- in India
- with readers working within the Securities & Investment industries
- within Government, Public Sector and Energy and Natural Resources topic(s)
Summary
The UAE Federal TaxAuthority (FTA) has recently issued Public Clarification CTP011¹, setting out its position on downward transfer pricing (TP) adjustments made by a Taxable Person in the Corporate Tax Return, along with the disclosure and documentation expected to support such adjustments.
Background
Article 34(1) of the Corporate Tax Law requires all transactions and arrangements between Related Parties to meet the arm's length standard. Where amounts recordedintheFinancial Statements are not at arm's length, the Taxable Person are required to make a TP adjustment in the Tax Return, upward (increasing Taxable Income) or downward (decreasing Taxable Income) to align with the arm's length result. Prior to the clarification, downward transfer pricing adjustment could be made only upon obtaining prior approval from the FTA.
Key Considerations
- Self-assessed, not pre-approved- No prior FTA approval is required even in case where a downward TP adjustment in the Tax Return, however it remains open to review in Tax Audit by FTA.
- Mandatory disclosure- Every downward adjustment must be disclosed in the Tax Return, irrespective of value or nature- the usual disclosure thresholds do not apply.
- Documentation is expected- The FTA expects rationale, benchmarking, reconciliation and evidence of a symmetrical adjustment to support the position taken.
Documentation requirement
- Rationale– why the original booked pricing was not at arm's length, and how the revised outcome aligns with the standard.
- Arm'slength analysis– including a benchmarking study consistent with the applicable TP methods and regulations.
- Reconciliation– between values recorded in the Financial Statements and arm's length values disclosed in the Tax Return.
- Symmetry–evidence of a corresponding adjustment made by the relevant Related Party to the transaction.
Illustrative Examples
- Upward adjustment– Co. A sold goods to a Related Party below arm's length price. If taxable Income is increased to reflect adherence to arm’s length price, disclosure is required only if Related Party transactions exceed the applicable thresholds.
- Downward adjustment– Co. A sold goods to a Related Party above arm's length price. If taxable Income is decreased to reflect adherence to arm’s length price, disclosure in Tax Return is required irrespective of the value or nature of the transaction.
Practical Considerations
- Identify exposure early- Review related-party pricing outcomes before finalizing the Financial Statements so that any required TP adjustments can be reflected in the accounts, potentially avoiding a downward TP adjustment in the Tax Return and the related disclosure requirements.
- Prepare documentation contemporaneously- Rationale, benchmarking and reconciliation should be prepared alongside the Tax Return, not reconstructed after the fact.
- Secure symmetry with the Related Party- Engage the counterparty early to ensure a corresponding adjustment is made and evidenced; an unmatched adjustment raises audit risk.
- Distinguish the adjustment route- This self-initiated Article 34(1) adjustment is distinct from a corresponding adjustment under Article 34(10) or 34(11).
Aurtus Comments
This is a welcome clarification from the FTA and gives taxpayers greater certainty when making downward adjustments. That said, it places a significant documentation burden on taxpayers, who bear the onus of substantiating any adjustment they make. Taxpayers are encouraged to proactively identify transactions that may require a downward adjustment andprepare the necessary documentation to remain audit-ready.
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.
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