By Sarmad Jaffar, CFA
BakerBanbury Corp October 8, 2024
All Rights Reserved by BakerBanbury Corp (FZE)
The Federal Tax Authority (FTA) recently disclosed specific details on various elements of the transfer pricing disclosure form, which will need to be filed with the 2024 UAE Corporate Income Tax returns. This development should not come as a surprise.
Article 55 of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses specifically grants the FTA the authority to require the submission of a transfer pricing disclosure form. The form is designed according to the FTA’s needs to ensure effective compliance with transfer pricing laws.
While this recent development does not necessarily change the transfer pricing compliance requirements for UAE taxpayers, certain unique elements of the transfer pricing disclosure form provide an insight into how the FTA may enforce the new transfer pricing regime.
Specific Requirements
The FTA Transfer Pricing (TP) Disclosure Form requires the following details on Related Party and Connected Person transactions:
Identification of the Related Parties
Amounts of the Intercompany Transactions between Related Parties
Expenses and Income related to Connected Persons
Nature of the Transaction (e.g. services/sale of goods/loans)
Transfer Pricing Method Applied for each Related Party and Connected Person Transaction
Notably, the TP Disclosure Form does not grant any de minimis exemptions. Even if there are nominal transactions between Related Persons within the UAE or between UAE and Non-Residents, the TP Disclosure Form still needs to be prepared and submitted.
There is no distinction between the disclosure requirements for Free Zone and Mainland Companies. Nor is any clemency granted for disclosures within designated Corporate Tax Groups (i.e. when a related group of companies elect to file as a single unified tax group to reduce their compliance burden).
FTA’s transfer pricing disclosure forms: the big picture.
Comparison to Other Regimes
What can we discern from FTA’s design of the TP Disclosure Form? It might be useful to draw a comparison to other tax regimes. In more established transfer pricing regimes such as the US, UK, and Canada, similar transfer pricing disclosures are required, and the elements are quite similar (i.e., related parties, amounts, and methods).
However, there are some important differences:
De Minimis Exemptions: Tax authorities in Canada, for example, only require TP disclosure forms (T106) when certain threshold value of intercompany transactions (collectively) is met e.g. for instance, in Canada, the Canada Revenue Agency (CRA) only requires TP disclosure forms (T106) when the total intercompany transaction value exceeds a threshold, such as CAD 1 million (approximately AED 2.7 million).
Domestic Transactions: Domestic transactions (within the same jurisdiction) are not required to be disclosed.
Transfer Pricing Documentation: Taxpayer are generally not required to attach transfer pricing documentation to the transfer pricing disclosure forms themselves.
Implications
The FTA is demonstrating a clear commitment to ensuring rigorous compliance with the novel transfer pricing regime. Furthermore, the requirement to attach transfer pricing documentation as part of the tax return (through the TP Disclosure Form) indicates that the FTA will not adopt a lenient approach towards the taxpayers during the early years to get their house in order and prepare transfer pricing documentation if and when it is required on audit – which is typically several months or years after the filing of the corporate tax returns. [1]
The larger UAE taxpayers need to have 100 percent compliance on transfer pricing documentation going into their first tax filing season. The bar is set quite high.
The Big Picture
The UAE’s major sources of fiscal income (other than oil and gas revenues, sovereign wealth fund returns and dividends from SOEs) in order of magnitude are:
· Government Fees and Charges
· VAT
· Tourism Related Taxes
· Custom Duties
· Excise Tax
Since the introduction of the VAT in 2018, it has become one of the largest sources of non-oil related revenues amounting to roughly AED 30 billion annually (~ 1.5 % of GDP) behind Government Fees and Services at roughly AED 60 billion (~3.0 % of GDP). The other major sources of revenues are Custom Duties ~ AED 25 billion, Tourism and Hospitality Taxes ~ 30 billion and Excise Tax 2.5 billion.
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