In recent years, the UAE has introduced significant changes to its tax regulations, one of the most important being the inclusion of Transfer Pricing (TP) disclosure requirements in the Corporate Tax return. These updates bring the UAE's practices more in line with global standards, emphasizing the importance of compliance and transparency in related-party transactions.
The roots of this requirement stem from the Federal Decree-Law No. 47 of 2022, where Article 56 mandated that entities submit a disclosure form alongside their tax return. This form must detail the taxable person’s transactions with related parties and connected persons.
In October 2023, the Federal Tax Authority (FTA) released a comprehensive guide outlining the TP disclosure form’s blueprint. The form covers essential information such as the nature of controlled transactions, their value, details of related parties, and the Transfer Pricing methods used.
Submission of Master file and Local file is mandatory along with tax return!
Key aspects
Separate Schedules for Related Parties and Connected Persons:
The form has distinct sections for disclosing transactions with related parties and connected persons. One particularly challenging area involves payments made to connected persons, such as salary and employment benefits. These payments must meet the "arm's length" test, which can be complex due to comparability challenges.
Suo-Moto Adjustments:
Taxpayers must disclose any adjustments made to transaction values to align with arm's length principles. For instance, if a taxpayer's TP policy is cost + 5%, but the arm's length study suggests cost + 8%, the taxpayer may offer a 3% adjustment via a suo-moto declaration. Adjustments due to transitional provisions must also be reported.
Gross Income Reporting:
Transactions must be reported at their gross value. For example, if a taxpayer supplies goods to a distributor for USD 100 and offers a USD 5 rebate, the form will still require the disclosure of USD 100 as the transaction's value.
Tax Residence of Related Parties:
The tax residence of related parties must be disclosed, even when their incorporation address differs from their tax residence. This complexity requires careful attention when completing the form.
Transaction Categorization:
Each transaction must be categorized under goods, services, intellectual property, interest, assets, liabilities, or other categories. While this compartmentalization aids in risk assessment, it can be challenging for certain businesses, such as software providers who may struggle with the categorization of intangible assets.
Attachments:
The TP disclosure form must include attachments such as the Local File and Master File, though these documents only need to be maintained and not submitted unless specifically requested by the authorities.
Why it matters
Transfer Pricing disclosure is not unique to the UAE; many countries globally have similar requirements. The data collected from these forms plays a vital role in risk assessment and can influence audit selection by tax authorities. Therefore, ensuring accuracy in these disclosures is crucial for businesses operating in the UAE.
As the UAE continues to align its tax regulations with global standards, businesses must be diligent in maintaining comprehensive TP policies. With the introduction of the TP disclosure form, companies are encouraged to adopt transparent and accurate reporting practices, ensuring compliance with both local and international Transfer Pricing regulations.
In conclusion, businesses should prioritize accurate Transfer Pricing disclosure, prepare local files, and adopt robust TP methodologies to justify the arm’s length nature of their transactions.
For more information and consultation, please contact us at info@wellspring-solutions.com or +971-58-664-88-55; or visit www.wellspring-solutions.com
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