#Transfer pricing

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What Is Transfer Pricing & How Does It Impact My UAE-based Business?

What is Transfer Pricing?

Since the implementation of Corporate Tax in UAE, The notion of Transfer Pricing (TP) is receiving more attention in the Ministry of Finance (MoF) released Questions and Answers along with public Consultation documents.

This idea could be new for many local-owned companies, leading to numerous concerns and Transfer Pricing considerations for implementation. The topic of this article is Transfer Pricing, and its implications within The UAE will be reviewed to provide more information for businesses.

The standard definition of the term “transfer pricing” is commonly referred to as:

“The prices of goods and services sold or purchased between the entities with associated parties.”

When a related party refers to an entity or person who has a prior connection with a business by control, ownership, or family kinship (in instances of natural people).

Naturally, related-party transactions may allow entities to shift profits artificially. Therefore, this UAE corporate tax introduction strongly emphasizes transfer pricing.

The world’s tax justice network defines Transfer Pricing as “a technique used by multinational corporations to shift profits out of the countries where they operate and into tax havens.”

Both definitions explain that transfer prices are a way to make money. But it’s helpful to go back and expand the definition. It is essential to clarify that Transfer Pricing refers to the following:

A tax law to prevent abuse was enacted to implement the  “arm’s length” principle.

It is a requirement that the price of the goods and services  that the respective parties charge must be precisely the same as they     would have been being the parties involved in each transaction were     connected.

The goal of the arm’s-length rule and the Transfer Pricing (“TP”) regulations is to ensure that there isn’t any price mispricing of transfers, which can be due to fraudulent transfer Pricing methods, in which the prices of transfers are deliberately manipulated to obtain certain tax benefits which benefit several related entities.

Transfer pricing is of crucial importance to corporate taxation. Transfer prices directly impact the distribution of losses and profits for companies that are who are taxed by the corporate tax. The Transfer Pricing practices of taxpayers could have an immediate impact on the tax revenues of a nation.

When the corporate tax rates of the countries concerned differ substantially, related parties might be motivated to establish their transfer rates so that they can allocate profits to the less tax jurisdiction, thus reducing the total (group) global tax burden for corporations.

Even when a country has lower tax rates and is not governed by Transfer Pricing laws, transfer mispricing can take away significant tax revenue.

For instance:

Company A, a tax resident of Bangladesh, manufactures electronic devices and personal computers in a country taxed at a rate of 32.5 percent. It sells its items to the UAE-related tax-resident company B which pays 0 percent or 9% corporate tax on the resale of its products in third markets and UAE.

In this scenario, company A will be driven to offer the product at a price or with a lower profit percentage to Company B. In contrast, Company B will be able to resell the product with the highest possible profit margin and take the more significant part of the profits to ensure that both entities pay corporate taxes at a lower efficient tax rate.

Tax authorities in Bangladesh are likely to audit and modify the tax on corporate income paid by company A, thereby taxing a substantial portion of the profits that the UAE taxes.

Suppose company B was to pay taxes on corporate income in the UAE.

In that case, company B is likely to be keen to reduce the tax paid by the UAE to reduce and eliminate the phenomenon known as “economic double taxation” through the Transfer Pricing adjustment. That’s why countries with corporate tax systems should create transfer pricing laws and an administrative capacity to deal with the request for adjustment.

Additionally, as accounting and legal tax laws and practices vary from country to country, It is of the utmost importance to be aligned with the Transfer Pricing law to ensure that the adjustments to TP are based on the same rules and principles as the Transfer Pricing method.

Will It Impact A UAE-Based Business?

The simple answer is yes. The official MoF documents ( Press release  and Public Consultation) stipulate that UAE businesses must adhere to Transfer Pricing rules and the requirements for documentation by the Transfer Pricing Guidelines.

As part in the Corporation Tax introduction as part of the Corporate Tax introduction, the UAE will implement Transfer Pricing rules, which means that all transactions with related parties and those that involve connected individuals (“intercompany transaction”) will have to conform to the applicable TP requirements according to the principle of arm’s length that is outlined in the OECD Transfer Pricing Guidelines.

Who are the Related Parties?

By the UAE Corporate Tax Consultation Document [2(the (“Consultation Paper”), A related person is an individual or an entity with already established a connection to a business by control, ownership, or family kinship (in cases of natural people).

The document also lists these relationships in the form of related parties:

Two or more people connected with the 4th degree of kinship,     affiliation, or kinships such as marriage, birth, or adoption.

When alone or in conjunction with a partner, a person, or a legal entity, the individual directly or indirectly holds more than 50% of this legal entity.

A legal entity or two in which one legal entity or in conjunction with a related entity directly or indirectly, has more than 50% part in or controls each legal entity

More than two legal entities, if an individual taxpayer or together with a partner who directly or indirectly owns 50 percent of each.

A taxpayer, its branch, or permanent establishment

The partners in the same unincorporated partnership and

Business activities that are exempt and non-exempt of the same individual (for instance, an exempt-free zone-based business).

Who Are Connected Persons?

Consultation Paper Consultation Paper stresses that in the absence of taxation on personal income in the UAE, individuals who own tax-deductible companies would be encouraged to reduce the UAE corporate tax base through excessive payments to themselves and others who are associated with them.

So, benefits or payments offered by a company for the “Connected Persons” will be tax-deductible only if the company can prove that the benefit or payment conforms to “arm’s length” or the “arm’s length principle” and that the cost is incurred entirely and solely for the benefit of your business.

Connected Persons differ as Related Parties. A person is regarded as being ‘connected’ to a business in the scope of the UAE Corporate Tax regime it is:

A person who directly or indirectly holds an ownership control or interest in the taxable person

Director or Officer of a taxable person.

An individual who is related to the director, owner, and Officer of the tax-paying person in four degrees of affinity or kinship, such as through marriage, birth, or adoption.

If the tax-paying person is a member of an unincorporated partnership or any other partner of the same partnership and

The term “related party” refers to a Related Party of any of the above.

What Are the Compliance Obligations?

Transfer Pricing rules usually shift the burden of proof (burden of evidence) on the taxpayer. It is the responsibility of any taxpayer who has intercompany transactions that have more than a certain threshold, in the applicable tax year, to create documents for Transfer Pricing and demonstrate that the intercompany transactions were conducted at “arm’s length”.

The value of intercompany transactions has yet to be defined and is anticipated to be clarified following the implementation of UAE Corporate Tax Legislation. This Consultation Paper specifies the mandatory Transfer Pricing documentation consisting of a local file and a Master File (according to the formats and content required in OECD BEPS’s Action 13 and by the World’s Best practices).

Additionally, the arm’s-length nature of the transactions must be confirmed using one of the internationally recognized Transfer Pricing methods or another approach when the business can prove that the method specified can’t be used reasonably.

If the requirements are met, companies must complete and submit the Transfer Pricing disclosure form with details about their transactions with inter-company entities. It needs to be clarified how this Transfer Pricing disclosure form must be filed simultaneously with your tax returns (i.e., in the first (9) months from the expiration of the applicable period of tax) or with an earlier date.

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What Is Transfer Pricing, And How Does It Impact My UAE-based Business?

What is Transfer Pricing?

In the wake of the implementation of Corporate Tax in UAE, The idea of transfer Pricing (TP) is receiving greater attention in the Ministry of Finance (MoF) released Questions and Answers as well as the Public Consultation documents.

In the case of many locally-owned companies, this idea could be completely new, leading to numerous issues and Transfer Pricing considerations for implementation. The topic of this article is transfer Pricing, as well as its implications for UAE, which will be discussed. UAE will be reviewed to provide more information to business owners.

The most common definition of transfer pricing is commonly referred to as:

“the prices of goods and services sold or purchased between the entities with associated parties.”

A related party is an entity or person with a prior relationship with a company through control, ownership, or kinship (in instances of natural people).

Naturally, related party transactions may allow entities to manipulate profit. Therefore, a strong emphasis on transfer Pricing is evident in an introduction to the UAE corporate tax introduction. The world’s tax justice network defines Transfer Pricing as “a technique used by multinational corporations to shift profits out of the countries where they operate and into tax havens.” 

Both definitions explain that transfer prices are a way to make money. But it’s helpful to go back and expand the definition. One could include that Transfer Pricing means:

A tax law to prevent abuse was enacted to enforce the “arm’s     length” principle.

It is a requirement that the price of the goods and services     charged by the respective parties must be precisely the same as they would     be should the parties involved in this transaction have never been     connected.

The goal of the arm’s-length concept and transfer pricing (“TP”) guidelines is to ensure that there are no instances of pricing mismatch in transfers due to improper transfer Pricing methods. In which the prices of transfers are deliberately manipulated to gain certain tax advantages which benefit several related entities.

Transfer pricing is of crucial importance to corporate taxation. Transfer Pricing directly impacts the distribution of losses and profits for companies subject to corporate tax. Notably, the practices of Transfer Pricing taxpayers have an immediate impact on the tax revenues of a nation.

Suppose the tax rates for corporations of the respective countries differ significantly. In that case, the associated parties might be motivated to establish their transfer rates to allocate profits to the tax-free jurisdiction, thus reducing the total (group) global corporate tax burden.

Even when a country has lower tax rates and is not governed by Transfer Pricing laws, transfer mispricing could result in substantial tax revenue being removed.

For instance:

Company A, a tax resident of Bangladesh, manufactures electronic and personal computers in a country taxed at a rate of 32.5 percent. The company sells its manufactured items to the UAE-related tax-resident business Company B, which pays 0 percent or the corporate tax rate of 9% for the resale of its products in third markets and the UAE.

In this scenario, company A will likely be driven to sell the product for price or with a lower profit cost to company B. Company B can resell the product with the highest possible margin and take home the more significant portion of the profits, to make both companies pay corporate taxes at a lower amount.

Tax authorities in Bangladesh are likely to audit and modify the tax on corporate income paid by company A, thereby taxing a substantial portion of the profits that the UAE taxes. Suppose company B had paid taxes on corporate income in the UAE.

In that case, company B is likely to be keen to reduce the tax paid by the UAE to avoid and lessen the phenomenon known as “double economic taxation” through the transfer pricing adjustment. That’s why countries with corporate tax systems, in general, must develop transfer pricing laws and establish an administrative capacity to manage the request for adjustment.

Additionally, accounting, as well as legal and corporate tax laws and practices, vary from one country to the next and from country to country. It is essential to be aligned with the Transfer Pricing law to ensure that the appropriate TP adjustments are based on the same rules and principles as the Transfer Pricing procedure.

Will It Impact A UAE-Based Business?

The simple answer is yes. The documents published by the MoF documents ( Press release and Public Consultation) clarify that UAE companies must adhere to Transfer Pricing regulations and documentation requirements based on the Transfer Pricing Guidelines.

In the context of the Corporation Tax introduction as part of the Corporate Tax introduction, the UAE will implement Transfer Pricing rules.

That means that all transactions between related parties and persons who are connected (“intercompany transaction”) will have to comply with applicable TP requirements according to the principle of arm’s length outlined in the OECD Transfer Pricing Guidelines.

Who are the Related Parties?

As per the UAE Corporate Tax Consultation Document [22 (“Consultation Paper”), A related person is an individual an entity with an existing connection to a business by control, ownership, or family kinship (in cases of natural individuals).

The document also lists these relationships in the form of connected parties:

A minimum of two or more persons who are related with the 4th     degree of kinship or affiliation, for example, through marriage, birth, or     adoption;

When alone or in conjunction with a partner, a person, or a     legal entity, the individual directly or indirectly holds more than 50% of     this legal entity.

One or more legal bodies, where one legal entity on its own     or in conjunction with a related entity directly or indirectly, holds at     least a 50% percentage of or controls each legal entity

More than two legal entities, if the taxpayer, either alone     or in conjunction with a related person directly or indirectly, holds at     least 50% of each or is the sole owner;

A taxpayer and its branch or permanent establishment

Members of the same unincorporated partnership and

Non-exempt and exempt business activities of the same     individual (for instance, an exempt-free zone-based business).

Who Are Connected Persons?

Consultation Paper Consultation Paper stresses that in the absence of taxation on personal income in the UAE, individuals who own tax-deductible companies would be encouraged to reduce the UAE corporate tax base through excessive payments to themselves or those associated with them.

So, benefits or payments given by a company for the “Connected Persons” will be tax-deductible only if the company can show that the benefit or payment conforms to “arm’s length” or the “arm’s length principle” and the expense is entirely and solely for the benefit of your business.

Connected Persons differ as Related Parties. A person is considered as being connected to a business in the scope of the UAE Corporate Tax regime it is:

An individual who either directly or indirectly owns an     ownership control or interest in the tax-paying person.

An officer or director of a taxable person.

An individual who is related to the director, owner, or     another officer tax-paying person in the extent of the 4th degree of     family kinships such as through marriage, birth, or adoption.

If the tax-paying person is a member of an unincorporated     partnership or any other     partner of the same partnership and

A Related Party of any of the above.

What Are the Compliance Obligations?

Transfer Pricing rules usually place the onus probandi (burden of evidence) on the taxpayer. The taxpayer is responsible for intercompany transactions with an amount greater than a specific threshold in the applicable tax year to create the Transfer Pricing documents and show that the transactions between its companies were carried out at an “arm’s length.”

The value of intercompany transactions has yet to be defined and is expected to be clarified following the implementation of UAE Corporate Tax Legislation. Consultation Paper Consultation Paper does specify the mandatory Transfer Pricing documentation that will comprise a Local File along with a Master file (according to the formatting and content required in OECD BEPS Act 13 as well as following the World’s Best practices).

Additionally, the arm’s-length nature of intercompany transactions must be confirmed using any of the internationally accepted Transfer Pricing methods or another approach when the business can prove that the specified method can’t be used reasonably.

If the requirements are met, companies must complete and submit a Transfer Pricing disclosure form with information about their intercompany transactions. It is unclear how it is necessary to submit the Transfer Pricing disclosure form will need to be filed simultaneously with when filing the tax return (i.e., at least 9 months from the date of expiration of the relevant period of tax) or by an earlier date.

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Best Transfer Pricing Services by Auditac International

Auditac International provides expert transfer pricing solutions to help businesses stay compliant and optimize financial strategies. Their comprehensive approach ensures accurate and fair pricing across borders. Trust Auditac International to streamline your global operations and minimize risks.

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UAE Corporate Tax Transfer Pricing Guide

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law”) was issued on 3 October 2022 and published in Issue #737 of the Official Gazette of the United Arab Emirates on 10 October 2022. This law establishes the legal framework for imposing a federal tax on corporate and business profits in the UAE. Its provisions apply to tax periods beginning on or after 1 June 2023.

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Explore EY India's expert solutions for transfer pricing in India. Stay compliant and optimize your tax strategies with our guidance.

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"Elevate Your Business with Suraa Al Bark's Transfer Pricing Services in the UAE"

Suraa Al Bark Transfer Pricing Services is a leading firm specializing in transfer pricing solutions in the United Arab Emirates (UAE). With a team of experienced professionals and a commitment to providing comprehensive and tailored transfer pricing strategies, we have established ourselves as a trusted partner for businesses operating in the UAE.

What is Transfer Pricing?

Transfer pricing refers to the pricing of goods, services, or intangible assets within a multinational organization. It is a critical aspect of international taxation, as it ensures that transactions between related entities are conducted at arm's length, reflecting fair market value. Accurate transfer pricing is essential to prevent tax avoidance, ensure compliance with regulations, and reduce the risk of disputes with tax authorities.

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In the first episode of our brand new podcast series, "The Next Paradigm of Outsourcing," we welcomed Dr. Martin Fahy to share his insights on the Australian BPM landscape. During the discussion, Dr. Fahy spoke about the change in mindset brought about in the BPM landscape in Australia due to COVID and its aftermath. Dr. Martin highlighted the need for organizations to rethink the service models and consider the scope and importance of automating industry processes to gain optimum efficiency.

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Federal Corporate Tax in UAE – Published Official CT Legislation

After the announcement by the government regarding the benefits of Corporate Tax in UAE (CT) and the frequently asked questions (FAQs) on January 31, 2022, as well as the publication of the Public Consultation Document in April 2022, the Federal Decree-Law no. 47 of 2022 regarding the Taxation of Corporations and Businesses UAE Corporate Tax Law has been released on December 9, 2022.

The UAE Corporate Tax Law is Federal Decree-Law No. 47 of 2022, enacted on October 3, 2022, and will be in force 15 days following its public publication by the Official Gazette. The UAE Corporate Tax law applies to profits from businesses in financial years beginning on or after June 1, 2023.

This article offers brief highlights of the new rules which were made public by The Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). It is important to note that the rules closely match those in the Public Consultation Document.

Additional details will be deferred to Cabinet and Tax Authority Decisions. Further guidance is expected to be issued to finalize all UAE Corporate Tax Legislation in areas such as the Free Zone and Director compensation guidelines. Following the publication of Corporate Tax Legislation, the MoF has confirmed that the implementation is scheduled for June 2023.

Scope of Corporate Tax in UAE

Corporate Tax in UAE will be applied to the adjusted net profit of the worldwide accounting of the company.

The UAE Corporate Tax regime has two rates of different types:

A tax-free rate will be applied to tax-paying earnings up to     a certain amount that is to be set in the Cabinet Decision (the FAQs relate to the threshold of AED 375,000)

The tax statutory standard rate is 9 percent.

The relative minimal tax burden of just 9% aims to ensure that the UAE has a competitive tax rate in the global marketplace.

The UAE Corporate Tax Law is silent in Article 3 on aspects governing the global minimum of 15% tax rate. That applies to MNEs that fall within the scope of Pillar Two, which is part of BEPS Pillar 2. OECD BEPS project and applies to multinational corporations (MNCs) that have consolidated worldwide revenues exceeding EUR 750 million (c. 3.15 billion AED) 3.15 billion) at any time in two of the preceding four years. The FAQs address the possibility of adopting within the UAE of BEPS Pillar 2.

Individuals:

Individuals also are affected by corporate taxation if they engage in business activities and are in line with general VAT rules of business activities. The Cabinet is expected to decide how to apply Corporate Tax in UAE to natural individuals. Thus, Corporate Tax in UAE does not apply to a person’s salary and other earnings earned through employment.

However, those who are earning income through an enterprise activity will be covered by Corporate Tax in UAE.

Free Zones

A clearly defined and specific policy (subject to a further Cabinet decision) is set out for companies established in UAE-free zones. These zones:

Maintain sufficient substance and

Earn qualifying income.

What exactly is a sufficient income will be defined by a Cabinet decision. The Public Consultation Document could refer to the requirement to not do business with the mainland UAE. It is stated that Free Zone businesses can choose to be taxed as a corporation at a rate of 9 percent.

The extensive UAE rules for sourcing are in force and essential for the Free zone companies seeking to comply with the substance requirements.

Withholding Tax

There is a possibility of a zero-withholding tax on specific categories in the UAE State Sourced income produced by a non-resident. In turn, foreign investors who do not conduct any activities in the UAE won’t be taxed within the UAE.

Foreign Entities

Foreign entities can be considered residents in the UAE if they are managed and controlled by the UAE. In the case of foreign companies that aren’t recognized as residents of the UAE and who possess a permanent establishment in the UAE, The Definitions of Permanent Establishment have been clarified as fixed PE as well as the term “agency PE. Further details on PEs will be subject to a Ministerial decision.

Exempt Entities

The UAE Corporate Tax Law has retained the exemption for Investment Managers of the Public Consultation Document. Specific rules apply to Partnerships as well, as Family Foundations can also use to increase tax transparency 

Government entities and government-controlled entities as well as qualifying public benefit entities and qualifying investment funds will be exempt from the UAE Corporate Tax Law.

Extractive companies (upstream oil and gas companies) are exempt if they earn revenue from the extraction business.

Bank operations will be restricted to Corporate Tax in UAE (unless your institution operates in a Free Zone and is eligible for the zero-interest rate).

Implementation Date

Article 69 of the UAE Corporate Tax Law provides that the Law applies to Tax Periods that begin on or after June 1, 2023.

Companies with a fiscal year that begins on January 1 are subject to CIT beginning 1. January 2024.

Financial records & Requirement to Maintain Audited Statements

Taxpayers must prepare and maintain financial statements backed by all records and documents to support UAE Corporate Tax returns. The forms should be kept for a minimum of seven years.

That will apply to every UAE entity (unless included in the Corporate Tax Group). Every entity must make separate financial statements. However, all entities will not be audited for financial information. Subsequent Cabinet Decision(s) will outline the tax-paying categories required to keep audited or certified accounts.

Small Business Tax Relief

The possibility of relief for small-sized businesses with gross or revenue less than the threshold of a specific amount is made. Qualifying businesses will be considered not to have tax-deductible income and must comply with a simplified set of requirements.

Revenues and not tax-deductible income determine the threshold. It is likely to be confirmed by an upcoming Cabinet Decision.

Deductible / Non-Deductible Expenses

The expenses incurred solely and exclusively to serve business needs (and which are not to be capitalized) can be deducted.

Deductions are not allowed for expenditures incurred to generate tax-free income. Deductibility is only permitted in the case of any price with a mixed purpose. Interest expense is deductible subject to a maximum of 30% of EBITDA.

Financial assistance rules have been implemented to prevent businesses from getting funding to pay dividends or distribute profits.

Entertainment costs are limited to 50 percent.

Non-deductible expenses include contributions to a non-qualifying Public Benefit Entity and bribes, fines, and dividends.

Importantly, amounts taken from the business by an individual who is a tax-deductible individual are not deductible.

Exempt Income & Relief

 The following income categories are exempt from Corporate Tax in UAE (Article 22 of the UAE Corporate Tax Law):

Capital Gains and Dividends, and other profits distributions     from a Resident

Capital Gains or Dividends, as well as other profits distributions     from Qualifying shareholding in a legal entity of a foreign country with a     holding time of 12 months and a minimum contribution of 5 percent, and at     an absolute minimum of 9 percent CIT for the source country. From which     they originate.

The income from a foreign PE is subject to the conditions     & an option to use an exemption (rather than credit)

The income earned by an individual, not a country resident,     comes from the operation of ships or aircraft involved in international     transport.

These transactions can be subjected to a specific reduction, i.e., it is essentially an exemption from taxation:

Restructurings and intragroup transactions that qualify as     qualifying entities are eligible when they hold 75 percent common ownership

Restructuring of businesses is a relief from the government     with specific conditions.

Transfer Pricing

Related parties’ transactions should be carried out under the arm’s-length arms-length principle outlined in Section 34 of the UAE Corporate Tax Law. It also states that the five standard OECD transfer pricing techniques are suitable to help support the arm’s-length arms-length nature of arrangements with related parties and allow alternative methods if needed.

Article 34 states that should there be an adjustment by a tax authority from a foreign country that affects a UAE entity, the application must be submitted to the FTA to request a similar adjustment that allows the UAE firm to be exempt against double taxation. The resulting adjustments relating to domestic transactions do not require an application.

The requirements for documentation on transfer pricing are covered by Article 55. UAE businesses must follow the transfer pricing regulations and the documentation requirements set by references to the Transfer Price Guidelines.

These lead to three-tier reports, i.e., master file, local file, and country-by-country reporting. The connection to a controlled transactions disclosure form is provided (details of which are to be determined).

It is important to note that no thresholds of materiality are provided. Separate legislation will be announced shortly. Advance pricing plans will become made available via the normal clarification process currently in place.

UAE has introduced provisions requiring the payment and benefits given to persons connected to be tax-deductible in the market value. The same rules are followed in section 34 of UAE CIT Law for applying this principle.

Administration & Enforcement

The MoF is the sole authority for multilateral or bilateral     agreements and the exchange of information between countries.

The FTA is responsible for the corporate tax system’s     administration, collection, and application. The Tax Procedures Law sets     fines and penalties.

Companies will require an FTA VAT     Registration UAE.

Companies affected by Corporate Tax in UAE must submit a CT     report electronically for each period of financial activity within nine     months from the close of that Financial Period. (A financial period     generally refers to any financial period that is 12 months long)

Free Zone companies that are which are subject to CIT at 0     percent CIT must also submit a Corporate Tax Return.

Foreign Tax Credits

Tax credits for foreign taxation are allowed for UAE corporate tax due as per the Public Consultation Document. Businesses are entitled to claim the lesser amount of corporate tax due and the sum of withholding tax that is effectively taken out. There is no carrying forward. There will be no credit for taxes paid to an individual Emirate.

Tax Grouping

Fiscal unity or Tax Group: UAE companies can create a “fiscal unity” or Tax Group to serve UAE purposes. The primary requirement for the formation of a Tax Group is to comply with an (in)direct minimum shareholding of 95 percent.

Free zone entities subject to zero percentage shareholding are not eligible to join the Tax Group. Furthermore, the parent (which may be intermediate) is required to be a UAE company.

Losses 

By article 37 of the UAE Corporate Tax Law, losses can be carried forward for up 75 percent of taxable income. Losses can be transferred between members of the same group of corporations if they are 75 percent direct or indirectly owned. Losses cannot be transferred from exempt people or entities in the free zone. The loss offset is subject to the cap of 75 when it comes to businesses that roll forward losses.

Tax-deductible losses may be lost in the event of an ownership change (50 percent or more); however, the new owner is operating the same or similar business. The requirements to be considered for this have been established.

Anti-Abuse

UAE will implement an Anti-Abuse General Rule known as “GAAR”. The GAAR applies to cases where one of the principal reasons for a transaction is to gain an advantage in taxation for corporations that is not in line with the intent, intent, or purpose of UAE Corporate Tax Law.

The FTA will be able to address and adjust or counteract the transaction. The GAAR only applies to arrangements or transactions made after the UAE Corporate Tax Law is published in the UAE Official Gazette on October 10, 2022, in issue #737.

Summary

The publication of UAE Corporate Tax Law and confirmation of a rate of 9 The UAE have established a global affordable Corporate Tax rate and confirmed their intention to implement Corporate Tax in June 2023.

The information to be released in the next few months will be fleshed out and provide a greater understanding of the implementation process. Nevertheless, several key elements are already confirmed, including introducing compulsory transfer pricing rules.

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Federal Corporate Tax in UAE – Published Official CT Legislation

In the wake of the public announcement regarding the benefits of Corporate Tax in UAE (CT) and the frequently asked questions (FAQs) on January 31, 2022, as well as the publication of the Public Consultation Document in April 2022, the Federal Decree-Law no. 47 of 2022 regarding the Taxation of Corporations and Businesses Corporate Tax Law has been released on December 9, 2022.

The UAE Corporate Tax Law is Federal Decree-Law No. 47 of 2022, issued on October 3, 2022, and becomes effective 15 days following its announcement in the Official Gazette. The Corporate Tax law applies to the profits of businesses for fiscal years that begin on or after June 1, 2023.

This article gives brief highlights of the new rules, which were it was announced by The Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). It is important to note that the new rules align with the Public Consultation Document.

More details are awaiting Cabinet and Tax Authority Decisions, and further guidelines are expected to be issued to finalize all Corporate Tax Legislation in areas such as the Free Zone and Director compensation guidelines. Following the publication of Corporate Tax Legislation, the MoF has confirmed that its introduction is scheduled for June 2023.

Scope of Corporate Tax in UAE

Corporate Tax in UAE applies to the adjusted net profit of the worldwide accounting of the company.

The Corporate Tax in UAE Regime has two rates of different types:

A tax-free rate applies to tax-deductible earnings up to a     certain amount that is to be set in a Cabinet Decision (the FAQs relate to the threshold of AED 375,000)

The tax standard for the statutory rate is 9 percent.

Confirming the minimal tax burden of just 9% aims to ensure that the UAE has a competitive tax rate worldwide.

The Corporate Tax Law is silent in Article 3 on aspects governing the global minimum of 15% tax rate. That applies to MNEs that fall within the definition of Pillar Two, which is part of BEPS Pillar 2. OECD BEPS project and applies to multinational corporations (MNCs) that have consolidated worldwide revenues exceeding EUR 750 million (c. the equivalent of AED 3.15 billion) at any time in two of the last four years. The FAQs address the possibility of adopting within the UAE of BEPS Pillar 2.

Individuals:

Individuals are affected by corporate taxation if they engage in business activities that are in line with an overall VAT concept for business activities. A Cabinet decision is anticipated regarding how to apply Corporate Tax in UAE to natural people. That means that Corporate Tax does not apply to a person’s salary and other earnings earned through employment. However, those earning income through part of a business venture would be covered by Corporate Tax in UAE.

Free Zones

A specific and defined regime (subject to a further Cabinet decision) is provided for all businesses in UAE-free zones. These zones:

Maintain sufficient substance and

Earn qualifying income.

What is a sufficient income will be defined by a Cabinet decision. According to the Public Consultation Document, this could refer to the requirement not to do Business with the mainland UAE. It is stated that Free Zone companies can choose to be taxed as a corporation at a rate of 9 percent.

A wide range of UAE rules for sourcing is in force and essential for businesses in the Free zone who want to satisfy the requirements of substance.

Withholding Tax

There will be no withholding tax on specific categories of UAE State Sourced income produced by a non-resident. In turn, foreign investors who don’t carry any businesses in the UAE, in general, will not be taxed within the UAE.

Foreign Entities

Foreign entities can be residents of the UAE if they are operated and controlled in the UAE. Foreign entities who aren’t considered to be residents in the UAE, however, may have a permanent establishment in the UAE. The Definitions of Permanent Establishment have been clarified as fixed PE and the term “agency PE. Further details on PEs will be subject to a Ministerial decision.

Exempt Entities

The UAE Corporate Tax Law retains the exemption for Investment Managers exempted from Public Consultation Documents. Rules apply to Partnerships, and Family Foundations can also use to increase tax transparency.

Government entities and government-controlled entities, as well as qualifying public benefit entities and investment funds, will be exempt from the UAE Corporate Tax Law. Extractive companies (upstream oil and gas companies) are exempt if they earn revenue from their extractive businesses.

Banking operations are affected by Corporate Tax in UAE (unless an institution falls located in a Free Zone and is eligible for the zero-interest rate).

Implementation Date

Article 69 of the UAE Corporate Tax Law provides that the Law will apply to Tax Periods that begin on or after June 1, 2023.

Businesses with a financial year that begins on January 1 are subject to CIT starting on January 1, 2024.

Financial records & Requirement to Maintain Audited Statements

Taxpayers must create and keep financial statements backed by all records and documents to support Corporate tax returns. The forms must be kept for a minimum of seven years.

This obligation will apply to every UAE entity (unless included in the Corporate Tax Group).

Every entity must create its financial statements. However, only some entities may be audited for financial information. A subsequent Cabinet Decision(s) will define the types of tax-paying individuals that must keep certified or audited accounting statements.

Small Business Tax Relief

Reliefs for small-scale businesses with revenues or gross income below the threshold of a specific amount are made. Qualifying businesses will be considered to have no tax-deductible income and must comply with a simplified set of requirements.

The threshold is determined by the revenue, not the earnings or taxable income. That is likely to be confirmed by an upcoming Cabinet Decision.

Deductible / Non-Deductible Expenses

The expenses incurred solely and exclusively for business reasons (and which are not to be capitalized) can be deducted.

Deductions are not allowed when expenses are incurred to earn tax-free income. In the case of any expenditure with a mixed purpose, removal is not permitted. Interest expense is deductible subject to a limit of 30% of EBITDA.

Financial assistance rules are in effect and prevent companies from getting funding to pay dividends or distribute profits.

Entertainment costs are set at 50 percent.

Donations not tax-deductible include those made to a non-Qualifying Public Benefit Entity and bribes, fines, and dividends.

Notably, the amounts withdrawn from the Business by any natural person who is a tax-deductible individual are not deductible.

Exempt Income & Relief

The following income categories will be exempted from Corporate Tax in UAE (Article 22 of the UAE Corporate Tax Law):

Capital Gains and Dividends, and other distributions of     profits from a Resident

Capital Gains such as dividends, capital gains, and other     distributions from Qualifying shareholding in a legal entity of a foreign     country that is subject to a hold duration of 12 months, the minimum     contribution of 5 percent, and at the minimum, subject to 9 percent CIT     for the source country. From which they originate.

The income from a foreign PE is subject to certain conditions     and the option to apply an exemption (rather than credit)

Earnings of an individual who is not a resident of the     country come from operating ships or aircraft involved in international     transport.

These transactions can be subjected to a specific reduction, i.e., effectively an exemption from taxation:

Restructurings and intragroup transactions that qualify as     qualifying Entities will be eligible when they hold 75 percent common     ownership.

Restructuring relief for businesses under specific conditions.

Transfer Pricing

Related party’s transactions should be carried out under the arm’s-length principle as outlined in Section 34 under the UAE Corporate Tax Law. In addition, it states that the five conventional OECD Transfer Pricing strategies are suitable to help support the arm’s length character of arrangements with related parties and allows the use of alternative methods when needed.

Article 34 provides that when a tax authority adjusts to a foreign country that affects the tax structure of a UAE entity, the application must be submitted to the FTA to request a similar adjustment that allows the UAE firm to be exempt against double taxation. Any adjustments that result from domestic transactions do not require an application.

The requirements for documentation on transfer pricing are covered in Article 55. UAE businesses will have to follow the rules for transfer pricing and the documentation requirements set by OECD Transfer Price Guidelines, which lead to three-tier reports, i.e., master file, local file, and country-by-country reporting. A reference to a controlled transaction disclosure form is provided (details of which are still to be determined).

It should be noted that no thresholds for the materiality of the product are provided. Separate legislation will be released later. Advance pricing plans will become made available via the normal clarification process currently in place.

UAE has introduced provisions requiring the payment and benefits given to persons connected to be tax-deductible in their market value. The same rules are followed in Article 34 of the UAE CIT Law.

Administration & Enforcement

The MoF is the sole authority for purposes of multilateral     bilateral or multilateral agreements as well as for the exchange of     information between countries.

The FTA is accountable for the corporate tax system’s     administration, collection, and application. Fines and penalties are governed     under a law known as the Tax Procedures Law.

Companies will require a VAT Registration UAE from     the FTA.

Companies that are required to comply with UAE Corporate Tax     are required to submit the Corporate Tax return online for every financial     year within nine months from the date of the end of that Financial Period.     (A financial period generally refers to any financial period that is 12     months long)

Free Zone companies that are subject to CIT at 0 percent CIT     must also submit a CT Return.

Foreign Tax Credits

Tax credits for foreign taxation are allowed for Corporate Tax in UAE due as per the Public Consultation Document. Businesses can claim less corporate tax owing and the sum of tax withholding effectively removed. There is no way to carry forward. There will be no credit for taxes paid to the individual Emirate.

Tax Grouping

Fiscal unity or Tax Group: UAE companies can form a “fiscal unity” or Tax Group to serve UAE purposes. The main requirement for a Tax Group is to comply with the (in)direct sharing requirement, which is 95 percent. Free zone entities subject to zero percent cannot join the Tax Group. Additionally, the parent (which may be intermediate) must be a UAE company.

Losses

By article 37 of the UAE Corporate Tax Law, losses can be carried forward for up 75 percent of taxable income. Losses can be transferred between members of the same group of corporations if those entities have 75 percent direct or indirectly owned. Losses cannot be transferred from exempt individuals or entities that are free zone. Loss offsets are also subject to the cap of 75 for businesses that roll forward losses.

Tax-deductible losses may be lost in the event of an ownership change (50 percent or more) if the new owner runs the same or similar Business. The criteria to be considered for this have been established.

Anti-Abuse

UAE will adopt an Anti-Abuse General Rule, also known as “GAAR.” The GAAR applies to cases where one of the primary reasons for a transaction is to gain an income tax benefit for the corporation that is incompatible with the purpose or intent of the UAE Corporate Tax Law.

The FTA will deal with and alter or counteract the transaction. The GAAR only applies to agreements or transactions entered after the UAE Corporate Tax Law is published in the UAE Official Gazette on October 10, 2022, in issue #737.

Summary

With the publication of the UAE Corporate Tax Law and confirmation of a 9% tax rate and a 9% rate, UAE has established a globally competitive rate for Corporate Tax in UAE and confirmed its intention to implement Corporate Tax in June 2023.

It is expected that additional information to be released over the coming months to be fleshed out and provide more excellent knowledge of its implementation. Nevertheless, several key elements are already confirmed, including introducing compulsory transfer pricing rules.

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Understanding the Importance of FAR Analysis in Transfer Pricing Compliance

Imagine, for a moment, you're at the helm of a multinational enterprise, steering the ship through the tumultuous waters of global business.

As a business leader, you must ensure that your enterprise navigates these waters successfully and complies with the myriad of international tax regulations. One such critical regulation is Transfer Pricing, a concept that often proves to be as complex as it is crucial.

This article simplifies this concept and highlights the importance of Function, Asset, and Risk (FAR) Analysis in maintaining Transfer Pricing compliance, particularly within the Indian context.

Now, let's delve into the world of Transfer Pricing and FAR Analysis, where understanding and adhering to these rules could mean the difference between smooth sailing and rough seas.

Neglecting a robust FAR Analysis could lead to severe consequences, such as hefty penalties and a tarnished reputation.

Understanding Transfer Pricing

Transfer pricing refers to the pricing of transactions between associated enterprises. It is a regular part of the operations of a multinational company but needs careful attention due to varying tax laws across countries.

The arm's length principle, which suggests that transactions between related parties should be conducted as if they were unrelated, forms the basis of most countries' transfer pricing rules, including India's.

The Concept of FAR Analysis

At the heart of transfer pricing is the concept of FAR analysis - Functions performed, Assets used, and Risks assumed.

It is a vital tool used in transfer pricing studies to compare the functions performed, assets employed, and risks the tested party assumes with those of independent enterprises engaging in comparable uncontrolled transactions.

Detailed Explanation of FAR Analysis

In simpler terms, the functions refer to each entity's activities in the transaction, the assets to the resources they employ, and the risks to the uncertainties they assume. Understanding the FAR profile helps identify comparable uncontrolled transactions, which are then used to determine the arm's length price.

Rule 10B and the Necessity of FAR Analysis

Rule 10B of the Income Tax Rules underscores the importance of FAR Analysis in determining whether a transaction is at arm's length. This rule mandates the use of FAR Analysis in the process of identifying comparable uncontrolled transactions.

Case Studies Illustrating the Importance of FAR Analysis

Understanding the theoretical concept of FAR analysis is one thing, but witnessing its application in real-world scenarios truly underscores its importance.

The Supreme Court Case of Morgan Stanley and Company Inc.

Let's consider the Supreme Court case of Morgan Stanley and Company Inc., a U.S. investment bank, which entered into an agreement with its group company in India for certain support services.

The question was whether Morgan Stanley had a permanent establishment in India, and if so, what income was attributable to it.

The Supreme Court held that the employees sent on deputation constituted a service PE of the assessee, and the income of the non-resident assessee was taxable in India to the extent of income attributable to the activities carried on by the non-resident through its permanent establishment in India.

This case illustrates the importance of a detailed FAR analysis in determining an international transaction's arm's length price​.

The Case of Hoganas India (P.) Ltd. V. Dy. CIT and Wrigley India (P.) Ltd. V. Addl. CIT

Further, the cases of Hoganas India and Wrigley India showcase the application of FAR Analysis in real-life scenarios. These cases underscore how an in-depth FAR Analysis can help businesses avoid disputes and achieve compliance with transfer pricing regulations.

A thorough FAR analysis played a crucial role in determining the correct transfer pricing in these cases.

Key Takeaways from FAR Analysis

Transitioning from the intricacies of Transfer Pricing and FAR Analysis, here are the key takeaways from the article:

* Transfer pricing refers to pricing transactions between related business entities, a critical aspect of international tax compliance.

* Function, Asset, and Risk (FAR) Analysis is central to transfer pricing.

* FAR Analysis is not merely a compliance requirement; it's a tool that helps businesses navigate the complex waters of international transactions, ensuring fair pricing and avoiding penalties.

* FAR Analysis is mandated by Rule 10B of the Income Tax Rules to ensure transactions are at arm's length.

* FAR Analysis should be integrated into the transfer pricing strategy of multinational businesses operating in India.

Furthermore, a robust FAR Analysis maintains the company's reputation and promotes good corporate governance.

Conclusion:

FAR analysis is not just a compliance requirement. It is a powerful tool that can help businesses to set prices that reflect the economic reality of their transactions, thereby reducing the risk of double taxation and potential penalties.

It helps companies to identify the most suitable comparables for their transactions, allowing them to benchmark their prices against the market and ensuring that they comply with the arm's length principle.

As such, it should be seen as an integral part of the transfer pricing strategy of any multinational business operating in India.

Source: https://www.manishanilgupta.com/blog-details/understanding-the-importance-of-far-analysis-in-transfer-pricing-compliance

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Discover comprehensive insights on transfer pricing in India with EY India. Stay informed about the latest regulations, strategies, and best practices for effective transfer pricing management in the Indian business landscape.