On 09 December 2022, the United Arab Emirates (UAE) implemented Federal Decree-Law No. 47 of 2022, commonly referred to as the Corporate Tax (CT) Law. This legislation introduces a 9% tax rate, effective for financial years commencing on 01 June 2023. Aligned with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) initiative, the CT Law aims to enhance transparency and equity within the international tax framework. It also supports the strategic objectives of the UAE, contributing to its accelerated development and transformation. The UAE CT Law also introduces a Transfer Pricing (TP) regime in the UAE. In this article, we will highlight those provisions pertaining to TP that could significantly influence both your audit report and your financial statements.
- Article 61 (Chapter 19 - Transition Rules)
Article 61 explores the transitional rules impacting the tax treatment of specific transactions. As such, it emphasises the crucial need for a thorough review of Article 61 provisions for compliance and precise financial reporting, as well as specifying that a taxable person's opening balance sheet for CT purposes is derived from the closing balance sheet under the applicable accounting standards on the last day of the preceding financial year.
Further, Ministerial Decision No. 120 of 2023, issued by the UAE Ministry of Finance (MoF), outlines the transitional rules for CT. These guidelines assist businesses in transitioning seamlessly from the pre-implementation to the post-implementation period of the CT Law. This Decision aims to facilitate the determination of a taxable person's opening balance sheet, ensuring a fair and transparent approach for assets and liabilities held before the implementation of the new CT regime.
- Article 34 (Chapter 10 - Transactions with Related Parties and Connected Persons)
Article 34 focuses on those transactions involving related parties and connected persons, stipulating that all transactions and/or arrangements between them shall meet the arm's length principle. Due to the complexities inherent in transactions with related parties, a comprehensive analysis is essential to ensure adherence to the arm's length principle and compliance with the relevant transfer pricing regulations. Assessing the implications of Article 34 on related-party transactions is thus crucial, demanding proactive measures to rectify any deviations and ensure the selection of an appropriate TP method.
While companies traditionally disclosed related party transactions following the requirements of IAS 24, the UAE CT Law calls for a specific analysis of related parties under Article 35 and 36 of the CT law. This step is vital for accurately identifying related parties and ensuring that transactions with them conform to fair and equitable terms, consistent with those between unrelated entities. This approach fosters transparency and compliance with transfer pricing standards, aligning with the specific requirements outlined in the UAE CT regulations.
- Impact on Audit Report and Financial Statements
Non-adherence to the TP regulations can profoundly impact a company's financial health and operational stability. One significant consequence is the heightened risk of tax adjustments and penalties imposed by the FTA. Failure to conduct transactions at arm's length may lead to adjustments in taxable income, resulting in additional tax liabilities, interest, and penalties. Moreover, non-compliance can influence the reported cost of goods sold and operating expenses, directly impacting the taxable income. Non-arm's-length transactions may lead to either an artificial inflation or deflation of costs, thus affecting the overall tax position of the company.
Additionally, non-compliance can impact the reported cost of goods sold and operating expenses, directly influencing taxable income. Beyond financial repercussions, it can cause operational disruptions, and diverting management's focus from core activities. To mitigate these risks, companies must prioritize adherence to transfer pricing regulations, establish clear policies, and conduct regular reviews to ensure compliance with the evolving tax laws and international standards.
- Next Steps
In light of the potential consequences of non-compliance with the UAE TP regulations, companies should take proactive steps to safeguard their financial standing and operational efficiency. The below steps are therefore recommended:
1. Identify related parties
Evaluate whether other group entities qualify as related parties under the provisions of Article 35 (related parties) and Article 36 (connected persons).This involves a thorough examination of ownership, control, or significant influence relationships.
2. Map related party transactions
Accurately identify transactions between related parties and comprehend the nature of such transactions.This step is crucial for applying the correct TP method, ensuring that transactions are conducted on fair and equitable terms.
3. Draft a transfer pricing policy
Evaluate the existing TP policy to determine its compliance with the arm's length standard. Assess whether the policy needs adjustments or updates to align with current regulations and business practices.
4. Evaluate sufficiency of supporting documents
Identify the necessary documentation required for compliance with TP provisions under Article 55 of the UAE CT law. This may include the completion of a TP disclosure form, preparation of a Master file and Local file, and documentation supporting the TP policy.
5. Reinstate opening related party balances
Accurately identify the related party transactions and use an appropriate TP method to analyse opening balances. If discrepancies indicating misalignment with the arm's length principle are found, make the necessary adjustments to ensure that related party balances comply with the arm's length principle, reinforcing transparency and regulatory compliance.
6.Engage with experts:
Embark on a thorough review of your TP practices and involve experts as necessary. Early action can minimize risks and simplify year-end reporting. We are dedicated to providing independent support for the analysis and compliance of TP. Thank you for trusting us with your tax matters; we anticipate working closely with you to address any questions or concerns you may have.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
