The upcoming corporate tax in UAE is for corporations and applies to their business profits for the year 2023 and so on. The law is not active presently, however, work is in progress to make the law official and acceptable. This law update addresses the regulations for tax returns and relevant aspects such as transfer pricing, applicability, and much more. Let’s discuss the regulations about transfer pricing and how related parties will be impacted by them.
Defining the Concept of Transfer Pricing (TP)
Transfer pricing is the price that a company charges to its related parties for goods and services. It is set and defined under transfer pricing rules. The concept of transfer pricing is important because it allows companies to determine their profit margins based on what they charge other entities rather than just charging them more than the cost of production or sales expenses like wages, rent, utilities, etc., which would have been done in normal circumstances when there was no need for such methods.
Transfer pricing rules help companies calculate their profits so that they can make accurate assessments of their financial situation without any ambiguity about profits made by related entities
(i) To assess whether these profits are above-normal or below-normal levels;
(ii) To identify probable causes behind such differences.
Read More : UAE’s New Corporate Tax Policy on Entities – An Overview.
Impacts of TP Rules Over Transactions Between Related Parties
The impact of these UAE Transfer Pricing rules on related parties varies depending on whether they are based in the UAE or not. For example, if your company is based outside the UAE then these rules may affect its ability to sell goods and services within the country without incurring additional costs. The main impact of UAE Transfer Pricing rules on intercompany transactions is that they require the pricing of goods and services sold to related parties to be based on arm’s-length terms.
The cross-border intra-group pacts of multinational unions with firms subject to the Corporate Tax in UAE would undoubtedly be impacted by the TP rules. It is unclear if the commodities prone to Corporate Tax in UAE will be impacted by the TP laws regarding domestic intra-group pacts. It will probably depend on additional and ultimate information regarding how free zone firms are handled, the regulations governing loss recovery, and tax bunches. It should be emphasized, nevertheless, that only a small number of nations allow intra-group domestic transactions to be prone to TP rules, particularly if they could give the group a general tax benefit. Therefore, it is not possible to rule out the potential that these transactions will be covered by the current TP regulations.
Another factor to consider is that new rules will make it harder for companies to sell goods and services at below-market prices. This may result in an increase in costs for customers because they will be required to pay more for items purchased from related parties. However, the impact is not likely to be significant as most transactions between unrelated parties take place through a third-party intermediary (such as an agent or distributor) who are unaffected by these changes.
The Need for a UAE TP Master File
The law about Corporate Tax in UAE has introduced new regulations that require all companies to maintain a TP master file. A TP master file is a record of intercompany transactions and details about the entities involved in these transactions, including the amounts and dates of payment, the identity of the parties involved, as well as other relevant information such as whether there has been any change in ownership or control over an asset, etc. This record will help ensure compliance with all applicable tax laws including those related to transfer pricing rules which may not necessarily be stated explicitly within existing legislation but need special attention when dealing with cross-border transactions between related parties within one country (such as UAE).
Documenting TP Compliance in UAE
The UAE TP master file is a document containing all of the transfer pricing information for an entity that has been reported to the UAE tax authorities. It contains detailed information on transactions between related parties (including intercompany sales and payments) as well as intra-entity transactions, such as loans or advances made by one company to another.
The contents of this file include:
- A listing of all entities in which you are involved;
- Details about each entity including its legal form (corporation, partnership), purpose(s), and ownership structure;
- Information regarding any subsidiaries controlled by your group;
- Your group's annual turnover for each year since inception;
- Average sales prices charged by individual products sold within these entities over a period from last year through next year (if applicable).
As we have seen the possible impacts and TP rules that indicate that you should welcome corporate tax advisory services to your door for coping with all challenges regarding corporate income tax UAE. Corporate tax advisors help your firm to fulfill all legal requirements to avoid compliance issues.
Read More : How Corporate Tax in UAE will Impact the Real Estate Industry.
