The arm’s length principle, which ensures that transactions between related parties are priced as if they were independent, is a key component of transfer pricing regulations and has been specifically addressed under International Accounting Standards. With the introduction of the UAE Corporate Tax Law, businesses are now subject to stricter guidelines for related party transactions, aligning with global standards and ensuring fairness in tax reporting.

The Arm’s Length Principle: Why It’s More Critical Than Ever

For businesses in the UAE, the introduction of the Corporate Tax Law marks a significant shift in the regulatory landscape. This law mandates that all related party transactions must be conducted at arm’s length, meaning that the pricing of these transactions should reflect the terms that would be agreed upon between independent parties in a competitive market. The principle aims to prevent profit shifting and tax avoidance, thereby ensuring that businesses pays the correct amount of tax.

Previously, the focus was often mainly on financial reporting and disclosure, but now businesses must also prove their compliance with the arm’s length principle as this may have a potential impact on the provisions made in the financial statements through detailed transfer pricing (TP) documentation and assessment.

This shift underscores the growing importance of maintaining compliance with transfer pricing regulations, as failure to do so could lead to significant tax penalties, modifications in opinion/reporting, or even potential reputational damages, inadequate provisioning for tax and filing, inappropriate disclosures as per standards in the financial statements prepared by management etc.

Staying Compliant with the UAE Corporate Tax Law

In addition to the immediate tax implications, ensuring compliance with transfer pricing regulations is crucial for the overall integrity of a business’s financial reporting. The UAE Corporate Tax Law mandates that businesses disclose their related party transactions in a manner consistent with the arm’s length principle, ensuring that the pricing is fair and accurately reported.

The UAE is also committed to following the global standards outlined by the OECD on transfer pricing, meaning businesses must stay up-to-date with international best practices. A robust transfer pricing policy, along with timely and accurate TP studies, will help businesses safeguard against the risks associated with non-compliance, ensuring that they can continue to operate smoothly and without unnecessary disruptions.

Timely communication with your Auditors

Don’t wait until it’s too late!!

If there are any uncertainties regarding your transfer pricing practices and its implications on the financial statements, compliance with taxation, Audit opinion etc, it’s crucial to communicate with your auditors immediately as its involved lot of quality efforts and close evaluation. 

Stay Compliant with Crowe

Navigating the complexities of the UAE Corporate Tax Law and transfer pricing regulations isn’t something you want to leave to chance. The consequences of non-compliance are high, and the need for timely, expert guidance is immediate.

Stay compliant, stay prepared— contact Crowe today to ensure your business stays compliant and prepared for what lies ahead. Let us help you avoid costly mistakes and ensure your transfer pricing practices are solid, so you can focus on growing your business with confidence.