Overview of guidance on the preparation of transfer pricing documentation in the UAE
29 May 2023
Tax Messenger
Tax Messenger
In May 2023 the Ministry of Finance of the UAE published on its official website Decision No. 97: «Requirements for Maintaining Transfer Pricing Documentation» («the Decision»), which supplements Decree-Law No. 47/2022 on the Taxation of Corporations and Businesses («the Corporate Tax Law» / «the Law»). The Decision is intended to address matters relating to the preparation of transfer documentation in the UAE that are not already covered in the Law (see our earlier overview of the new transfer pricing rules in the UAE).
In addition, on 12 May 2023 the Ministry of Finance of the UAE also issued an Explanatory Guide on the Corporate Tax Law («Explanatory Guide»), which may be used in interpreting the meaning and effect of each individual article of the Law.
Presented in this alert is a brief overview of the additions made to the transfer pricing rules in the UAE based on the documents mentioned above.
In addition, on 12 May 2023 the Ministry of Finance of the UAE also issued an Explanatory Guide on the Corporate Tax Law («Explanatory Guide»), which may be used in interpreting the meaning and effect of each individual article of the Law.
Presented in this alert is a brief overview of the additions made to the transfer pricing rules in the UAE based on the documents mentioned above.
The Decision[1] sets the revenue levels above which a company must prepare both a master file and a local file:
The format of the master file and local file is to be prescribed by the Federal Tax Authority of the UAE [B1 — the format for those documents has not yet been prescribed].
Generally, the master file should provide an overview of the company’s business activities and the corporate structure of the group to which it belongs. The local file should contain more detailed information on transactions with the following related persons[2]:
On the other hand, transactions that a taxable person should not disclose in the local file include[3]:
- Where the company is the founder of a multinational enterprise group with a consolidated revenue of AED 3,150,000,000 or more, or
- Where the company has a revenue or AED 200,000,000 or more.
The format of the master file and local file is to be prescribed by the Federal Tax Authority of the UAE [B1 — the format for those documents has not yet been prescribed].
Generally, the master file should provide an overview of the company’s business activities and the corporate structure of the group to which it belongs. The local file should contain more detailed information on transactions with the following related persons[2]:
- Non-residents
- Persons exempt from corporate tax
- Residents that elect to benefit from the Small Business Relief (Article 21 of the Law)
- Residents whose profits are subject to a different corporate tax rate from that applicable to the company’s profits
On the other hand, transactions that a taxable person should not disclose in the local file include[3]:
- transactions with related persons that are not exempt from corporate tax, or that do not elect to benefit from the Small Business Relief, or that apply the same corporate tax rate as the taxable person;
- transactions with natural persons, provided that the parties to the transactions are acting as independent persons[4];
- transactions with juridical persons that are related to the taxable person solely by virtue of being partners in an unincorporated partnership, but provided that the parties to the transactions are acting as independent persons;
- transactions with a permanent establishment of a foreign persons whose profits are subject to the same corporate tax rate as the taxable person’s profits.
In the UAE, natural persons are considered to be related to each other for transfer pricing and corporate tax purposes if their relationship is within the fourth degree of kinship (including by way of adoption or guardianship)[5]. The Guide presents examples of such degrees of kinship:
- First degree — parents and children of a natural person and of his or her spouse
- Second degree — grandparents, grandchildren and siblings of a natural person and of his or her spouse
- Third degree — great-grandparents, great-grandchildren, uncles, aunts, nieces and nephews of a natural person and of his or her spouse
- Fourth degree — great-great-grandparents, great-great-grandchildren, grand-uncles, grand-aunts, grand-nieces, grand-nephews and first cousins of a natural person and of his or her spouse.
Clause 3 of Article 34 of the Law does not set a hierarchy of transfer pricing methods which a taxpayer must use to show that transaction prices are at arm’s length. The Guide states that a taxpayer has a right to use one or more transfer pricing methods, taking into account the terms and characteristics of the transaction concerned, the economic circumstances in which the transaction takes place and the functions, risks, assets and business strategies of the parties to the transaction.
In conclusion
It should be noted that there are still many aspects of the transfer pricing rules that are not covered by the Law, the Decision and the Guide. At the same time, the Guide states that the UAE’s transfer pricing rules are intended to be aligned with the international transfer pricing rules set out in the OECD Guidelines for Multinational Enterprises and Tax Administrations («the OECD Guidelines») and allows taxable persons to use relevant provisions from the OECD Guidelines as a reference in the application of the provisions of the Law.
It should also be expected that, further to the Decision, the Federal Tax Authority of the UAE will issue guidance on the application of provisions of the Decision and the preparation of transfer pricing documentation.
We will continue to monitor the development of these rules in the UAE and will publish regular updates on any further changes.
It should be noted that there are still many aspects of the transfer pricing rules that are not covered by the Law, the Decision and the Guide. At the same time, the Guide states that the UAE’s transfer pricing rules are intended to be aligned with the international transfer pricing rules set out in the OECD Guidelines for Multinational Enterprises and Tax Administrations («the OECD Guidelines») and allows taxable persons to use relevant provisions from the OECD Guidelines as a reference in the application of the provisions of the Law.
It should also be expected that, further to the Decision, the Federal Tax Authority of the UAE will issue guidance on the application of provisions of the Decision and the preparation of transfer pricing documentation.
We will continue to monitor the development of these rules in the UAE and will publish regular updates on any further changes.
How B1 can help
In light of the new transfer pricing rules in the UAE, B1's professionals are ready to provide prompt support in:
In light of the new transfer pricing rules in the UAE, B1's professionals are ready to provide prompt support in:
- Analysing current transactions involving UAE companies and identifying and assessing transfer pricing risks
- Developing and implementing transfer pricing policies with the involvement of UAE companies
- Preparing templates of transfer pricing documentations, including master files and local files
- Carrying out benchmarking studies of prices / profit margins in relation to transactions with UAE residents
- Transfer pricing advice and planning for new transactions involving UAE companies.
[1] Clause 1 Article 2 of the Decision, which supplements Clause 2 of Article 55 of Chapter 17 of the Law
[2] Clause 2 of Article 2 of the Decision
[3] Clause 3 of Article 2 of the Decision
[4] The concept of "acting as independent persons" refers to circumstances in which: 1) the transaction in question is undertaken in the ordinary course of business and the parties do not transact exclusively or almost exclusively with each other, or 2) the activities of one of the parties to the transaction is not subject to detailed instruction or to comprehensive control of the other party to the transaction. In this respect, the tax authorities must take into account all relevant facts and circumstances to determine whether or not the persons are acting in the transaction as if they were independent of each other
[5] Clause 1а of Article 35 of the Law
[2] Clause 2 of Article 2 of the Decision
[3] Clause 3 of Article 2 of the Decision
[4] The concept of "acting as independent persons" refers to circumstances in which: 1) the transaction in question is undertaken in the ordinary course of business and the parties do not transact exclusively or almost exclusively with each other, or 2) the activities of one of the parties to the transaction is not subject to detailed instruction or to comprehensive control of the other party to the transaction. In this respect, the tax authorities must take into account all relevant facts and circumstances to determine whether or not the persons are acting in the transaction as if they were independent of each other
[5] Clause 1а of Article 35 of the Law
Authors:
- Ruslan RadzhabovPartnerTransfer Pricing and Operating Model Effectiveness
- Vasilii AnishchenkoAssociate PartnerTransfer Pricing and Operating Model Effectiveness
- Ekaterina SyrnikovaSenior ManagerInternational Tax and Transaction Services
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