Corporate tax: What the new transfer pricing rule means for family businesses

As businesses adjust their legal and accounting structures ahead of the UAE’s new corporate tax regime, which comes into effect next June, it is family businesses that may need to rethink their traditional ways of operating.

Transfer pricing regulations, a fundamental part of any corporate tax policy, will see greater scrutiny placed on businesses providing financial support to each other, a practice more commonly associated with family businesses. That was the view of expert speakers at a recent corporate tax discussion, led by ICAEW.

The UAE’s introduction of a corporate tax levy of nine per cent aligns with the broader OECD Pillar II framework and its recent global minimum corporate tax requirement, which subjects large multinationals to a minimum 15 percent tax rate. Within this framework, OECD members, including the UAE, are obligated to include transfer pricing regulations to prevent multinational businesses from exploiting tax loopholes.

The UAE government is expected to announce its corporate tax policy framework, including its transfer pricing regulation, this summer. In anticipation of this, ICAEW convened the expert panel to provide in-depth insight into the new corporate tax regime, as businesses prepare for the changes.

The expert speakers included Istina Delivan, director, Transfer Pricing, KPMG; Chris Searing, associate director, Corporate & International Tax, KPMG; and Ankit Mathur, associate director, Corporate & International Tax, KPMG.

In line with the OECD’s transfer pricing policy framework, the UAE will introduce its own transfer pricing regulation that will come into effect as part of its corporate tax regime. Transfer pricing is a tax planning strategy whereby businesses that operate across different tax jurisdictions pay inflated prices to a subsidiary or connected business in a lower tax area, to appear less profitable and therefore subject to less tax.

The speakers explained that while tangible transactions can be easily recorded and tracked against standard market rates, intangible transactions, such as loans, are more difficult to identify. As a result, the UAE transfer pricing policy will include the ‘Arm’s Length’ principle for all transactions. This means business transactions between related parties must have the same terms as they would between unrelated parties, and these transactions must be reported.

Family businesses, which have outsized importance in the region and make up the majority of private sector businesses, were highlighted as a group that may need to adapt some of their practices to comply with the transfer pricing regulations.

Traditionally, regional family businesses are interconnected and act to support each other, utilising their relationships within the community to promote a favourable business environment. While family businesses were not using these strategies to sidestep regulation, under the new corporate tax regime, offering favourable terms to a connected business could be interpreted as base erosion or profit shifting, according to the experts.

Mark Billington, ICAEW's international managing director, said: “As part of its corporate tax regime, the UAE is required to establish a transfer pricing policy. The introduction of this regulation is necessary to create a fair and transparent business environment and prevent exploitation through tax planning strategies. Interestingly, free zone companies will also be expected to comply with the ‘Arm’s Length’ principle, despite not being subject to tax.

“Overall, the corporate tax regime is a positive move by the UAE. While there will certainly be challenges to navigate, further complicated by the 40 free zones in the UAE and the key role family businesses play in the market, the measured introduction of the policy suggests those leading its implementation are committed to creating a mutually beneficial business landscape.”

The speakers also discussed the option for organisations to form a tax group, enabling subsidiary businesses to be treated as one taxable entity. However, the UAE government has been quick to reinforce that regional businesses with little experience in corporate tax regimes should maintain standard accounting practices to avoid compliance issues.

While the levy on corporations will reshape business operations from a legal and accounting standpoint, it is believed that its implementation will be used to support the business environment. This includes continuing the tax holidays offered to free zone companies and allowing tax groups to be formed.

The event was held at the Capital Club in the Dubai International Financial Centre and attended exclusively by ICAEW’s young members.

— business@khaleejtimes.com