As United Arab Emirates (UAE) is all set to implement Corporate Tax (CT) effective 1 June 2023, understanding the Transfer Pricing guidelines is essential when a tax registrant is having any transactions with any related parties either in UAE or outside of UAE. As per the public consultation document on Corporate Taxes in UAE released by the Ministry of Finance, all the Related Party transactions and transactions with Connected Persons will have to comply with transfer pricing rules and the arm’s length principle as set out in OECD guidelines.

What is Arm’s Length Price (ALP)?

ALP is a price which is applied in a transaction between persons who are unrelated to each other in uncontrolled conditions. For e.g: Open market transactions

Why should we calculate ALP as part of compliance with Corporate Tax in UAE?

Many a times the transactions between related parties are influenced due to nature of their relationships. In order to verify that their relationship has not affected their transaction calculating ALP is necessary. The applicability to all entities may vary according to the applicability guidelines as mentioned in the law.

What are the Transfer Pricing guidelines as per OECD referred for UAE Corporate Tax?

OECD has set out following methods for computation of Arm’s Length Price

• Comparable uncontrolled price (CUP) method
• Resale price method 
• Cost plus method

• Profit split method
• Transactional net margin method

ALP must be computed using the most appropriate method, having regard to the nature of transaction or class of transaction. 

Detailed information about the methods to calculate Arm’s Length Pricing in UAE

Traditional transaction method

1. Under this method the price charged for goods or services under any comparable uncontrolled transaction should be identifiable
2. Adjustment to account for differences between related party transaction & comparable unrelated transaction can be made.
3. The adjusted price calculated here will be considered as ALP.

Under this method, price at which goods or services obtained by the enterprise from a related party is resold to an unrelated party.

Following adjustment should be made under this method:

1. For normal gross profit margin 
2. For expenses in connection to purchase of goods or services
3. For any other functional differences

ALP under this method can be computed in the following manner:

1. All the direct & indirect cost of production incurred by enterprise for goods & services provided to related party should be determined.
2. The normal GP percentage should be added to such costs.
3. This GP percentage can be adjusted after taking into account any functional differences.

Transactional Profit method

4.  Profit split method