Transfer Pricing Benchmarking in the UAE: A Practical Guide for Businesses

Author: Sivaprasad R
BDM – Elysian Consulting Group

Transfer pricing has become an important area of corporate tax compliance for businesses operating in the UAE. Companies that enter into transactions with related parties or connected persons need to ensure that those transactions are conducted on an arm’s length basis.

One of the most important tools for demonstrating that pricing is at arm’s length is a transfer pricing benchmarking study.

A well-prepared benchmarking analysis helps businesses determine whether the prices, margins, interest rates, royalties or other financial terms applied in related-party transactions are consistent with those that would be agreed between independent parties under comparable circumstances.

For UAE businesses, understanding how transfer pricing benchmarking works can help reduce tax risk, strengthen documentation and prepare the business for potential Federal Tax Authority (FTA) scrutiny.

What Is Transfer Pricing Benchmarking?

Transfer pricing benchmarking is a systematic analysis used to determine whether the financial outcome of a related-party transaction is consistent with the arm’s length principle.

In simple terms, the analysis compares a controlled transaction between related parties with comparable transactions or companies involving independent parties.

For example, consider a UAE company that receives management services from its overseas group company. The UAE company needs to determine whether the management fee it pays is commercially reasonable.

A benchmarking study may compare the profitability or pricing of similar independent companies or transactions to determine an appropriate arm’s length range.

The UAE transfer pricing framework requires transactions between related parties to be conducted as though the parties were independent.

Why Is Transfer Pricing Benchmarking Important in the UAE?

Following the introduction of UAE Corporate Tax, transfer pricing has become an important compliance consideration for businesses with related-party transactions.

The UAE transfer pricing rules are based on the arm’s length principle and are aligned with internationally recognised transfer pricing principles.

A benchmarking study can help a business:

• Demonstrate that related-party transactions are conducted at arm’s length
• Support the preparation of transfer pricing documentation
• Establish an appropriate profit margin or pricing range
• Identify potential transfer pricing risks
• Support positions taken in the Local File
• Prepare for possible FTA enquiries or tax reviews
• Improve the consistency between intercompany agreements and actual business activities

The Federal Tax Authority recognises several transfer pricing methodologies, including the Comparable Uncontrolled Price, Resale Price, Cost Plus, Transactional Net Margin and Transactional Profit Split methods.

What Does a UAE Transfer Pricing Benchmarking Study Involve?

A benchmarking study is not simply a search for companies with similar names or industries. It involves a structured comparability analysis.

1. Understanding the Related-Party Transaction

The first step is to understand exactly what transaction is being tested.

This may include:

• Management services
• Consultancy services
• Distribution activities
• Manufacturing arrangements
• Intercompany loans
• Royalty payments
• Software or technology services
• Shared service arrangements
• Purchase or sale of goods
• Financing transactions

The nature of the transaction determines which transfer pricing method may be most appropriate.

2. Functional Analysis

A functional analysis examines the:

Functions performed, Assets used and Risks assumed (FAR).

This is often referred to as a FAR analysis.

For example, a UAE distributor may perform routine distribution functions while the overseas group company owns the intellectual property and assumes significant market and product risks.

Understanding these differences is essential when selecting comparable companies.

3. Selection of the Transfer Pricing Method

The appropriate transfer pricing method depends on the facts and circumstances of the transaction.

The five commonly recognised methods are:

1. Comparable Uncontrolled Price (CUP) Method
2. Resale Price Method
3. Cost Plus Method
4. Transactional Net Margin Method (TNMM)
5. Transactional Profit Split Method

The FTA confirms these methodologies for determining arm’s length values.

For many routine service providers and distributors, the Transactional Net Margin Method (TNMM) may be considered where reliable gross-margin or direct-price comparisons are not available.

However, the appropriate method must always be determined based on the specific facts of the transaction.

How Are Comparable Companies Selected?

The quality of a benchmarking study depends heavily on the quality of the comparable companies or transactions selected.

A typical benchmarking process may consider:

• Industry or business activity
• Geographic market
• Functions performed
• Assets employed
• Risks assumed
• Revenue profile
• Company size
• Availability and reliability of financial data
• Independence from related parties
• Business model
• Accounting and financial characteristics

The objective is not necessarily to find companies that are identical to the tested party.

Instead, the objective is to identify sufficiently comparable independent companies and make appropriate adjustments where necessary.

The UAE framework follows the OECD approach to comparability analysis. The OECD’s UAE country profile notes that domestic comparables are preferred where available, while regional or global comparables may be considered where suitable domestic data is unavailable.

What Is the Arm’s Length Range?

A benchmarking study may produce a range of financial results rather than one specific percentage or price.

For example, after screening comparable companies, the analysis could identify an arm’s length operating margin range.

The UAE transfer pricing framework recognises the use of an arm’s length range and statistical measures such as the interquartile range.

If the tested UAE company falls outside the appropriate arm’s length range, further analysis may be required to determine whether an adjustment is appropriate.

This is why businesses should not simply select a target margin without performing a proper benchmarking analysis.

Domestic vs International Comparables in the UAE

One of the common questions businesses ask is whether a benchmarking study must use UAE companies.

Ideally, comparable companies from the UAE or the relevant local market can provide useful evidence where sufficiently reliable data is available.

However, the availability of suitable UAE comparables can sometimes be limited.

In such cases, regional or international databases may be considered, provided that the selected companies are sufficiently comparable and appropriate adjustments are made where necessary.

The FTA’s Transfer Pricing Guide and the OECD’s UAE country profile provide guidance on comparability and the use of appropriate comparable data.

Transfer Pricing Benchmarking for Common UAE Businesses

Benchmarking requirements can vary depending on the business model.

UAE Distribution Companies

A UAE distributor purchasing products from a related overseas entity may need to demonstrate that its profitability is consistent with independent distributors performing similar functions.

UAE Service Companies

Management, consulting, IT and shared-service companies may need to benchmark their operating margins or service charges against comparable independent service providers.

UAE Manufacturing Companies

Manufacturers may need to analyse their return based on their functions, assets and risks, particularly where raw materials, finished goods or technical services are purchased from related parties.

Intercompany Financing

Loans between related parties also fall within transfer pricing considerations. The FTA specifically confirms that related-party loans should be evaluated on an arm’s length basis, including factors such as interest rates and duration.

Royalty and Intellectual Property Transactions

Where UAE businesses make royalty or intellectual property payments to related parties, the pricing should be supported by appropriate transfer pricing analysis and evidence of the underlying commercial arrangement.

How Does Benchmarking Support the UAE Local File?

Certain UAE taxpayers are required to maintain transfer pricing documentation, including a Local File and Master File, subject to the applicable requirements.

The Ministry of Finance introduced Ministerial Decision No. 97 of 2023 concerning transfer pricing documentation requirements. Its objective is to enable taxpayers to demonstrate that related-party transactions are priced on an arm’s length basis.

A benchmarking study can therefore form an important part of the supporting evidence for the transfer pricing position documented in the Local File.

Importantly, even businesses that are not required to maintain a Local File should consider maintaining appropriate records supporting their transfer pricing positions where relevant. The FTA states that businesses need to maintain information regarding transactions with related parties and connected persons.

Common Mistakes in Transfer Pricing Benchmarking

Businesses should avoid treating benchmarking as a purely mechanical database exercise.

Some common mistakes include:

Using Poorly Comparable Companies

Selecting companies simply because they operate in the same broad industry may result in an unreliable analysis.

Ignoring the FAR Analysis

A company’s industry classification alone does not establish comparability. Functions, assets and risks are critical.

Using Outdated Information

Financial information should be reviewed carefully to ensure that the benchmarking analysis is based on appropriate and relevant data.

Ignoring Business Differences

Differences in market, geography, size, accounting policies or business models may affect profitability and should be evaluated.

Treating the Benchmark as a Fixed Percentage

A benchmarking result should be interpreted in the context of the transaction and the tested party. It should not automatically be treated as a universal margin.

Preparing the Study After the Transaction

Transfer pricing documentation is much stronger when the pricing policy, intercompany agreement and actual conduct of the parties are consistent from the beginning.

How Elysian Can Help With Transfer Pricing Benchmarking in the UAE

Transfer pricing benchmarking requires more than selecting comparable companies from a database.

At Elysian Consulting Group, we help UAE businesses understand their related-party transactions, assess their transfer pricing requirements and develop practical documentation and benchmarking support.

Our approach can include:

• Related-party transaction review
• Functional and FAR analysis
• Transfer pricing method selection
• Comparable company screening
• Benchmarking analysis
• Arm’s length range assessment
• Transfer pricing documentation support
• Local File support
• Corporate tax and FTA compliance advisory

With a practical understanding of the UAE business environment, our objective is to help businesses establish defensible transfer pricing positions while maintaining clear and commercially realistic documentation.

Final Thoughts

Transfer pricing benchmarking is an important part of demonstrating compliance with the UAE’s arm’s length principle.

For businesses with related-party transactions, a robust benchmarking study can provide valuable evidence that pricing and profitability are commercially reasonable.

The right approach depends on the nature of the transaction, the functions performed, assets used, risks assumed, available comparable data and the transfer pricing method selected.

Rather than treating benchmarking as a year-end compliance exercise, UAE businesses should consider it as part of their broader corporate tax and related-party transaction strategy.

Need help with transfer pricing benchmarking in the UAE?

Speak with the team at Elysian Consulting Group for practical support with transfer pricing analysis, benchmarking and UAE corporate tax compliance.

Author: Sivaprasad R
Designation: BDM
Company: Elysian Consulting Group, UAE

Disclaimer: This article is provided for general informational purposes only and should not be considered legal, tax or financial advice. UAE transfer pricing requirements may depend on the specific facts and circumstances of each taxpayer. Businesses should obtain professional advice before making tax or transfer pricing decisions.