Corporate Tax Case Study: Failure to Comply with UAE TP
Under the UAE Corporate Tax Law, businesses must ensure that all transactions with Related Parties are conducted at arm's length and properly documented per Articles 34 to 36.
This case study highlights how a lack of Transfer Pricing TP documentation exposed a UAE-based distribution company to compliance risks, potential adjustments, and penalties.
Background of the Company
➤ Company Name: Al Noor Distribution LLC
➤ Location: Dubai Mainland
➤ Activity: Import and wholesale distribution of electronics
➤ Annual Revenue (FY 2024): AED 102 million
➤ Ownership Structure: 100% owned by a parent entity in Singapore
➤ Business Model: Al Noor Distribution LLC imports electronics from its parent company in Singapore and distributes them across the UAE.
The company had a long-standing supply arrangement with its parent, but never formalised its transfer pricing methodology.
Objective of the Company
The Company intended to:
- File its first UAE Corporate Tax Return correctly
- Justify intercompany pricing for goods imported from Singapore
However, they failed to prepare or retain transfer pricing documentation, assuming that the standard pricing arrangements were sufficient without further review.
Legal Framework: Transfer Pricing under UAE Corporate Tax Law
As per Articles 34 to 36 of Federal Decree-Law No. 47 of 2022:
- Transactions with Related Parties must be at arm's length.
- Documentation must include:
- Local File and Master File Ministerial Decision No. 97 of 2023
- Proper justification of pricing using accepted TP methods CUP, Resale Price, Cost Plus, TNMM, etc.
Non-compliance could lead to:
- Adjustment of taxable income by the FTA &
- Administrative penalties for non-compliance
What Went Wrong?
- Non-market pricing was used, without undertaking any benchmarking.
- They have not prepared any Transfer Pricing Report, Local File, or benchmarking study for the related party transactions.
- Failed to make proper disclosure of the Related Party Transactions while filing the Corporate Tax Return.
- Intercompany markup was below the industry median, increasing the risk of FTA challenge.
FTA Scrutiny Triggered
During the corporate Tax return filing on the emara portal:
- Failed to disclose transactions, and the transaction with the group entity was more than 40 million during the financial year. And where the transaction per category of transaction was more than 4 million
- The Shareholder & the CEO were withdrawing from the company without any benchmarking study.
- None of the schedules were filled for the related party and connected person transaction.
The FTA requested:
- Economic rationale for the pricing with Related parties (group entities)
- Functional Analysis (FAR Analysis) of roles, assets, and risks on the transaction involved
- Pricing of the transaction against the third-party transactions.
Impact and Risks Faced by Al Noor Distribution LLC
- Possible Transfer Pricing Adjustments under Article 34-3 for the amount difference between the related party and the market price derived by the authority
- Penalties under the Tax Procedures Law for inadequate records and failure to comply properly compliance
- Reputational Damage and Prolonged Audit Cycles
Lessons Learned
1. Transfer pricing is Mandatory: Related party dealings must comply, regardless of company size or the amount of the transaction. Any payment made to the related parties should be made as per the ALP.
2. Documentation is Essential: The Company should maintain all the bases for deriving the Arm Length Price. Lack of records attracts enforcement even if taxes are paid.
3. Pricing Must Be Justified: The Transfer Pricing method selected by the company should be supported by benchmarking are required.
4. FTA has re-characterisation power: FTA may ignore your pricing and impose its view if arm's length isn't demonstrated.
Mitigation and Corrective Action
Upon receiving the FTA's inquiry, the Company:
- Appointed a Transfer Pricing advisor for the advisory on all the transfer pricing aspects applicable to the Company
- Prepared a retrospective benchmarking study to support all the transactions with group entities.
- Filed the update UAE Corporate Tax Return on EmaraTax filings with complete explanations
- Implemented internal Transfer Pricing Policy & controls for ongoing compliance w.r.t related party transactions.
Compliance Advice for UAE Businesses
- First step for the transfer pricing compliance is to identify all Related Parties and Connected Persons under UAE law
- Second, is to maintain updated ownership structures and shareholding maps
- Third, classify and analyse all intercompany transactions (goods, services, financing, intellectual property)
- Fourth, prepare and retain Local File, Master File, and FAR Analysis, if applicable
- Communicate and train internal teams on annual TP disclosures in EmaraTax
How Flyingcolour® Can Help?
At Flyingcolour Tax Consultant, we assist companies with:
- * Identifying and analysing Related Party Transactions
- * Preparing compliant Transfer Pricing documentation (Local + Master File)
- * Applying OECD-compliant pricing methods
- * Responding to FTA inquiries and audits
To learn more about Corporate Tax Case Study: UAE TP Missteps Bring FTA Penalties, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.