UAE Transfer Pricing and Benchmarking: A Complete Guide for Businesses

Author: Sivaprasad R – Business Development Manager

As the UAE Corporate Tax regime continues to develop, Transfer Pricing (TP) has become an increasingly important area of tax compliance for businesses operating in the UAE. Companies that conduct transactions with related parties or connected persons need to ensure that their pricing is consistent with the arm’s length principle.

Transfer pricing is particularly important for businesses that operate as part of a group, have overseas related companies, provide management or support services to group entities, provide intercompany loans, or purchase and sell goods or services between related entities.

The UAE Federal Tax Authority (FTA) confirms that transfer pricing rules apply to UAE businesses dealing with Related Parties and Connected Persons, whether those parties are located in the UAE mainland, a Free Zone or outside the UAE.

This makes UAE transfer pricing benchmarking an important consideration when establishing whether the pricing of controlled transactions is commercially reasonable.

What Is Transfer Pricing?

Transfer pricing refers to the pricing applied to transactions between entities or persons that have a special relationship with each other.

For example, consider a UAE company that purchases products from its parent company in another country. If the UAE company pays AED 100 for a product that independent businesses normally purchase for AED 70, the difference could affect the UAE company’s taxable profit.

Transfer pricing rules are designed to ensure that transactions between related parties are priced as though they were carried out between independent parties.

This concept is known as the arm’s length principle.

The FTA explains that transfer pricing rules seek to ensure that transactions between Related Parties are conducted on arm’s length terms, similar to transactions between independent parties.

What Is the Arm’s Length Principle in the UAE?

The arm’s length principle is the foundation of transfer pricing.

Under this principle, the price or conditions applied to a transaction between related parties should generally be comparable to what independent parties would have agreed to under similar circumstances.

Businesses may therefore need to demonstrate that their related-party transactions reflect commercially reasonable pricing.

Examples can include:

• Sale or purchase of goods between group companies
• Management service fees
• Consultancy and professional services
• Royalty and intellectual property payments
• Intercompany financing
• Loans and advances
• Guarantees
• Shared service arrangements
• Distribution arrangements
• Cost-sharing arrangements
• Lease or rental arrangements involving related parties

A proper transfer pricing analysis helps establish whether these transactions satisfy the arm’s length standard.

What Is Transfer Pricing Benchmarking?

Transfer pricing benchmarking is the process of comparing a related-party transaction or the profitability of a related-party business activity with comparable transactions or independent companies.

The objective is to determine an appropriate arm’s length price, margin or range.

For example, suppose a UAE company provides marketing support services to a related company.

A benchmarking study may identify independent companies performing similar functions and analyse their operating margins. If comparable independent companies earn operating margins within a particular range, that information can be used to assess whether the UAE company’s related-party pricing is commercially appropriate.

Benchmarking therefore provides evidence to support the transfer pricing position adopted by a business.

Why Is Benchmarking Important for UAE Businesses?

A transfer pricing policy without appropriate supporting analysis may be difficult to defend during a tax review.

A benchmarking study can help businesses:

1. Support the arm’s length nature of related-party transactions.
2. Establish appropriate pricing or profit margins.
3. Identify comparable independent companies or transactions.
4. Reduce transfer pricing risk.
5. Support Corporate Tax compliance.
6. Strengthen transfer pricing documentation.
7. Identify potential adjustments before filing the Corporate Tax return.

Benchmarking is particularly useful where the value of related-party transactions is significant or where the transaction involves complex functions, assets and risks.

UAE Transfer Pricing Methods

The UAE transfer pricing framework recognises several internationally accepted methods for determining an arm’s length value.

The main methods include:

1. Comparable Uncontrolled Price Method

The Comparable Uncontrolled Price (CUP) Method compares the price charged in a controlled transaction with the price charged in a comparable transaction between independent parties.

For example, if a UAE company sells the same product to both a related company and an independent customer under comparable conditions, the independent transaction may provide useful evidence for determining an arm’s length price.

The CUP method can be particularly effective when reliable comparable prices are available.

2. Resale Price Method

The Resale Price Method starts with the price at which a product purchased from a related party is resold to an independent customer.

An appropriate gross margin is deducted to determine the appropriate purchase price between the related parties.

This method may be relevant for distribution businesses that purchase products from related entities and resell them to independent customers.

3. Cost Plus Method

Under the Cost Plus Method, the relevant costs incurred by the supplier are identified and an appropriate arm’s length mark-up is applied.

For example, if a related company provides administrative or support services and incurs AED 500,000 of relevant costs, an appropriate arm’s length mark-up may be applied based on comparable independent service providers.

4. Transactional Net Margin Method

The Transactional Net Margin Method (TNMM) examines the net profit margin earned from a controlled transaction and compares it with margins earned by comparable independent businesses.

TNMM is frequently considered where reliable gross-margin comparisons are difficult to establish.

Profit-level indicators may include operating margin, return on assets or other appropriate financial measures depending on the transaction and facts.

5. Transactional Profit Split Method

The Transactional Profit Split Method considers the combined profits from controlled transactions and allocates those profits between related parties based on their respective contributions.

This approach can be relevant for complex transactions where both parties make significant contributions involving valuable functions, assets or risks.

The FTA identifies these five methodologies for determining arm’s length values for transfer pricing purposes.

What Is a Benchmarking Study?

A transfer pricing benchmarking study normally involves several stages.

Step 1: Understand the Transaction

The first step is to clearly understand the controlled transaction.

This may involve reviewing:

• Contracts
• Invoices
• Accounting records
• Payment arrangements
• Business activities
• Group structure
• Related-party relationships
• Geographic markets

Step 2: Functional Analysis

A Functions, Assets and Risks (FAR) analysis is an important part of transfer pricing.

The analysis considers:

Functions:
What activities does each party perform?

Assets:
What tangible and intangible assets are used?

Risks:
Which party bears commercial, financial, inventory, credit or operational risks?

The FAR analysis helps determine which transfer pricing method may be appropriate.

Step 3: Select the Transfer Pricing Method

The appropriate TP method should be selected based on the characteristics of the transaction and the availability and reliability of comparable data.

There is no single transfer pricing method that is suitable for every business.

Step 4: Identify Comparable Companies or Transactions

A benchmarking exercise may involve searching for independent companies or transactions that have similar economic characteristics.

The comparables should be carefully reviewed rather than selected solely because they operate in the same broad industry.

Factors such as functions, geographic market, business model, size, risks and financial characteristics can affect comparability.

Step 5: Financial Analysis

The financial performance of the selected comparable companies may then be analysed to determine an appropriate arm’s length range.

Depending on the transaction, the analysis may consider gross margins, operating margins, mark-ups or other appropriate financial indicators.

Step 6: Prepare the Benchmarking Report

The final benchmarking report should explain the methodology, search strategy, selection criteria, comparable companies or transactions, financial analysis and conclusion.

This creates an evidence-based foundation for the company’s transfer pricing position.

Transfer Pricing Documentation in the UAE

Transfer pricing compliance is not limited to calculating a price.

Businesses should maintain appropriate information and documentation supporting their related-party transactions.

Depending on the taxpayer and applicable thresholds, transfer pricing documentation can include a Master File and Local File.

The UAE Ministry of Finance states that taxpayers may be required to maintain transfer pricing documentation, including a Master File and Local File, subject to specified conditions and thresholds. The documentation requirements include businesses with revenue of at least AED 200 million in the relevant tax period or UAE entities belonging to a multinational enterprise group meeting the applicable consolidated revenue threshold.

Businesses should therefore assess their transfer pricing obligations rather than assuming that documentation is required only for multinational corporations.

Transfer Pricing and UAE Corporate Tax

Transfer pricing is closely connected with UAE Corporate Tax because related-party pricing can affect taxable income.

If a transaction between related parties is not conducted on an arm’s length basis, the resulting pricing may require consideration when determining taxable income under the UAE Corporate Tax framework.

Importantly, transfer pricing rules are not restricted only to cross-border transactions. The FTA confirms that the rules can apply to transactions involving Related Parties and Connected Persons in the UAE, Free Zones and foreign jurisdictions.

Therefore, UAE businesses should review both domestic and international related-party transactions.

Common Transfer Pricing Transactions in the UAE

Businesses should consider reviewing transfer pricing implications for transactions such as:

• Related-party sales and purchases
• Management fees
• Administrative support fees
• Consultancy charges
• Intercompany loans
• Interest payments
• Royalty payments
• Trademark and intellectual property charges
• Shared employee costs
• IT support services
• Marketing and advertising services
• Distribution arrangements
• Guarantees
• Cost-sharing arrangements

Even where the transaction is commercially genuine, the business should consider whether the pricing and supporting documentation are appropriate.

Common Transfer Pricing Mistakes

Businesses can face unnecessary transfer pricing risks when they:

1. Use arbitrary mark-ups

Applying a standard 5%, 10% or 15% mark-up without supporting analysis may not automatically demonstrate an arm’s length result.

2. Ignore related-party transactions

Some businesses focus only on international transactions and overlook domestic related-party arrangements.

3. Prepare documentation after a tax review

Transfer pricing documentation is stronger when it is prepared as part of the normal compliance process rather than reconstructed later.

4. Select inappropriate comparables

A company operating in the same industry is not necessarily a reliable comparable.

5. Ignore changes in business operations

A benchmarking study should be reviewed when there are significant changes in functions, risks, business models, markets or related-party arrangements.

6. Treat benchmarking as a one-time exercise

Transfer pricing should be monitored periodically to ensure that the pricing remains appropriate as business circumstances change.

How Elysian Consulting Group Can Help

Transfer pricing can become complex when a business has multiple related-party transactions, international group entities or significant intercompany arrangements.

At Elysian Consulting Group, we assist UAE businesses with tax and compliance requirements and can help businesses understand their transfer pricing obligations and develop an appropriate approach to related-party transactions.

Our transfer pricing support can include:

• Transfer pricing review
• Related-party transaction assessment
• FAR analysis
• Transfer pricing method selection
• Benchmarking analysis
• Comparable company analysis
• Arm’s length pricing assessment
• Transfer pricing documentation support
• Master File and Local File assistance
• Corporate Tax compliance support
• Transfer pricing policy review

For businesses operating in Dubai and across the UAE, proactive transfer pricing planning can help identify potential issues before they become significant tax compliance concerns.

Conclusion

Transfer pricing is an important part of UAE Corporate Tax compliance for businesses dealing with Related Parties and Connected Persons.

A well-prepared transfer pricing benchmarking study can provide valuable evidence that related-party transactions are conducted on an arm’s length basis. It can also help businesses establish appropriate pricing, support documentation and identify potential compliance risks.

Businesses should not wait until a tax review to examine their related-party arrangements. Reviewing transactions, performing a FAR analysis, selecting the appropriate transfer pricing method and maintaining supporting documentation can create a stronger and more defensible transfer pricing position.

If your UAE business has related-party transactions, now is a good time to review your UAE transfer pricing and benchmarking requirements.

Frequently Asked Questions

1. What is transfer pricing in the UAE?

Transfer pricing refers to the pricing of transactions between Related Parties or Connected Persons. UAE rules generally require such transactions to be considered using the arm’s length principle.

2. Is transfer pricing applicable to UAE companies?

Yes. UAE businesses with transactions involving Related Parties and Connected Persons may fall within the UAE transfer pricing rules. The rules can apply to domestic and cross-border transactions.

3. What is transfer pricing benchmarking?

Transfer pricing benchmarking involves comparing a controlled transaction or profitability with comparable independent transactions or companies to assess an appropriate arm’s length price or margin.

4. What are the five UAE transfer pricing methods?

The recognised methods include the Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method, Transactional Net Margin Method and Transactional Profit Split Method.

5. Do all UAE companies need a transfer pricing benchmarking study?

Not necessarily. The requirement depends on the nature of the transactions, applicable transfer pricing rules, documentation requirements and the taxpayer’s circumstances. Businesses should assess their individual position.

6. What is a FAR analysis?

FAR stands for Functions, Assets and Risks. It examines what each party does, which assets are used and which risks are assumed in a controlled transaction.

7. Why is transfer pricing documentation important?

Documentation helps demonstrate how the arm’s length position was determined and provides supporting evidence for the taxpayer’s transfer pricing approach.

8. Can transfer pricing apply to transactions between UAE companies?

Yes. UAE transfer pricing rules can apply to transactions between Related Parties and Connected Persons located in the UAE, including mainland and Free Zone businesses.

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Author: Sivaprasad R
Designation: Business Development Manager
Elysian Consulting Group – Tax Advisors, UAE

Website: Elysian Consulting Group – https://elysianuae.com/