UAE - Transfer Pricing Disclosures in Tax Return
26 November 2024 – On 11 November 2024, the United Arab Emirates (UAE) Federal Tax Authority (FTA) released the long-awaited Corporate Tax (CT) Guide for Tax Returns (TRG). This comprehensive document offers essential guidance and clarifications on the process of filing tax returns.This alert focuses on important aspects of the Transfer Pricing (TP) Disclosure Form (DF), with an emphasis on disclosures pertaining to Related Party Transactions (RPT) and Connected Persons (CP).
Key Highlights
All transactions between Related Parties must comply with the arm’s length principle, regardless of their inclusion in the DF. Payments or benefits granted by a Taxable Person to its CP are only deductible if they align with the Market Value (MV) of the received service or benefit.
For disclosure purposes, thresholds are defined. In the RPT schedule, disclosure is required if the aggregate value of all transactions with Related Parties, recorded in the Financial Statements or at MV, exceeds AED 40 million. Once this primary threshold is surpassed, individual transaction categories exceeding AED 4 million must also be disclosed.
The CP schedule is to be completed only if aggregate value of transactions with at least one CP (including their related parties) exceeds AED 500,000. If this threshold is exceeded, any payment or benefit exceeding AED 500,000 per CP (together with its related parties) must be disclosed.
If transactions are not recorded at arm’s length in the Financial Statements, a TP adjustment might be necessary to adhere to the arm’s length standard. Adjustments resulting from non-arm’s length transactions must be manually reported. Consequently, taxpayers must report adjustments for all transactions, whether they appear in the RPT and CP schedules.
Qualifying Free Zone Persons must indicate in their tax returns that their RPTs comply with the Arm’s Length Principle (ALP) and that the appropriate TP documentation has been prepared. Taxpayers are also required to report non-deductible amounts stemming from the Specific Interest Deduction Limitation Rule.
Related Party Transaction Schedule
Disclosure is required for transactions exceeding AED 40 million and individual category values exceeding AED 4 million. Transactions should be categorized into goods, services, intellectual property, interest, assets, liabilities, or other. Both the gross income and expenses must be reported separately, indicating both the transaction amount and the arm’s length value. If the transaction is at an arm’s length price, both fields will reflect the same amount.
Taxpayers can select any of the five internationally accepted TP methods, or the "Other Method." In cases where the arm’s length value of a transaction does not match the value at which a transaction was conducted, an adjustment can be made in the DF. Upward adjustments, which increase taxable income, should not be offset against downward adjustments.
Downward adjustments, intended to decrease taxable income, will only be allowed upon successful application to the FTA. If the downward adjustment is not approved, the amount entered should be zero. Dividends between related parties are exempt from disclosure.
Impact on Taxpayers
Taxpayers should not rely solely on Financial Statements to determine thresholds; all transactions must meet the arm’s length test. Careful categorization of transactions is necessary, for instance, where goods contain embedded intellectual property. Any TP adjustments should be finalized before closing Financial Statements to limit the potential impact of requiring placing adjustments into the DF, and taxpayers must ensure all RPT adjustments are priced at arm’s length, even if transactions do not meet the AED 40 million aggregated or AED 4 million individual transaction (per category) thresholds.
In essence, the FTA expects taxpayers to be proactive in applying necessary checks, balances, and stricter internal controls that adhere to the arm's length principle for all controlled transactions. This is essential as Financial Statements may not always accurately capture RPTs and payments/benefits to CPs (e.g., arrangements without consideration).
It is important to highlight that the transaction category in the schedule includes assets and liabilities. This implies that transactions involving balance sheet items should also be considered where determining if the AED 40 million threshold has been breached. For instance, the provision of a loan between related parties may be treated as an asset transaction (for the lender) and corresponding liability transaction (for the borrower) and should be included on the DF. Conversely, principal repayments on the same loan will have a comparable impact, and also be disclosable in the RP.
The TRG does not provide specific guidance regarding requirements to disclose related party transactions between members of a tax group in the schedule. This omission also creates some ambiguity regarding the disclosure of such transactions in DF and the disclosure requirement outlined in Ministerial Decision No. 125 of 2023 on Tax Group1.
Connected Person Schedule
To ensure ALP compliance, disclosures are required for payments or benefits made to CPs (including their related parties) if the aggregate value exceeds AED 500,000. Separate disclosures are necessary for each payment or benefit provided to the same CP. The market value of the service or benefit provided by the CP must be reported, and any adjustments (i.e., the difference between transaction value and market value) are calculated automatically and disallowed for CT.
Impact on Taxpayers
Taxpayers must map all CPs and their related parties, identifying payments or benefits made to each CP (and their related parties), to ensure accurate disclosure in the CP schedule where the AED 500,000 threshold is breached.
Furthermore, in cases where payments and benefits to CP’s are not at market value, adjustments must be reported for all payments or benefits to CPs, even if transactions do not meet the AED 500,000 threshold.
Gains/losses realized in the current Tax Period in relation to assets/liabilities previously received from a Related Party at a non-arm’s length price
When transferring assets or liabilities previously received from Related Parties, taxpayers must determine gains or losses upon realization per Article 3 of Ministerial Decision No. 134 of 2023 and relevant sections of the CT Guide on Accounting Standards and Interaction with CT.
Realization includes various events such as sale, transfer, settlement, or worthlessness of an asset or forgiveness of a liability.
Impact on Taxpayers
Taxpayers should monitor the realization of assets or liabilities previously received from Related Parties at non-arm’s length prices to comply with the provisions of Article 3, Ministerial Decision No. 134 of 2023. If assets or liabilities were acquired at above or below arm’s length prices, the opportunity to recognize the associate gain or loss should be realized.
Free Zone Schedule
Qualifying Free Zone Persons (QFZP) are required to confirm their adherence to the ALP for their RPTs and to ensure that their TP documentation complies with Article 55 of the UAE CT Law.
Impact on Taxpayers
QFZPs must conduct a thorough TP analysis and maintain robust documentation to support their RPT compliance.
In Summary
The FTA has adopted a self-review approach to TP disclosure requirements, placing increased responsibility on the taxpayer to not only disclose all material RP & CP transactions, but also state any adjustments that may be required to meet the criteria. While the reasonably material primary and secondary thresholds, for RPTs represents a positive step towards targeting high-value transactions, the relatively low threshold in place for CP’s (combined with their related parties) will require most companies to itemize CPs on their disclosure. It is crucial to be aware of additional manual reporting obligations for adjustments resulting from non-arm's length transactions.
In essence, the taxpayers must ensure accurate disclosures in their CT returns, assess RPTs for arm’s length compliance, align payments and benefits to CPs with market value, and keep detailed records.
Successfully navigating these complexities necessitates proactive engagement and staying updated on any updates or clarifications from tax authorities. Staying ahead of evolving requirements empowers taxpayers to fulfil their TP obligations confidently, while minimizing risks and ensuring maximum compliance.
