UAE Transfer Pricing for Pakistani Businesses

Transfer Pricing Guide

On October 23, 2023, the UAE's Federal Tax Authority (FTA) shared the official Transfer Pricing Guide. For Pakistani companies in the UAE, this guide gives helpful information on the Transfer Pricing (TP) rules that are part of the UAE's Corporate Tax Law.

Transfer pricing is about setting fair, market-based prices for goods and services that are exchanged between related companies (like between a parent company in Pakistan and its branch in the UAE).

For Pakistani multinationals, it is good to know that the UAE's TP Guide follows the OECD Guidelines. It gives general advice on the TP rules in the UAE and provides clear examples on topics like how to know who your Related Parties are, how to do a functional analysis, and how to price loans between group companies.

In the UAE, transfer pricing is managed by the Federal Tax Authority (FTA) and applies to companies that do business with related parties. These rules are meant to stop tax avoidance and make sure multinational companies, including those from Pakistan, pay the right amount of tax in the UAE.

Under the UAE Corporate Tax Law, transfer pricing rules apply to deals between related parties, like selling goods, providing services, or using brand names. The law says that the prices for these deals must be at 'arm’s length', which means they should be the same as prices between two independent companies.

The following are the relevant keywords important to understand Transfer Pricing as per the Corporate Tax Law

Related Parties

For Pakistani companies in the UAE, 'Related Parties' means other companies or people that have a close link to your business. This is an important idea in UAE tax law to prevent unfair tax advantages. Common examples of related parties are:

Key Managers: People who have the power to plan and direct the company, like top executives and directors, are often related parties.
Close Family Members: Deals between your company and close family members of its key managers may be checked to make sure they are fair and at market price.
Companies Under the Same Control: Companies that are controlled by the same person or group are often related. This includes when different companies in the UAE and Pakistan are controlled by the same person.
Companies with Major Influence: Companies that can influence each other, even without formal control, can be seen as related parties.

When dealing with related party transactions, the UAE tax authorities want to be sure that the prices are at 'arm's length'—meaning, the same as they would be between unrelated companies. This is to stop companies from changing prices to avoid tax. UAE tax laws require companies to report all their related party deals in their financial statements and tax returns.

Substance over Form

This is a key rule in UAE Transfer Pricing that Pakistani companies should understand. It means that the real business reason for a deal is more important than how it looks on paper. This is especially important for deals between your UAE company and its head office in Pakistan.

Arm’s Length Principle

This is a core part of transfer pricing in the UAE. It means that deals between your related companies should be priced as if the companies were independent and not related. This makes sure all deals are fair and based on real market conditions.

OECD Guidelines

The Organisation for Economic Co-operation and Development (OECD) gives detailed guides on transfer pricing. For Pakistani multinationals, it is important to know that these guides are used by many countries, including the UAE and Pakistan, to make their transfer pricing rules.

Master File and Local File

For Pakistani multinationals, the Master File and Local File are key documents for Transfer Pricing in the UAE. They are part of a three-part system that also includes Country-by-Country Reporting.

The Master File gives a big-picture view of your whole multinational group's business and its policies. It helps tax authorities understand your overall business structure. The Local File is a more detailed document just for the UAE. It must give specific information about the deals your local UAE company has made and how you decided on the prices.

Intra-group transactions

These are deals that happen between companies in the same group, for example, between your parent company in Pakistan and your branch in the UAE. These can include selling goods or services, providing management help, licensing brand names, sharing research, and financial deals like loans.

Usually, deals between members of a Tax Group do not need to follow transfer pricing rules because they are removed when the group's final financial reports are made. The only time they would need to is if a member has to calculate its own separate income to use tax losses from before it joined the group.

Yes, the UAE transfer pricing rules apply to both local deals within the UAE and cross-border deals.

Yes. You need to be sure that the terms of any loans between your group companies are at arm's length and fair.

Free Zone companies that are part of a large multinational group may have a different Corporate Tax rate once the Pillar Two rules are added to the UAE Corporate Tax system.

Yes, tax losses from one UAE group company can be used to lower the taxable income of another UAE group company, as long as there is 75% or more common ownership and other rules are met.