Transfer Pricing (“TP”) continues to be an area of increasing importance for businesses operating in the UAE. As taxpayers progress through their Corporate Tax compliance and TP documentation cycles, the Federal Tax Authority (“FTA”) is expected to place greater emphasis on whether related-party transactions are appropriately priced, adequately supported, and consistent with the underlying business substance.
While having TP documentation in place is an important starting point, effective compliance goes beyond fulfilling documentation requirements. Businesses should be prepared to demonstrate the commercial rationale behind their arrangements, the basis for their pricing, and the alignment between their TP analysis and actual business operations.
Why Transfer Pricing Is Becoming a Greater Area of Focus
The UAE TP framework is broadly aligned with OECD principles, while its practical application requires taxpayers to consider the specific circumstances of their UAE operations. As the FTA develops its risk-based approach to tax administration, certain areas are likely to receive increased attention, including:
- Quality of TP documentation: Generic or outdated benchmarking studies may not adequately support the pricing adopted by taxpayers. Documentation should reflect the taxpayer’s specific facts, industry, geography, and transaction profile.
- Economic substance and value creation: The FTA may examine whether the profits attributed to UAE entities are consistent with the functions performed, assets employed, and risks assumed by those entities.
- High-value related-party transactions: Businesses with significant cross-border transactions involving goods, services, intellectual property, or financing may face greater scrutiny, particularly where the transactions have a material impact on taxable income.
- Consistency across tax and financial records: Differences between TP documentation, TP disclosures, audited financial statements, and underlying accounting records may raise questions regarding the completeness and accuracy of the taxpayer’s position.
Key Areas Businesses Should Revisit
Benchmarking analysis
- Regional comparables: Global datasets without regional adjustments can distort results. FTA expects UAE-specific analysis attempted or regionally adjusted benchmarks.
- Adjustment accuracy: Working capital or capacity adjustments must be well-reasoned and documented as unsupported changes increase audit risk.
- Method justification: While TNMM is common, methods like CUP may suit financing or IP transactions. Taxpayers must justify the chosen method.
Intercompany Service
- Evidence of benefit: The FTA expects clear proof that services deliver measurable value such as emails, reports, Key Performance Indicators (“KPIs”), and meeting notes. Documentation should demonstrate that the services are not duplicative and provide genuine operational support.
- Allocation and mark-up: Cost allocation keys must be logical and based on actual usage or benefit
- Avoiding shareholder activity misclassification: Services benefiting only the parent entity such as investor relations or group strategy should not be charged to subsidiaries. Misclassification can lead to disallowance of deductions and audit challenges.
IP Licensing and Intangibles
- DEMPE analysis: Identification of Development, Enhancement, Maintenance, Protection, and Exploitation functions determines where value lies. FTA will expect clear documentation of who performs these functions and where they are located.
- Royalty benchmarking: Determining appropriate royalty rates requires support from external data and alignment with industry norms. The FTA will expect evidence that rates are not arbitrary and are based on reliable benchmarks.
- Substance of IP ownership: Entities holding IP without performing real functions face significant audit risk. The FTA will expect clear evidence of actual control and decision making over the IP.
Intra-Group Financing
- Arm’s length interest rates: Determining appropriate interest rates requires a creditworthiness assessment and reference to market data. The FTA will expect clear evidence that rates are based on borrower specific credit rating and not based on generic assumptions.
- Interest limitation compliance: UAE tax rules cap net interest deductions at 30% of EBITDA. The FTA will expect alignment between TP and tax regulations to avoid disallowances.
- Guarantees and implicit support: These factors are often overlooked but are critical for pricing justification. The FTA will expect clear evidence of whether guarantees or group support were considered in determining the price.
Transactions and Profiles That May Attract Greater Scrutiny
Certain circumstances may increase the likelihood of questions during a tax review, including:
- Significant related-party transactions: Material cross-border transactions involving goods, services, IP, or financing may receive closer attention.
- Consistently low margins or losses: Persistent losses or unusually low profitability in UAE entities may prompt questions around the allocation of functions, risks, and profits within the group.
- Complex group structures: Arrangements involving free zone entities, mainland operations, and multiple related parties may require particular care to demonstrate that the TP outcome reflects the underlying commercial reality.
- Inconsistencies in reported information: Differences between TP documentation, tax filings, financial statements, and supporting records can create unnecessary audit risk.
Strengthening TP Readiness
Rather than waiting for an FTA enquiry or audit, businesses should consider undertaking a periodic TP health check covering both documentation and actual implementation.
Key steps include:
- Review the TP methodology
- Refresh benchmarking analyses:
- Maintain contemporaneous evidence
- Reconcile TP documentation with financial data
- Revisit the FAR analysis
- Test the robustness of the TP outcome
Conclusion: From Compliance to Defensibility
Transfer Pricing should no longer be viewed simply as a documentation exercise. As the UAE Corporate Tax regime matures, businesses should expect greater emphasis on the commercial substance behind related-party transactions and the evidence supporting the pricing adopted.
A defensible TP position requires more than a benchmarking report. It requires consistency between the contractual arrangements, actual conduct, financial results, TP analysis, and supporting documentation.
Businesses that take a proactive approach today by reviewing their TP policies, strengthening documentation, validating benchmarking, and ensuring alignment with their actual operations will be better positioned to respond confidently to potential FTA scrutiny.
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GCC Tax Monday is a weekly publication that provides valuable insights into tax developments across the GCC region. Each week, we cover key updates, regulatory changes, and expert analyses to keep you informed and prepared for the evolving tax landscape.
