The application of transfer pricing procedures has grabbed abundant attention globally with the increasing importance of transfer pricing on corporate taxation in the UAE. Businesses involved in cross-border transactions realize the importance of transfer pricing. The transfer pricing rules in the UAE require companies to maintain documentation to support the transfer pricing arrangements for their cross-border transactions.
Burden of Proof
Transfer Pricing documentation must enable the FTA (Federal Tax Authority) to assess whether the tax outcome for the Tax Period has been influenced by practices inconsistent with the Arm’s Length Principle. The Taxable Person bears the burden of maintaining adequate supporting documentation and making timely submissions to substantiate the positions taken in the tax return for relevant Controlled Transactions. The FTA reserves the right to request information, make inquiries, and form its own conclusions regarding the Taxable Person’s Transfer Pricing practices.
Transfer Pricing adjustments
Transfer Pricing adjustments ensure that the taxable outcome of Controlled Transactions aligns with the Arm’s Length Principle. Such adjustments may be initiated either by the Taxable Person or the FTA where transactions are not conducted at arm’s length. As the Transfer Pricing disclosure form follows a self-assessment model, the burden remains on the Taxable Person to ensure compliance with the Arm’s Length Principle for all transactions during the Fiscal Year.
- Transfer Pricing adjustments by the FTA
Under Article 34 of the Corporate Tax Law, if a Controlled Transaction does not align with the arm’s length range, the FTA may adjust the Taxable Income to reflect an arm’s length outcome based on the transaction’s facts and circumstances. The FTA will provide the Taxable Person with the information used to make the adjustment.
If such an adjustment is made, the FTA will also reflect it in the Taxable Income of the local Related Party involved in the transaction.
Additionally, under Article 34(11), if a foreign tax authority adjusts the transfer price based on the Arm’s Length Principle, the Taxable Person may request a corresponding adjustment from the FTA under the relevant Double Taxation Agreement. The FTA will review the foreign authority’s position and may approve the adjustment where appropriate.
The FTA can make transfer pricing adjustments where transactions don’t meet the arm’s length standard.
- Transfer Pricing Adjustments by the Taxable Person
Taxable Persons are encouraged to monitor their Controlled Transactions throughout the Tax Period to ensure compliance with the Arm’s Length Principle. They may also seek legal clarifications from the FTA as needed.
Since the burden of proof lies with the Taxable Person, arm’s length pricing should be applied proactively. Real-time adjustments can be made before filing the Tax Return.
Post-filing, Taxable Persons may adjust transfer prices if it increases taxable income or reduces allowable losses. However, adjustments that reduce taxable income or increase losses can only be made through FTA procedures.
Non-Recognition of Transactions
Under Article 50 of the Corporate Tax Law, the FTA may adjust or disregard transactions lacking valid commercial reasons, especially if their main purpose is to obtain a tax advantage inconsistent with the law’s intent.
If a Controlled Transaction differs from what independent parties would agree upon in similar circumstances, the FTA may replace it with an alternative arrangement.
The key consideration is whether the transaction reflects the commercial rationale expected between independent parties—not whether an identical transaction exists. Disregarding a transaction that meets this standard is not aligned with the Arm’s Length Principle.
Conclusion
In conclusion, the Corporate Tax Law emphasizes the importance of adhering to the Arm’s Length Principle in all Controlled Transactions. Taxable Persons are expected to proactively apply arm’s length pricing, monitor transactions throughout the Tax Period, and make necessary adjustments to ensure compliance. While the FTA holds the authority to adjust or disregard non-compliant transactions, especially those lacking commercial substance or aimed at securing undue tax advantages, it also allows for corresponding adjustments in line with international agreements. Ultimately, the onus remains on the Taxable Person to demonstrate that their transactions reflect the commercial rationale expected between independent parties under comparable circumstances.
How BCL Globiz Helps?
Navigating the complexities of transfer pricing under the Corporate Tax Law requires technical precision, strategic foresight, and a strong compliance framework. BCL Globiz partners with businesses to deliver tailored solutions that not only ensure adherence to UAE transfer pricing regulations but also support efficient group structuring and risk mitigation. Our expertise spans functional and risk analyses, benchmarking studies, and the preparation of robust transfer pricing documentation to defend tax positions. By aligning business models with regulatory expectations and applying industry best practices, BCL Globiz enables multinational enterprises to optimize their structures, reduce exposure to tax disputes, and operate with confidence in a dynamic compliance landscape.
For further assistance, reach out to our expert rakesh@bclglobiz.com and check out our website www.bcl.ae.
BCL Globiz also advises on tax group structuring and related party disclosures.
