UAE Transfer Pricing: Understanding New Rules, Documentation & Penalties

With new tax rules coming in 2024, let’s break down what transfer pricing means in clear, simple terms.

What is Transfer Pricing?

Transfer pricing is the price a company charges itself for internal goods or services. For example, imagine a clothing company called ABC Fashions. They make shirts in their factory in India. ABC’s stores in Dubai sell those shirts. The price they pay their India factory for the shirts is the “transfer price.” It’s important because different countries have different tax rates.

When Does it Apply?

Transfer pricing rules apply only to “related parties.” These are companies owned by the same group, like a parent and its subsidiaries. They apply when goods or services are transferred between them. Or two sister companies owned by the same parent group. The rules apply if the total value transferred between these firms exceeds AED 3 million in a tax year. Then special documentation is needed.

Why is it Important?

When related companies trade internally, they can shift profits. They can move them between high and low tax countries to cut taxes. For example, ABC Fashions could sell India-made shirts to Dubai stores at a very low price. That reduces ABC’s profits in the UAE (low tax) and increases them in India (high tax). Authorities use transfer pricing rules to ensure fair taxes on companies. They should pay based on their local activities in each country. This prevents profit shifting.

Calculating the Right Price

There are accepted methods used to find the “arm’s length price” related companies should charge each other:

• Comparable Uncontrolled Price Method – Look at third party market prices
• Cost Plus Method – Use production costs plus markup
• Resale Price Method – Deduct normal markup from resale price

Proper documentation showing work is key to prove charged prices are reasonable.

Documentation Requirements

From 2024, contemporaneous documentation must be ready by November 2023 covering:

• Company structure
• Related party transaction details
• Transfer pricing method used
• Analyses supporting the pricing

It must be available if tax authorities review within 6 years. Penalties apply for delays or lacking records.

Action Steps for Compliance

To prepare, companies should:

1. Analyze related party flows.
2. Select pricing methods.
3. Create documentation by November 2023.
4. Engage experts annually.
5. File necessary disclosures on time.

Proper planning simplifies the transition to the new tax rules.
Let me know if any part needs more explanation!

Conclusion

While transfer pricing may sound complex, the underlying logic is straightforward. By clearly understanding key concepts and planning documentation accordingly, businesses can comply with rules smoothly as the UAE’s tax landscape evolves. Please reach out if any part requires further simplicity

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