The Federal Tax Authority (FTA) has just released a Public Clarification (CTP011) regarding Transfer Pricing (TP) downward adjustments made directly in the Corporate Tax return.
For businesses navigating the United Arab Emirates (UAE) Corporate Tax regime, this is a highly crucial positive shift in the regulatory landscape.
No More Prior Approval
Previously, tax practitioners and taxpayers understood that any TP downward adjustment (an adjustment that decreases taxable income) required prior approval from the FTA before it could be made in the tax return.
The FTA has clarified that because the Corporate Tax system operates on a self-assessment basis, taxpayers do not require prior approval from the FTA to make downward TP adjustments in their Tax Return.
Strict Conditions
While taxpayers will not be required to obtain permission, the FTA has put clear guardrails in place to prevent misuse. If a taxpayer makes a downward adjustment, it must comply with strict disclosure and documentation standards:
- Zero-Threshold Disclosure: Unlike regular related-party transactions (which only need disclosure if they exceed certain thresholds), any transaction subject to a downward adjustment must be disclosed, regardless of its value or nature.
- Robust Documentation Required: Taxpayers must maintain and be ready to present:
- A clear written rationale explaining why the original accounting price wasn’t at arm's length and how the new price complies.
- A full arm's length analysis, including a robust benchmarking study.
- A reconciliation between a taxpayer’s financial statements and the adjusted values in the tax return.
- Symmetrical corresponding adjustments by the participating related party.
- Scope Restriction: This self-assessment mechanism applies solely to primary adjustments made by the taxpayer to meet the arm's length standard under Article 34(1). It does not cover corresponding adjustments arising from tax authority audits or foreign adjustments under Articles 34(10) and 34(11), which are subject to separate procedures.
What This Means for Businesses
This clarification brings operational flexibility, but it also places the burden of proof squarely on the taxpayer.
- Tax audit: By bypassing the approval process, the FTA has essentially shifted its review to the back-end. Any downward adjustment is highly likely to trigger a tax audit. If the adjustment lacks adequate support and rationale, the adjustment will likely be disallowed, leading to penalties and back-taxes.
- Symmetry is crucial: A taxpayer cannot unilaterally reduce its taxable income. It must prove that the counterparty in the transaction has made a corresponding upward adjustment (or vice versa) to keep the tax base balanced.
- Prompt action: Taxpayers must not treat TP adjustments as a last-minute filing exercise. They must establish their TP policies, perform benchmarking studies early, and align their intercompany agreements to reflect arm's length pricing throughout the year.
Is your group's transfer pricing policy robust enough to withstand a post-filing audit? Let’s discuss how to prepare your benchmarking and documentation to safely utilize these downward adjustments.
Connect With Us
