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With the introduction of a corporate income tax. The UAE CT regime is expected to introduce TP rules and TP documentation requirements in line with the OECD TP Guidelines.

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.

Transfer pricing is an accounting practice in which a particular division or subsidiary of a company charges a second division or subsidiary of the same company for goods or services. This can provide tax savings for the larger enterprise, as the companies are able to divide earnings among subsidiaries and affiliates. By using transfer pricing, companies can move tax liabilities to jurisdictions with low taxes to reduce corporate tax bills.

The transfer pricing practice can cover not only goods and services but also intellectual property such as research, patents, and royalties. It can be used both domestically and across borders; when used internationally, it can take advantage of varying tax rates in different countries.

What is Arm’s Length Price?

The arm’s length price (ALP) of a transaction between two associated enterprises is the price that would be paid if the transactions had taken place between two comparable independent and unrelated parties, where the consideration is only commercial.

Expected TP impact on businesses

Taxpayers should apply the arm’s length principle to ensure that the transactions between related parties reflect independent pricing. Such arm’s length price is fairly a market price of such commodity or service in the market. All companies would have to comply with the transfer pricing rules and documentation requirements. These transfer pricing rules would be mandatory and could also be applicable to domestic transactions

As a general practice, Federal Tax Authority (FTA) shall make an assessment and scrutinize the transfer pricing policies, documentation, inter-company and inter-group transactions, etc whether transactions are consistent with TP regulations. Business entities are subject to huge penalties for non-compliance with Transfer Pricing regulations.

Transfer Pricing Documentation

Businesses will have to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.

The purpose of transfer pricing documentation is to show that the company’s related-party transactions are in accordance with the arm’s-length principle. Good transfer pricing documentation should clearly lay out how the functions, assets and risks are shared between related parties in each related-party transaction in such a way that anyone can understand, whether or not they are familiar with the company.

Documentation model under OECD guidelines

As per the OECD guidelines on transfer pricing, authorities adopt a three-tier approach for transfer pricing documentation consisting of:

  1. Master file– containing standardized information for all MNE group members
  2. Local file– is where the company documents the details of its intercompany transactions in each country. Each company files this document with its jurisdiction’s tax authority.
  3. Country by Country Report – Global allocation of the MNE groups’ income and tax paid, indicators of the location of economic activity within the MNE group.
TP Methods Under OECD Guidelines

The arm’s length price for a controlled transaction can be determined by selecting and applying the most appropriate transfer pricing method. OECD recognizes five main transfer pricing methods:

1-Traditional transaction method
  • Comparable Uncontrolled Price Method

The comparable uncontrolled price (CUP) method establishes a price based on the pricing of similar transactions that have taken place between third parties. When comparable uncontrolled prices exist, this is a reliable transfer pricing method, and one of the most difficult to challenge.

The challenge of this pricing method is that comparable transactions can be difficult to find. Even the addition of a few small variables can differentiate the cases enough to render the CUP method insufficient for establishing an accurate price based on the available information.

  • Resale Price Method

The resale-minus method bases its pricing on the resale price of a product or asset sold to a third party. But that resale price is then adjusted by subtracting the gross margin, along with additional costs associated with the purchase.

After these costs are deducted from the resale price, the resulting figure can be used as an arm’s-length price to guide the transfer pricing between two entities.

  • Cost Plus Method

When no market price is available to serve as a basis for pricing, organizations can use the cost-plus transfer pricing method to set a price by calculating the standard cost of delivering the relevant goods and adding on top of that price a standard profit margin. The sum of these numbers can then be used as a fair transfer price for the transaction.

2-Transactional profit method
  • Transactional Net Margin Method

When actual transaction data isn’t available, enterprises can use margin levels to establish transfer pricing. The transactional net margin method (TNMM) uses the net profits from another controlled transaction to establish a net profit that can then be applied when establishing transfer pricing for comparable, uncontrolled transactions.

Because actual transactions aren’t being used, this transfer pricing method offers extra flexibility in identifying transactions to compare to one another.

  • Transactional Profit Split Method **

The profit split method is used when two parties are involved in the development of a product or some other venture in ways that make it difficult to examine each party on its own. Instead, the profit split method uses the profitability, or potential profitability, of a product or venture and develops a method of splitting profits that is fair to both organizations.

This pricing method comes with challenges, because it is based on margin levels, and the accuracy of its profit splitting may be up for debate. But in the absence of more concrete data or a clear division of roles between entities, this transfer pricing method can help parties arrive at a fair compromise.

Changes in the New Edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises & Tax Administrations:

On 20 January 2022, the Organization for Economic Cooperation and Development (“OECD”) has released a new edition of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which replaces the previous 2017 edition. The OECD Transfer Pricing Guidelines provide guidance on the application of the “arm’s length principle”, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises.

The document was updated with the following issues:

  • **comments on the application of the transactional profit split method.
  • approach to complicated assessment of intangible assets.
  • new section regarding financial transactions.
**The revision of the Guidance on the Transactional Profit Split method:

(This replaced the guidance in Chapter II, Section C (paragraphs 2.114-2.151) found in the 2017 Transfer Pricing Guidelines and Annexes II and III to Chapter II)

The revised guidance on transactional profit split method clarifies and significantly expands the guidance on when a profit split method may be the most appropriate method; The guidance describes the presence of one or more of the following indicators as being relevant –

  1. Each party makes unique and valuable contributions.
  2. The business operations are highly integrated such that the contributions of the parties cannot be reliably evaluated in isolation from each other.
  3. The parties share the assumption of economically significant risks, or separately assume closely related risks.

The guidance states that while a lack of comparable is, by itself, insufficient to warrant the use of the profit split method, if, conversely, reliable comparable are available, it is unlikely that the method will be the most appropriate.


Companies should select an appropriate transfer pricing method by considering several factors like availability of information, strength, and weakness of the transfer pricing method appropriateness of the method in giving nature of transactions, etc. Once the transfer pricing method and reliable comparable are found, an arm’s length range can be calculated.

The regulations may also provide an option to use methods other than approved Transfer Pricing Methods as above, provided that the Taxable Person can demonstrate a reliable measure of an Arm’s-Length price and documentation, and the suggested method satisfies the required provisions under UAE CT law.


Alia Noor Associate Partner
Alia Noor (FCMA, CIMA, MBA, GCC VAT Comp Dip, Oxford fintech programme, COSO Framework)
Associate Partner
Ahmad Alagbari Chartered Accountants
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