Transfer pricing compliance remains a complex aspect for many business owners, involving the pricing of transactions between related parties or connected persons. The aim is to prevent tax advantages arising from potential influences within such relationships, particularly in international transactions where tax rate disparities between jurisdictions can be exploited.
In the context of the United Arab Emirates (UAE), even transactions between parties subject to UAE corporate tax laws may yield tax advantages. For instance, one party could be exempt from tax, benefiting from a 0% preferential tax rate as a qualifying free zone entity or enjoying other tax incentives.
The key to compliance lies in ensuring that the transfer prices are at “arm’s length,” meaning they reflect the prices two independent parties would agree upon in similar circumstances. The Federal Tax Authority’s (FTA) guide emphasises the arm’s length principle, which forms the basis of transfer pricing compliance.
Transfer pricing compliance involves two main elements:
1. Ensuring Arm’s Length Transactions: Businesses must establish that their related-party transactions are conducted at arm’s length, without undue influence from the relationship.
2. Maintaining Transfer Pricing Documentation: Businesses need to keep detailed documentation to demonstrate compliance with the arm’s length principle. This documentation is crucial in providing evidence of the rationale behind the chosen transfer prices.
Business owners should be aware of the various scenarios and exemptions that may affect transfer pricing, including preferential tax rates, exemptions, and relief measures. Staying informed about transfer pricing regulations and seeking professional assistance in maintaining compliance can help businesses navigate this intricate aspect of taxation.