Do I need to Comply with Transfer Pricing Rules?
Transfer pricing refers to the prices of goods and services that are exchanged between companies under common control. Most tax jurisdictions around the world requires an arms length agreement for transactions made between related parties.
Put simply, transfer pricing accounting occurs when goods or services are exchanged between divisions of the same company.
UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.
Sometime there maybe a different rate of tax for large multinationals that meet specific criteria set in reference to the "Pillar Two" of the OECD base erosion rules.
How Transfer Pricing Works
A transfer price is used to determine the cost to charge another (internal) division, subsidiary, or holding company for services rendered. Typically transfer prices are reflective of the going market price for that good or service. Transfer pricing as practice extends to cross-border transactions as well as domestic ones.
Effective but legal transfer pricing takes advantage of different tax regimes in different countries by raising transfer prices for goods and services produced in countries with lower tax rates.
Why Does Transfer Pricing Exist?
Companies use transfer pricing to reduce the overall tax burden of the parent company.
Transfer pricing rules seek to ensure that transactions between related parties (an individual or entity which has a pre-existing relationship with a business) are carried out on arm’s length terms. This is what is known as the ‘Arm’s Length Principle, which means that transfer prices between two commonly controlled entities must be treated as if they are two independent entities, and therefore negotiate at “arm’s length”. The OECD also has rules around this principle which is also published on their website and which the UAE is expected to follow.
Transfer Pricing Documentation Requirements
As the UAE is expected to follow international standards when it comes to transfer pricing, the requirement of preparing documentation on the disclosure of transactions between related parties and connected persons is expected to be required. The OECD BEPS framework has documentation on the international standards required for this and also contain certain thresholds on the value of the transactions.