On 09 December
2022, the United Arab Emirates (UAE) implemented Federal Decree-Law No. 47 of
2022, commonly referred to as the Corporate Tax (CT) Law. This legislation
introduces a 9% tax rate, effective for financial years commencing on 01 June
2023. Aligned with the Organisation for Economic Co-operation and Development
(OECD) Base Erosion and Profit Shifting (BEPS) initiative, the CT Law aims to
enhance transparency and equity within the international tax framework. It also
supports the strategic objectives of the UAE, contributing to its accelerated
development and transformation. The UAE CT Law also introduces a Transfer
Pricing (TP) regime in the UAE. In this article, we will highlight those provisions
pertaining to TP that could significantly influence both your audit report and
your financial statements.
Article 61 explores the transitional rules
impacting the tax treatment of specific transactions. As such, it emphasises
the crucial need for a thorough review of Article 61 provisions for compliance
and precise financial reporting, as well as specifying that a taxable person’s
opening balance sheet for CT purposes is derived from the closing balance sheet
under the applicable accounting standards on the last day of the preceding
Further, Ministerial Decision No. 120 of 2023,
issued by the UAE Ministry of Finance (MoF), outlines the transitional rules
for CT. These guidelines assist businesses in transitioning seamlessly from the
pre-implementation to the post-implementation period of the CT Law. This Decision
aims to facilitate the determination of a taxable person’s opening balance
sheet, ensuring a fair and transparent approach for assets and liabilities held
before the implementation of the new CT regime.
Article 34 focuses on those transactions
involving related parties and connected persons, stipulating that all
transactions and/or arrangements between them shall meet the arm’s length principle.
Due to the complexities inherent in transactions with related parties, a
comprehensive analysis is essential to ensure adherence to the arm’s length
principle and compliance with the relevant transfer pricing regulations.
Assessing the implications of Article 34 on related-party transactions is thus crucial,
demanding proactive measures to rectify any deviations and ensure the selection
of an appropriate TP method.
While companies traditionally disclosed
related party transactions following the requirements of IAS 24, the UAE CT Law
calls for a specific analysis of related parties under Article 35 and 36 of the
CT law. This step is vital for accurately identifying related parties and
ensuring that transactions with them conform to fair and equitable terms,
consistent with those between unrelated entities. This approach fosters
transparency and compliance with transfer pricing standards, aligning with the
specific requirements outlined in the UAE CT regulations.
Non-adherence to the TP regulations can
profoundly impact a company’s financial health and operational stability. One
significant consequence is the heightened risk of tax adjustments and penalties
imposed by the FTA. Failure to conduct transactions at arm’s length may lead to
adjustments in taxable income, resulting in additional tax liabilities,
interest, and penalties. Moreover, non-compliance can influence the reported
cost of goods sold and operating expenses, directly impacting the taxable
income. Non-arm’s-length transactions may lead to either an artificial
inflation or deflation of costs, thus affecting the overall tax position of the
Additionally, non-compliance can impact the
reported cost of goods sold and operating expenses, directly influencing
taxable income. Beyond financial repercussions, it can cause operational
disruptions, and diverting management’s focus from core activities. To mitigate
these risks, companies must prioritize adherence to transfer pricing
regulations, establish clear policies, and conduct regular reviews to ensure
compliance with the evolving tax laws and international standards.
light of the potential consequences of non-compliance with the UAE TP
regulations, companies should take proactive steps to safeguard their financial
standing and operational efficiency. The below steps are therefore recommended:1.
Evaluate whether other group
entities qualify as related parties under the provisions of Article 35 (related
parties) and Article 36 (connected persons). This involves a thorough examination of ownership, control, or
significant influence relationships.2.
Accurately identify transactions
between related parties and comprehend the nature of such transactions. This step is crucial for applying the correct TP
method, ensuring that transactions are conducted on fair and equitable terms.3.
transfer pricing policy
Evaluate the existing TP policy to
determine its compliance with the arm’s length standard. Assess whether the
policy needs adjustments or updates to align with current regulations and
sufficiency of supporting documents
Identify the necessary
documentation required for compliance with TP provisions under Article 55 of
the UAE CT law. This may include the completion of a TP disclosure form,
preparation of a Master file and Local file, and documentation supporting the
opening related party balances
identify the related party transactions and use an appropriate TP method to
analyse opening balances. If discrepancies indicating misalignment with the arm’s
length principle are found, make the necessary adjustments to ensure that
related party balances comply with the arm's length principle, reinforcing
transparency and regulatory compliance.6. Engage with experts:
on a thorough review of your TP practices and involve experts as necessary.
Early action can minimize risks and simplify year-end reporting. We are
dedicated to providing independent support for the analysis and compliance of
TP. Thank you for trusting us with your tax matters; we anticipate working
closely with you to address any questions or concerns you may have.