Introduction
We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of July 2023.
- The 'Focus Point' covers features of the transfer pricing provisions in the UAE.
- Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
- Our 'Tax Talk' provides key updates on the important tax-related news from India and across the globe.
- Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.
We hope you find our newsletter useful and we look forward to your feedback.
You can write to us at taxstreet@nexdigm.com. We would be happy to hear your thoughts on what more can we include in our newsletter and incorporate your feedback in our future editions.
Warm regards, The Nexdigm Team
Aspects of Transfer Pricing in UAE
The UAE's Ministry of Finance made a groundbreaking announcement of implementing Corporate Tax (CT) in the region. On 9 December 2022, the UAE Federal Tax Authority (FTA) released the final version of the UAE CT law through Federal Decree Law No. 47 of 2022. This includes a comprehensive Transfer Pricing (TP) regime modeled along the lines of The Organisation for Economic Co-operation and Development (OECD). The UAE has undertaken this action in its attempts to adhere to the global standards and to align with OECD's Global Minimum Tax Proposal under Pillar 2.
Scope and Applicability
The TP law would apply to entities both in the UAE Mainland as well as the Free Zones. The effective date of the TP regime is the same as the CT law, i.e., the financial years starting on or after 1 June 2023.
Article 34 - Arm's Length Principle
All related party transactions/ arrangements must meet the arm's length standard in determining the taxable income as enumerated in Article 34.
TP Benchmarking Methodology
In order to determine the Arm's Length Price (ALP), taxpayers can apply the following acceptable TP method:
- Comparable Uncontrolled Price (CUP) Method
- Resale Price Method
- Cost-Plus Method
- Transactional Net Margin Method (TNMM)
- Transactional Profit Split Method (PSM)
This concept of the arm's length principle is predominantly in line with the OECD TP guidelines, which recommends transactions between unrelated parties as a measure of the arm's length standard.
There is no prescribed methodology or any preference for the order in which the methods might be applied. One or a combination of the above methods or any other method not listed above can be used to determine the ALP depending on the facts & circumstances of each transaction or arrangement (T/A).
In addition to the above, while selecting the most reliable TP method, the following parameters must be considered:
- Contractual terms and characteristics of the T/A;
- Economic circumstances in which the T/A is conducted;
- Functions performed, assets employed, risks assumed (FAR) and business strategies employed by the Related Parties entering into the T/A.
Arm's Length Range is not defined as yet
An acceptable ALP may be a range of results or indicators (rather than an absolute number). While the concept of ALP has been introduced, the arm's length range has not been specified (i.e., the use of inter-quartile range, percentile, minimum to maximum, etc.)
Corresponding Adjustment is possible
In a scenario where the pricing in relation to the transaction or arrangement does not fall within the arm's length range, the Authorities can make a TP adjustment on the taxable income to achieve the arm's length result.
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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.
