Transfer Pricing Guidelines: How Global Headquarters in UAE Should Get Ready

As the UAE continues to strengthen its regulatory framework, transfer pricing guidelines and transfer pricing (TP) have emerged as crucial areas for businesses to address. Transfer pricing refers to the rules and methodologies that govern the pricing of transactions between related entities, typically across different tax jurisdictions. The primary objective is to ensure that these transactions are conducted at arm's length, meaning they are priced similarly to transactions between unrelated entities under comparable conditions. Given the UAE’s increasing alignment with global tax standards, particularly through its adoption of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan, companies with global headquarters in the UAE need to strategically prepare for compliance with UAE TP regulations.

Below are key steps that headquarters in the UAE should take to effectively manage their transfer pricing obligations.

1. Familiarize with Local Transfer Pricing Regulations

The UAE has introduced transfer pricing guidelines as part of its commitment to the international tax landscape, especially through the BEPS initiative. It is essential for global headquarters to have a comprehensive understanding of the UAE’s specific TP regulations and the broader tax landscape. This includes the requirements under the Economic Substance Regulations (ESR) and Country-by-Country Reporting (CbCR), which impact multinational enterprises operating in the UAE. Understanding the local rules also requires staying updated with any new developments in tax policies. The UAE’s transfer pricing framework continues to evolve, and businesses must ensure they keep pace with changes to avoid non-compliance risks.

1. Develop Clear Transfer Pricing Policies

Establishing a robust transfer pricing policy is one of the most critical steps for multinational headquarters. This policy should provide clear guidelines on how related-party transactions, such as those involving goods, services, intangibles, or financing, will be priced. Importantly, the policy must align with the arm’s length principle, which is the cornerstone of international transfer pricing norms.

To create an effective policy, businesses should:

• Conduct a detailed analysis of all intercompany transactions.
• Identify appropriate transfer pricing methods based on the nature of these transactions, such as the Comparable Uncontrolled Price (CUP) method, the Resale Price method, or the Cost Plus method, among others.
• Ensure consistency in applying these methods across all jurisdictions where the company operates.
• The transfer pricing policy should not only comply with UAE TP regulations but also be aligned with the standards set by the OECD. This approach reduces the risk of double taxation or tax disputes with other jurisdictions.

1. Conduct a Transfer Pricing Risk Assessment

A transfer pricing risk assessment helps identify potential areas of vulnerability that may lead to disputes with tax authorities or non-compliance with regulations. Multinational companies operating in the UAE should regularly evaluate their TP practices to ensure they align with both local and international guidelines.

Key areas to assess include:

• Pricing of high-value transactions, particularly those involving intellectual property or financing.
• Compliance with documentation requirements, including maintaining relevant contracts, pricing models, and benchmarking studies.
• Evaluating the profitability of related entities to ensure that profits are appropriately allocated based on the functions, assets, and risks (FAR) of each entity.
• Conducting a risk assessment also provides a roadmap for any corrective actions that may be needed to address potential issues before they lead to penalties or audits.

1. Implement Robust Documentation Practices

Transfer pricing documentation is crucial in demonstrating that intercompany transactions comply with the arm’s length principle. The OECD has recommended a three-tiered documentation approach consisting of:

• Master File: This provides an overview of the multinational group’s global operations, including its transfer pricing policies and financial results.
• Local File: This focuses on specific transactions in each country, ensuring they are consistent with the arm’s length principle.
• Country-by-Country Report (CbCR): This report includes detailed information on the allocation of income, taxes, and business activities across various jurisdictions where the company operates.

In the UAE, companies that meet certain criteria, such as those part of a multinational group with consolidated revenues exceeding AED 3.15 billion, are required to submit a CbCR. Additionally, businesses should maintain thorough documentation to substantiate their transfer pricing policies and defend them in case of tax authority inquiries or audits. A key aspect of documentation is benchmarking, which involves comparing the pricing of related-party transactions with similar transactions between independent entities. Companies should use reliable databases and industry-specific data to perform benchmarking analyses.

Seek Expertise from Tax Advisors

Given the complexity of transfer pricing rules and the potential for significant penalties for non-compliance, it is advisable to work with professional tax advisors.

Experienced advisors can assist in:

• Interpreting the UAE’s TP regulations and ensuring compliance with local tax laws.
• Preparing documentation, including transfer pricing reports, benchmarking analyses, and CbCR filings.
• Conducting transfer pricing risk assessments and advising on strategies to mitigate risks.
• Representing the company in discussions with tax authorities if disputes arise.
• Partnering with tax advisors who have expertise in UAE regulations and global tax practices ensures that the headquarters remain compliant while optimizing tax efficiency.

1. Regularly Review and Update

Transfer Pricing Policies Transfer pricing is not static; it requires continuous monitoring and updating to reflect changes in the business environment, regulations, and market conditions. As the UAE continues to refine its tax policies and as global tax standards evolve, companies should regularly review their transfer pricing arrangements to ensure they remain compliant.

This review process should involve:

• Reassessing the appropriateness of the chosen transfer pricing methods.

• Updating documentation to reflect any changes in business operations or intercompany transactions.

• Adjusting transfer pricing policies to account for new regulations or rulings from the UAE or international bodies such as the OECD.

• Regular reviews not only ensure compliance but also help businesses stay proactive in managing their tax affairs, reducing the risk of audits or disputes.

1. Train Employees and Raise Awareness

Effective transfer pricing management requires the involvement of multiple departments, including finance, tax, legal, and operations. It is crucial to ensure that key employees are aware of transfer pricing rules and their implications for the business. Providing regular training on transfer pricing principles, documentation requirements, and regulatory updates will ensure that the organization remains compliant and well-prepared for any audits or inquiries from tax authorities. By raising awareness across the organization, companies can ensure that everyone involved in intercompany transactions understands their role in maintaining compliance with transfer pricing regulations.

Conclusion

As the UAE continues to align with global tax practices, multinational headquarters in the country must be proactive in managing their transfer pricing obligations. By understanding the local regulatory landscape, developing robust transfer pricing policies, conducting risk assessments, maintaining thorough documentation, and seeking expert advice, companies can minimize risks and ensure compliance. Regularly updating policies and training employees will further strengthen an organization’s ability to navigate the complexities of transfer pricing, reducing the likelihood of disputes with tax authorities and ensuring smooth business operations.

Authored by

CA Vivek Anand
Audit Associate