Transfer Pricing
Transfer pricing is one of the most complex tax challenges faced by multinational companies today. Global regulations now require stricter compliance and comprehensive disclosure of intercompany transaction pricing.
Transfer pricing rules across jurisdictions mandate that all transactions between related parties must adhere to the arm’s length principle—ensuring that the prices charged are consistent with those that would be applied between independent, unrelated entities under similar circumstances.
The arm’s length principle means that the value assigned to goods, services, or financial arrangements between related parties should reflect the price that would have been agreed upon in a comparable transaction between unrelated parties.
Applicability of Transfer Pricing
Transfer pricing provisions comes in to play under the following circumstances:
I. When a Business is Divided into Multiple Departments or Divisions Within the Same Country:
- Management needs to identify the specific activities that generate value within the business.
- One division may provide goods or services to another division, and it is essential to determine the profitability of each division separately.
II. In the Case of Cross-Border Transactions:
Transfer pricing applies when transactions—whether related to tangible goods, services, financing, or intangible assets—occur between entities that are under common ownership and control across different countries.
Need for Transfer Pricing in the UAE
The United Arab Emirates became a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on May 16, 2018. By joining this framework, the UAE has committed to implementing the BEPS minimum standards—one of which includes Transfer Pricing documentation and Country-by-Country Reporting (CbCR).
With the introduction of Corporate Tax in the UAE, Transfer Pricing regulations are now applicable. The UAE adheres to internationally recognized arm’s length principles for transactions and arrangements involving related parties and connected persons, ensuring that intercompany dealings reflect market-based pricing.
