The Federal Tax Authority (FTA) of the UAE has recently released the corporate tax transfer pricing guide CTGTP1, which provides comprehensive information on transfer pricing (TP) for businesses. The guide, consisting of nine sections, offers detailed insights into TP concepts, methods, practical applications, and examples of common scenarios.

The first three sections of the guide include a glossary, an introduction to the guide, and a high-level understanding of TP. Following this, the guide delves into the fundamentals of TP and various TP methods. Section 6 of the guide outlines the different types of documents required to justify TP applications to the FTA.

Section 7 focuses on common cases where companies are typically required to apply benchmarking tests on transactions with related parties and connected persons. Additionally, section 8 explains that in the event of an audit by the FTA, the burden of proof rests with the taxable person.

The application and importance of TP rules and principles are highlighted in the guide. These rules aim to dismantle arrangements made between related parties and connected persons that shift profits from high-tax jurisdictions to low-tax jurisdictions or from high-tax entities to low or no-tax entities.

It is crucial for all related parties’ transactions, as well as transactions with connected persons, to comply with TP rules and the arm’s length principles stated in guidelines from the Organisation for Economic Cooperation and Development (OECD). These rules and guidelines apply to both cross-border and domestic transactions.

Section 5 of the guide covers the application of the arm’s length principle, which is the most critical aspect. Here, taxable persons are required to identify related parties, connected persons, relevant transactions, and arrangements. They must also perform a comparability analysis, select and apply an appropriate TP method, and establish the arm’s length price.

The definitions of related parties and connected persons are provided in articles 35 and 36 of the UAE corporate tax law. A comparability analysis involves comparing a controlled transaction with comparable uncontrolled transactions under similar circumstances, considering factors such as similar assets used, risks assumed, and functions performed.

The guide proposes five TP methods to assess the arm’s length price. These include traditional transaction methods like the comparable uncontrolled price (CUP) method, resale price method (RPM), and cost-plus method (CPM). It also includes transactional profit methods such as the transactional net margin method (TNMM) and transactional profit split method (PSM).

The choice of method depends on the specific circumstances and nature of the transactions. For example, the CUP method is most suitable for the transfer of commodities, while the RPM works best when a reseller is involved. The TNMM and PSM are recommended for highly integrated transactions where parties have unique contributions.

Section 6 of the guide emphasizes the importance of maintaining TP disclosure forms, a master file, a local file, and a country-by-country report (CbCR) when applicable. These documents provide the FTA with a clear understanding of a taxable person’s TP policies and their application.

Section 7 of the guide covers special cases and transactions where TP rules generally apply. This includes transactions related to treasury functions, such as intra-group loans, intra-group services, intangibles, cost contribution arrangements, business restructuring, permanent establishments, and business synergies.

In conclusion, the CTGTP1 guide released by the FTA is a valuable resource for businesses operating in the UAE. It provides detailed information on TP concepts, methods, and practical applications. It is essential for businesses to adhere to TP rules and principles to ensure compliance and avoid potential audits by the FTA.

Mahar Afzal, the managing partner at Kress Cooper Management Consultants, has shared his personal opinion on the matter. It is important to note that his views do not represent the official stance of Khaleej Times. For further clarification or any inquiries, please contact Mahar at [email protected]. Stay tuned for more in-depth analysis of specific sections of the guide in our upcoming articles.