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
A. Traditional transaction method
- Comparable uncontrolled price (CUP) method
- Resale price method
- Cost plus method
B. Transactional Profit 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. Comparable uncontrolled price (CUP) method
- Under this method the price charged for goods or services under any comparable uncontrolled transaction should be identifiable
- Adjustment to account for differences between related party transaction & comparable unrelated transaction can be made.
- The adjusted price calculated here will be considered as ALP.
2. Resale price method
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:
- For normal gross profit margin
- For expenses in connection to purchase of goods or services
- For any other functional differences
3. Cost plus method
ALP under this method can be computed in the following manner:
- All the direct & indirect cost of production incurred by enterprise for goods & services provided to related party should be determined.
- The normal GP percentage should be added to such costs.
- This GP percentage can be adjusted after taking into account any functional differences.
Transactional Profit method
4. Profit split method
This method is applicable mainly in transactions involving transfer unique intangibles or multiple transactions being inter related.
- Combined net profits of associated enterprises from such transactions are determined first.
- The contribution given by each of related party on the basis of functions performed, assets employed & risk assumed is to be considered.
- The combined net profits are then split among the enterprises on the basis of their contribution.
5. Transactional Net Margin Method
- Under this method, the net profit margin realized by an entity with related party transaction is computed having regard to all direct & indirect cost, assets employed or any other relevant base.
- The net profit margin on a similar transaction with unrelated party by applying the same basis is calculated.
- If the net profit calculated by above 2 steps are same then the same will be considered to arrive at ALP.
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