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Global transfer pricing guide

Transfer pricing - United Arab Emirates

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Introduction to the United Arab Emirates transfer pricing
Transfer pricing rules
  • 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 implement the following four BEPS minimum standards Actions:

    • Action 5: Countering harmful tax practices.

    • 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 actual profits that are commensurate with the economic activity undertaken within the UAE.

  • The UAE also introduced Country-by-Country Reporting (“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 However, CR 32 was superseded by Cabinet Decision No. 44, published in 2020.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 UAE CbCR notification by the last day of the financial year and submit a CbC Report no later than 12 months after the financial year end. Constituent Entities in the UAE, who are members of a foreign headquartered MNE are not required submit a CbCR notification.

  • Following the above CbCR regulations, the UAE MoF has activated a number of exchange mechanisms with other tax authorities and competent authorities. 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

  • On 24 June 2018, UAE became a signatory to the Multilateral Competent Authority Agreement on the exchange of Country-by-Country Reports.

  • On 28th April 2022, the MoF issued a Public Consultation Document (‘PCD’) on the proposed introduction of Corporate Taxes in the UAE. The PCD also includes a chapter on the proposed treatment under the UAE Corporate Tax regime for transactions between related parties i;e. the introduction of Transfer Pricing.

  • The Corporate Tax and Transfer Pricing regime shall be effective for financial years starting on or after 01 June 2023.

  • The PCD states a definition of ‘Related Party’ and ‘Connected Persons’ to whom such Transfer Pricing legislation shall be applicable.

     

Coverage under the term ‘Related Party’
  • The PCD summarises the rules for determining ‘Related Parties’, the said rules are provided as under:
    • Two or more individuals related to the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship
    • An individual and a legal entity where alone, or together with a related party, the individual directly or indirectly owns a 50% or greater share in, or controls, the legal entity
    • Two or more legal entities where one legal entity alone, or together with a related party, directly or indirectly owns a 50% or greater share in, or controls, the other legal
    • Two or more legal entities if a taxpayer alone, or with a related party, directly or indirectly owns a 50% share of each or controls them
    • A taxpayer and its branch or permanent establishment
    • Partners in the same unincorporated partnership
    • Exempt and non-exempt business activities of the same person
Coverage under the term ‘Connected Persons’
  • In addition to the definition of ‘Related Party’, the PCD also casts a wider net to cover ‘Connected Persons’ under the ambit of the Transfer Pricing framework. The intent to include such persons under framework is to avoid tax base erosion by the individual owners of taxable businesses from UAE.

  • In absence of a personal income taxation in the UAE, the individual may generate incentives by making excessive payments to themselves or persons connected with them.

  • Accordingly, the term ‘Connected Persons’ has been introduced to cover the below persons:

    • An individual who directly or indirectly has an ownership interest in, or controls, the taxable person

    • A director or officer of the taxable person

    • An individual related to the owner, director or officer of the taxable person to the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship

    • Where the taxable person is a partner in an unincorporated partnership, any other partner in the same partnership

Deductibility of expenses / payments in relation to ‘Connected Persons’
  • The PCD states a few conditions for allowing deductibility of any payments / benefits provided to Connected Persons:
    Any payments / benefits provided by a business to its Connected Persons will be deductible only if the business can demonstrate that the payment / benefit corresponds with the market value of the services provided and the same is incurred wholly and exclusively for the purpose of a taxpayer’s business.

OECD guidance
  • The PCD states that all the transactions with Related Party and Connected Persons will need to comply with the Transfer Pricing rules and the arm’s length principle set out in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations [‘OECD Guidelines’].
  • However, the final rules and regulations governing the framework of Transfer Pricing in the UAE is yet to be published by the Ministry of Finance.
Transfer pricing methods
  • The PCD provides that for the application of the arm’s length principle, internationally recognised Transfer Pricing methods shall be used.
Self-assessment
  • No self-assessment regime from a Transfer Pricing perspective is currently in place in the UAE. However, considering the proposed introduction of the Corporate Tax and Transfer Pricing in UAE, , it is recommended that the value of supply or import of services between Related and Connected Parties should be equal to the market value/ at arm's length even though the final legislation is yet to be published..
Transfer pricing documentation
Preparation of transfer pricing documentation
  • The PCD states that the businesses may be required to submit a disclosure containing information regarding their transactions with Related Party and Connected Persons.
  • The CbCR regulations in the UAE are effective from 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 MoF 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 reporting fiscal year of the MNE in line with the standard template set out at in Annex III of Chapter V of the OECD Transfer Pricing Guidelines.
Master and local file
  • The PCD states that the businesses will need to maintain a Master File and Local File (with format and content consistent with the requirements prescribed under OECD BEPS Action 13).
Some risk factors for challenge
  • Multinational companies engaged in intragroup transactions which do not maintain a formal Transfer Pricing policy consistent with the arm’s length principle may be exposed to increased scrutiny once the Transfer Pricing regulations kick in.
    Maintenance of appropriate back-up internal documentation will become critical. The taxpayers must therefore start to devise internal framework surrounding the preparation and maintenance of back up documents for their intra group transactions.
Penalties
  • 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.
  • The taxpayers can expect some guidance around any penalties that may be levied under the proposed Corporate Tax laws and regulations if there is a failure on part of taxpayers to maintain contemporaneous Transfer Pricing documentation.
Economic analysis and how to demonstrate an arm’s length result
  • The PCD puts reliance on the arm’s length principle for the taxpayer’s related party transactions and payments made to Connected Persons. In this regard, the following guidance is provided in the PCD:
    • In order for a transaction or arrangement between related parties or with a Connected Persons to meet the arm’s length standard, the results of the transaction or arrangement must be consistent with what the results would have been if they had been between parties that are not related to each other
    • The arm’s length price will need to be determined using one of a set number of internationally recognised Transfer Pricing methods, or a different method where the business can demonstrate that the specified methods cannot be reasonably applied to determine an arm’s length result.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • No APAs, dispute avoidance and resolution guidance in the UAE.
Exemptions
  • The PCD states that a business shall need to maintain a Master File and Local File if the arm’s length value of the related party transactions exceeds a certain threshold in the relevant tax period. However, the final rules and regulations providing such threshold for applicability is yet to be published by the MoF.
  • Multinational companies which do meet the revenue threshold for UAE CbCR purposes i.e. 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.
  • UAE businesses that are directly or indirectly at least 51 percent owned by the Federal or an Emirate Government, or a UAE Government body or authority, are exempt from the UAE ESR.
Related developments
Digital services tax
  • No digital services tax has been introduced in the UAE.
COVID-19
  • The UAE MoF takes 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. In the past year, we have witnessed increased number of queries and audits carried out by the Federal Tax Authority for UAE in-scope businesses. Considerations 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). We have also seen that considerations were 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).

  • 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 are therefore urged to make every effort to otherwise comply with their obligations under the ESR (including filing deadlines).

  • No COVID-19 considerations apply to CbCR regulations.

For further information on transfer pricing in the United Arab Emirates please contact:

Steve Kitching2.png

Steve Kitching
T +971 58 550 9064
E steve.kitching@ae.gt.com

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Anuj Kapoor
T +971 56 369 8944
E anuj.kapoor@ae.gt.com

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Oluwaseyi Abimbola
T
+971 56 287 4293
E oluwaseyi.abimbola@ae.gt.com

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Noha El Mawardy
T +971 55 534 9587
E noha.elmawardy@ae.gt.com