Article 55 of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses states that Taxable Persons are required to file together with their Tax Return, a disclosure containing information regarding the Taxable Person's transactions with its Related Parties and Connected Persons in the form prescribed by the Authority.
Recently, the Federal Tax Authority (FTA) released a comprehensive guide (the guide) on filing tax returns, which provides general guidance on filing and completing the Corporate Tax Return. The guide also provides guidance on information required to be furnished in the transfer pricing disclosure form, which is a part of the UAE Corporate Tax Return.
The UAE TP Guide released in October 2023 had mentioned that the Transfer Pricing Disclosure Form (TPDF) would be required when the materiality threshold is exceeded. However, there was a suspense, since then, on what would be the materiality threshold.
The guide clears the suspense on what is the materiality threshold for applicability of TPDF. The guide suggests different materiality thresholds for:
- Transactions with related parties,
- Transactions with connected persons.
Materiality Threshold for Transactions with Related Parties
Primary Threshold: Aggregate value of all transactions with all related parties exceeds AED 40 million.
Secondary Threshold: Aggregate value of transactions per category with all related parties exceeds AED 4 million. For this purpose, the category of transactions are:
- Goods;
- Services;
- Intellectual property;
- Interest;
- Assets;
- Liabilities, and
- Other.
The guidelines suggest that only when a taxable person crosses both the above thresholds, i.e. primary and secondary threshold, the requirement for preparing the transfer pricing disclosure form would be triggered for transactions with related parties.
Let us understand the disclosure requirement with the help of an example.
| Nature of transaction | Transaction category | Scenario 1 | Scenario 2 |
| Purchase of raw materials | Goods | 4,004,560 | 10,000,230 |
| Purchase of finished goods | Goods | 560,000 | 4,000,450 |
| Availing of technical services | Services | 3,000,045 | 5,005,100 |
| Availing of management services | Services | 5,000,000 | 3,000,200 |
| Payment of interest on loans | Interest | 1,040,010 | 3,000,000 |
| Purchase of fixed assets | Assets | 6,000,540 | 16,000,000 |
| Total | 19,605,155 | 41,005,980 | |
*All amounts are in AED.
Scenario 1
As can be seen in the table above, the aggregate value of all transactions with all related parties does not exceed AED 40 million. Since the primary threshold criteria is not met, TPDF would not be required.
Scenario 2
Since the primary threshold criteria i.e. aggregate value of all transactions with all related parties exceeds AED 40 million, TPDF would be required. Now, the secondary threshold needs to be checked and basis analysis, it is observed that the transaction value for 3 transaction categories i.e. goods, services, and assets is exceeding AED 4 million, the details of related party transactions for these categories would be required to be reported in TPDF.
The guide clarifies that the transaction pertaining to the pidend declared between Related parties need not be disclosed and also should not be taken into account in determining the thresholds i.e. AED 40 million or AED 4 million. Further, gross income (Revenue) and expenditure should be reported separately.
Materiality Threshold for Transactions with Connected Persons
The transactions with connected persons are required to be reported if the aggregate payment or benefit to each connected person (together with their related parties) exceeds AED 0.5 million.
The above implies that if the aggregate payment or benefit to a connected person does not exceed AED 0.5 million, there is no requirement to disclose such transaction in the transfer pricing disclosure form.
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Our Comments This guide completes the important missing link with respect to preparing transfer pricing disclosure form by prescribing the materiality threshold. The thresholds appear to be on the higher side especially considering that the regime is newly introduced. It may not be out of context to mention that the Kingdom of Saudi Arabia (KSA) also has a similar requirement as part of transfer pricing compliance. Notably, there is no materiality threshold for preparing the Controlled Transaction Disclosure Form (CTDF) in KSA. Further, the materiality threshold only means that the small and mid-size companies (below thresholds) are not burdened with the compliance requirement of filing TPDF. However, this can not be confused as relaxation from meeting the arm's length principle for all covered related party transactions and connected party transactions. In other words, all taxable persons (unless specifically exempted) have to ensure that all covered transactions meet the arm's length principle as per UAE transfer pricing regulations. |
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.
