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Transfer Pricing in Abu Dhabi

The adoption of transfer pricing practices has gained significant global attention recently, particularly due to its impact on corporate income taxation in Abu Dhabi. HLB Abu Dhabi can assist you in developing tax-efficient arrangements that ensure compliance with regulations while meeting your transfer pricing needs, amid heightened scrutiny by tax authorities worldwide.

Businesses involved in cross-border transactions increasingly recognize the importance of transfer pricing. Companies of all sizes face elevated risks due to increased monitoring and regulatory standards. Many multinational corporations are exploring cost management options through well-designed transfer pricing models.

Transfer Pricing Regulations in Abu Dhabi

Transfer pricing regulations govern the pricing of transactions within and between enterprises under common ownership or control. We provide initial insights into these regulations to help you navigate them effectively.

What is Arm’s Length Price?

The arm’s length price (ALP) for transactions between associated enterprises reflects what independent and unrelated parties would pay under similar commercial conditions.

Impact of Transfer Pricing Rules on Corporate Tax in Abu Dhabi

According to the Ministry of Finance (MOF), transfer pricing rules ensure that transactions between related parties are conducted on arm’s length terms, akin to transactions between independent parties. Abu Dhabi businesses must adhere to these rules and comply with documentation requirements based on OECD Transfer Pricing Guidelines.

Taxpayers must apply the arm’s length principle to ensure transactions with related parties reflect market prices for commodities or services.

It is anticipated that transfer pricing regulations will be integrated into Abu Dhabi’s Corporate Tax Law, encompassing various transfer pricing methods, extensive annual documentation, and stringent penalties for non-compliance.

As standard practice, the Federal Tax Authority (FTA) evaluates transfer pricing policies, documentation, inter-company, and inter-group transactions to verify compliance with regulations. Non-compliant businesses face substantial penalties.

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Why Transfer Pricing Documentation?

Businesses must comply with transfer pricing rules and documentation requirements aligned with OECD guidelines.

Comprehensive transfer pricing documentation helps demonstrate that transactions meet the arm’s length principle, reducing the likelihood of transfer pricing disputes. For businesses with complex international and domestic transactions, compliance costs can escalate significantly.

Clear and widely adopted documentation standards mitigate potential compliance costs associated with transfer pricing disputes. Businesses should consider employing in-house or outsourced tax specialists with expertise in transfer pricing rules and international transactions.

Typically, businesses electronically submit a self-declaration of compliance with transfer pricing rules along with their tax returns.

Transfer Pricing Documentation

  • Ensures that taxpayers incorporate transfer pricing requirements when establishing prices and other conditions and reporting income from such transactions in their returns.
  • Provides tax administrations with necessary information for conducting informed transfer pricing risk assessments.

Documentation Model under OECD Guidelines

According to OECD guidelines on transfer pricing, authorities adopt a three-tier approach for transfer pricing documentation:

Master File:

  • Contains standardized information for all MNE group members.

Local File:

  • Details material transactions of local taxpayers, including:
    • Management structure description of the local entity.
    • Comprehensive business strategy overview.
    • Identification of key competitors.
    • Description and context of material-controlled transactions.
    • Breakdown of intra-group payments and receipts per transaction category.
    • Identification of associated enterprises and their relationships.
    • Copies of all significant intercompany agreements.
    • Detailed comparability and functional analysis, including year-to-year changes.
    • Identification and rationale for selecting the most suitable transfer pricing method.
    • Summary of assumptions used in method selection.
    • List and description of selected comparable uncontrolled transactions.
    • Description of any comparability adjustments made.
    • Summary of financial information used in applying the chosen TP methodology.

Financial Information:

  • Includes annual financial accounts of the local entity.
  • Shows financial data and allocation schedule used for the TP methodology.
  • Provides summary schedules of financial data for comparables and their sources.

Country by Country Report (CbCR):

  • Requires the parent company of an international group to submit the report to the relevant authority in its country of residence.
  • Applies to parent companies of multinationals with consolidated turnover exceeding USD 857 million (approximately AED 3.15 billion) in the previous financial year.
  • Based on consolidated financial statements, the CbCR Report breaks down global revenue, pre-tax profits, accrued income tax, and other indicators of economic activity per jurisdiction where the MNE operates.

TP Methods under OECD Guidelines:

To determine the arm’s length price for controlled transactions, companies can choose from the following OECD-recognized transfer pricing methods:

  • Traditional transaction method
  • Comparable Uncontrolled Price Method
  • Resale Price Method
  • Cost Plus Method
  • Transactional Profit Method
    • Transactional Profit Split Method
    • Transactional Net Margin Method

When selecting an appropriate transfer pricing method, companies should consider factors such as data availability, method strengths and weaknesses, and suitability for the transaction nature. Once a method and reliable comparables are identified, an arm’s length range can be established.

Regulations may permit the use of methods other than the approved Transfer Pricing Methods, provided that the Taxable Person can demonstrate a reliable measure of an arm’s length price with appropriate documentation, meeting the stipulated provisions under Abu Dhabi Corporate Tax law.

Illustration:

Consider the application of the Comparable Uncontrolled Price Method:

  • ABC Ltd and XYZ Ltd are related entities within the same multinational group.
  • ABC Ltd sells goods to XYZ Ltd at AED 10,000 per metric ton (MT).
  • ABC Ltd sells identical goods to LMN Ltd (an independent party) for AED 12,000 per MT (inclusive of AED 1,000 transportation charges).

In this scenario:

  1. The AED 12,000 per MT charged to LMN Ltd does not adhere to the arm’s length principle, necessitating comparability adjustments.
  2. Identification of a potential comparable transaction may require adjustments to neutralize any material price differences.
  3. Comparability adjustments can factor in quantity discounts, delivery terms, contractual differences, and minor product variations.
  4. Adjusting controlled transactions based on internal comparables could establish a transfer price of AED 11,000 per MT (12,000 – 1,000), thereby increasing ABC Ltd’s profit by AED 1,000, which impacts tax liability calculations.

Frequently Asked Questions

Businesses must maintain a master and local file (formatted according to OECD BEPS Action 13) if the arm’s length value of their Related Party transactions exceeds a specified threshold in the relevant tax period, as outlined in Abu Dhabi transfer pricing regulations.

Do Abu Dhabi transfer pricing regulations apply to all domestic and international transactions?

Yes, according to the latest announcements, transfer pricing applies to all related party transactions.

Is it true that TP documentation in Abu Dhabi is not required for small and medium enterprises or startups?

No, there are no exclusions for SMEs or startups. According to current information from MoF, TP documentation requirements apply based on thresholds for related party transactions. Specific exemptions will be detailed in the forthcoming CT Law.

What are the documentation requirements under the corporate tax regime?

Businesses need to maintain a 3-tier documentation structure aligned with OECD BEPS Action 13:

  • Master File
  • Local File
  • Country by Country Report (CbCR)
What are the internationally recognized transfer pricing methods?

Internationally recognized transfer pricing methods include:

  • Traditional transaction methods
  • Comparable Uncontrolled Price Method (CUPM)
  • Resale Price Method (RPM)
  • Cost-Plus Method (CPM)
  • Transactional Profit Method
    • Transactional Profit Split Method (TPSM)
    • Transactional Net Margin Method (TNMM)
Can entities apply methods other than internationally recognized ones?

Yes, businesses can apply other methods if they can demonstrate that the specified methods are not reasonably applicable to determine an arm’s length result.

Yes, TP documentation applies to all related party transactions exceeding a threshold (to be announced), regardless of whether they are domestic or cross-border.

When will Abu Dhabi transfer pricing regulations become effective?

The Abu Dhabi CT regime will be effective for financial years starting on or after 1 June 2023. Therefore, transfer pricing regulations will also apply from this date.

Will submitting disclosure information requirements be applicable to all entities?

Yes, every business entity will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons, irrespective of the volume of such transactions.

What are the compliance requirements for payments or benefits to connected persons?

Payments or benefits to connected persons by businesses in Abu Dhabi should demonstrate that:

  • They correspond with the market value of the service provided; and
  • They are incurred wholly and exclusively for the purposes of the taxpayer’s business.

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Thomas Koshy

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