In 2022, the United Arab Emirates (“UAE”) introduced a Corporate Tax (“CT”) regime on corporations and businesses at a moderate rate of 9 %. It includes a detailed Transfer Pricing (“TP”) regime for Related Parties (“RP”) and Connected Persons (“CP”) for both cross-border and domestic transactions and arrangements. The latest document that has been issued is the so-called Transfer Pricing Disclosure Form (“Form”). Its significance and requirements are examined in thie Briefing.
1. What is TP and why is TP relevant in the UAE CT regime?
TP is the mechanism under which transactions and arrangements between RPs and CPs are considered (for tax purposes) – to be priced as if the parties were unrelated and dealing with each other at an arm’s length (also known as the Arm’s Length Principle, “ALP”).
For example, if two companies (A and B) are both fully owned by the same shareholder and A sells goods to B for AED 1 million (also known as a “Controlled Transaction”) but the market value is AED 10 million (which A would have received had it sold to any unrelated party) then for tax base computation purposes A will be treated as if it had made a sale of AED 10 million.
Almost every country that has a Income Tax/Corporate Tax system also has the TP system. The UAE introduced the CT Law in Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“UAE CT Law”) in 2022 – imposing for the first time a comprehensive CT regime for almost all businesses in the UAE. The UAE CT Law stipulates a comprehensive TP regime in Articles 34-36 and 55.
2. What was the purpose of introducing the Form? How does the Form fit within the whole TP documentation scheme under the UAE CT regime?
Article 55(1) requires taxpayers to file the Form along with their annual returns.
The main objectives of the Form are to ensure compliance, adhere to transparency obligations, and ensure that both the FTA and the taxpayer are aware of the transactions / arrangements that are more likely to bear TP risks and therefore need to comply with the ALP.
3. What are the major contents of the Form?
There are two major ‘Schedules’ in the Form:
- Related Party Transaction Schedule (“RPT Schedule”)
- Connected Persons Schedule (“CP Schedule”)
In the RPT Schedule, there is a requirement to add the following details:
- List of RPs;
- Amounts of inter-company transactions with RPs (Gross Income Received from RPs, Expenditure Paid to RPs) including:
- The Transaction Type (with the options – goods, services, Intellectual Property, Interest, Assets, Liabilities and others).
- The relevant TP method applied (such as resale price method, cost-plus method etc.).
- A summary Table, providing a breakup of all income and expenses for the above categories.
Similarly, in the CP Schedule, details such as the name of the CP, the payment/benefits received by them, the value of such payment/benefit actually provided, and the market value of such payment or benefit, and the adjustment thereof is required to be provided.
As per the Corporate Tax Guide | Tax Returns | CTGTXR1 (“Returns Guide”), under the RPT Schedule, the reporting thresholds are announced. Here, the Aggregate Value of Transactions with RPs must be disclosed if the transaction value exceeds AED 40 million (circa EUR 10 million).
Having exceeded this threshold, if the transactions with the RPs per category (i.e., Goods, Services, Intellectual Property, Interest, Assets, Liabilities and Others), exceeds AED 4 million (approx. EUR 1 million), that must also be disclosed.
Separately, under the CP Schedule, disclosure is required if the aggregate payment or benefit with each CP (together with its RPs) exceeds AED 500,000 (approx. EUR 125,000).
Some of the documentation that is required to be added with the Form include the Financial Statements, the Local File and the Master File (if applicable). If applicable, additional documents must also be attached, including those with respect to Qualifying Intellectual Property, Qualifying Expenditure, Qualifying Immovable Property etc.
4. What to expect next?
The Form is quite useful for the taxpayer to analyse and predict any potential questions of the FTA on controlled transactions. It is rather surprising that the design of the Form at this stage mandates uploading the Local File and the Master File, though as per strict reading of the law, there is only a requirement to ‘maintain’ them (Ref: Article 55(2) UAE CT Law).
Based on this Form, it is expected that the FTA may ask for further information – e.g., contracts, invoices, basis of benchmarking, etc.
For some RP transactions, contemporaneous documentation may be a good starting point to justify the ALP (for example, the basis of Customs valuation on import of goods from RPs, or the equivalent TP reports approved by tax officers of other countries where the RPs are located). However, these are not binding on the FTA.
5. Conclusion and Outlook
It is noted that in other countries, the tax officers focus profoundly on TP issues, especially to ensure that the ALP is adhered to. It is expected that the FTA too will invest sufficient resources in this exercise, so the importance of making the appropriate declarations in the Form upon reaching the threshold and keeping and maintaining the supporting documentation cannot be overstated.
Dr. Constantin Frank-Fahle, LL.M.
Founding Partner
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