What is Transfer Pricing?
Transfer pricing refers to the prices of goods and services that are exchanged between companies under common control. For example, if a subsidiary company sells goods or renders services to its holding company or a sister company, the price charged is referred to as the Transfer Price.
Entities under common control refer to those that are ultimately controlled by a single parent corporation. Multinational corporations use Transfer Pricing as a method of allocating profits (earnings before interest and taxes) among their various subsidiaries within the organization.
On 31 January 2022, the UAE Ministry of Finance announced the introduction of Federal Corporate Tax in the UAE that will be effective for financial years starting on or after 1 June 2023.
What we know so far is , based on the proposed UAE Corporate Tax – it will cover the introduction of Transfer Pricing Rules and Transfer Pricing documentation requirements in line with the Transfer Pricing guidelines issued by International bodies.
For example, entity A and entity B are both owned by Mr X. Entity A produces medicine in India, and entity B sells medicines in UAE.
Entity A may sell medicines to entity B through an Intracompany transaction.
If entity A offers entity B a rate lower than market value, entity B will have a lower cost of purchase (COGS) and higher earnings than it otherwise would have.
If, on the other hand, entity A offers entity B a rate higher than market value, then entity A would have higher Sales Revenue than it would have if it sold to an external customer. Entity B would have higher COGS and lower profits.
In either situation, one entity benefits while the other is hurt by a transfer price that varies from market value. Mr X being a common owner, has controlled the transaction, which resulted in the tax savings
Some companies use this as a tool to move their Profits to a country with lower Tax Rate – their by avoiding paying correct Taxes in the country, where it should have been.
To control such situations, transfer pricing rules have been proposed in the UAE corporate tax regime to ensure that the price of a transaction is not influenced by the relationship between the parties involved, and to achieve this outcome, the UAE will apply the internationally recognized “arm’s length” principle to transactions and arrangements between related parties and with connected persons.
If the transactions between the related parties, and with the connected persons are not at arm’s length price, then the Federal Tax Authority (FTA) will assess the arm-length price and will calculate the profits that would have been at the fair market value. In case, it has resulted in tax evasion, the penalties would be applicable accordingly.
