Transfer pricing - United Arab Emirates

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 However, CR 32 was superseded by Cabinet Decision No. 44, published in 2020.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.

• 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

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

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.

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.