g. travel restrictions, self-isolation situations, or quarantine requirements). Consideration is given to the impact of restrictions on the ability of Licensees to demonstrate an ability to meet the requirements of the “directed and managed” test (Article 6.2(b), ESR).
The above only applies to periods affected by COVID-19 related measures and restrictions and only to the extent required to mitigate the threats from this outbreak. Licensees must retain the requisite records to demonstrate adjustments made to their normal operating procedures in response to COVID-19. This is only a temporary arrangement and Licensees are therefore urged to make every effort to otherwise comply with their obligations under the ESR (including filing deadlines). The UAE MoF will continue to monitor developments on the COVID-19 measures and provide further updates, as necessary.
No COVID-19 considerations apply to CbCR regulations.
For further information on transfer pricing in the United Arab Emirates please contact:
Noha El Mawardy