Transfer pricing refers to determining the value of goods and services exchanged between related parties (such as subsidiaries of a multinational corporation) to ensure that the prices are fair and in line with market conditions.

In the UAE, transfer pricing regulations are governed by the Federal Tax Authority (FTA) and apply to entities that engage in transactions with related parties. These regulations aim to prevent tax avoidance and ensure that multinational corporations pay the correct amount of tax in the UAE.

Under the UAE Corporate Tax Law, transfer pricing rules apply to related-party transactions involving the sale or purchase of goods, the provision of services, the use of intangible assets, and other transactions that may affect the tax base. The law requires that transfer prices must be set on an arm's length basis, meaning that they must be consistent with the prices that would have been charged by independent parties under similar circumstances.

Example: Suppose ''A'' sold a set of goods to a third party for AED 15, cost of goods sold is AED 10. As a result of the above transaction, ''A'' made a profit of AED 5, and whenever someone makes a profit, they have to pay tax on it at 9%, Which comes out to AED 0.45.

However, sometimes when the same transaction is carried out between two or more related parties (assuming the cost will remain the same), rather than selling the goods to them for AED 15, they might do the transaction for AED 13. In such a case, the profit would get reduced from AED 5 to AED 3, and if we pay tax on it at 9%, the tax liability would be AED 0.27.

Entities that engage in related-party transactions must prepare and maintain transfer pricing documentation to support the arm's length nature of the prices charged. The documentation must include a description of the transaction carried out, a functional analysis of the parties involved, a comparison of the prices charged with those of independent parties, and any other relevant information.

In conclusion, the UAE Corporate Tax Law requires entities engaging in related-party transactions to comply with transfer pricing regulations and set prices on an arm's length basis. The law also requires entities to maintain transfer pricing documentation to support the pricing decisions.

To learn more about Applicability of Transfer Pricing under the UAE Corporate Tax Law, 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.