Transfer Pricing

Related parties are entities or individuals that share a certain level of connection. This concept is crucial to prevent tax evasion and ensure fair, arm’s length transactions. Common examples include:

• Controlled Entities: Parent companies and their subsidiaries, where control is usually determined by ownership of a significant percentage of voting shares.

• Key Management: Individuals with authority over planning, directing, and controlling a company, such as directors or executive officers.

• Close Family Members: Transactions involving close family members of key personnel are monitored to ensure they comply with arm’s length standards.

• Entities under Common Control: Companies controlled by the same party or group of individuals.

• Entities with Significant Influence: Companies that significantly influence each other even without formal control.

Authorities ensure that transactions between related parties follow arm’s length terms, and disclosure of these transactions in financial statements and tax filings is typically required.

The principle of substance over form emphasizes that the economic reality of a transaction takes precedence over its legal structure. This ensures that related-party transactions are evaluated based on their true business purpose rather than formal documentation.

The arm’s length principle requires that related-party transactions be priced as if the parties were unrelated. This ensures transactions reflect market conditions and the underlying economic substance.

The OECD Transfer Pricing Guidelines provide internationally recognized standards, including the principles of substance over form and arm’s length pricing. The UAE TP regime aligns closely with these guidelines.

Transfer Pricing documentation follows a three-tiered approach:

• Master File: Provides an overview of the multinational group’s global business operations, policies, and intra-group transactions. It helps tax authorities understand the overall structure and key factors influencing transfer pricing.
• Local File: Contains detailed information for a specific UAE entity, including local transactions and the application of transfer pricing methods.
• Country-by-Country Reporting (CbCR): Offers a summary of global operations, revenues, profits, and taxes for each jurisdiction.

Intra-group transactions include a wide range of activities, such as:

• Sale of goods or services within the group

• Provision of management or administrative services

• Licensing of intellectual property (e.g., patents or trademarks)

• Sharing of research and development activities

• Financial transactions like loans or guarantees