The United Arab Emirates introduced corporate tax in June 2023, bringing a new layer of financial considerations for businesses operating in this region. If your company engages in transactions with related parties, understanding transfer pricing becomes crucial. This article simplifies the concept of transfer pricing in the context of UAE corporate tax and highlights the importance of seeking professional advice from corporate tax services in the UAE.
What is Transfer Pricing?
Imagine you own a bakery in Dubai and a flour mill in Abu Dhabi (Both companies under your control). The flour mill sells wheat flour to your bakery. In a perfect world, this transaction would happen at an arm’s length price – the same cost you would pay to an unrelated flour mill.
Transfer pricing is all about making sure these transactions between related groups are conducted at arm’s length. This stops businesses from artificially moving profits to lower tax jurisdictions or manipulating their taxable income in this country.
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Why Is Transfer Pricing Important In The UAE
The UAE corporate tax law demands businesses show that transactions with related parties are conducted at arm’s length. This makes sure a fair tax evaluation and secures the government’s tax profits.
Failing to adhere to transfer pricing regulations can cause penalties, comprising –
Tax adjustments – The tax authorities can adjust your taxable income in case they believe transfer pricing was not operated at arm’s length. This can cause a higher tax bill.
Penalties – You can face extra financial fines for non-compliance.
Understanding Transfer Pricing Methods
A number of ways can be utilized to determine an arm’s length price for transactions between related parties. Here is a simplified overview of three common ways –
Comparable uncontrolled price – This method comprises financing similar transactions between unrelated corporations in the same industry and geographical location.
Transaction profit method – This method compares the profitability of the controlled transaction to the profitability of similar transactions undertaken by non-related corporations.
Cost plus method – This method adds a markup to the expense of goods and services sold by the related party to arrive at an arm’s length price.
Transfer Pricing And Arm’s Length Principle
Transfer pricing comprises determining the transaction cost between companies that share usual ownership or control. The common principle is to price these transactions as in case they were operated between independent units. This principle builds the base of transfer pricing rules globally, comprising within the corporate tax structure of the United Arab Emirates. The vital documentation is –
Transfer Pricing Policy
A transfer pricing policy highlights the approach of a company to pricing transactions with relevant parties or groups. It details the kinds of related party transactions, the ways utilized to build arm’s length costs, and the paperwork sustained to justify these costs.
Master File
A master file works as a detailed paper highlighting the transfer pricing guidelines and practices of a corporation. This encompasses details about the group framework, related party transactions, and the strategies executed to set the costs of arm’s length of the company.
Local File
This paper delivers deep knowledge of the transfer pricing of a business and methods during a particular tax duration. This covers data about related group transactions in that duration, the strategies executed for determining arm’s length costs, and the accompanying supporting documentation.
Businesses might be asked by tax authorities to deliver additional paperwork depending on their different situations. This is vital for companies to sustain all pertinent paperwork protectively for a minimum of five years.
How Can Innovex Tax Help With Transfer Pricing In UAE
Managing transfer pricing regulations can be complicated. Innovex Tax, a leading corporate tax services in UAE, can be your trusted partner in making sure adherence. We deliver an array of services comprising –
Transfer pricing planning and documentation – We assist you in creating a transfer pricing policy that aligns with your business scheme and adheres to UAE rules.
Transfer pricing audits – Our team can help you in preparing for a possible transfer pricing audit from the tax authorities of the United Arab Emirates.
Transfer Pricing Training – We deliver training programs to assist your workers in understanding transfer pricing rules and their role in adherence to corporate tax UAE regulations.
Final Words
The introduction of corporate tax in the UAE requires a proactive system to transfer pricing. By getting assistance from a reliable corporate tax advisory service like Innovex Tax, you can manage these rules with confidence and make sure your business runs in full adherence.
