Navigating global business: The art of transfer pricing and the arm’s length principle

The key is to determine the price that two independent parties would agree upon

By Prateek Tosniwal

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Published: Tue 31 Oct 2023, 4:06 PM

Last updated: Tue 31 Oct 2023, 4:07 PM

In today’s intricate global business landscape, multinational corporations frequently engage in a variety of transactions and arrangements with related parties or connected persons. These dealings span a wide spectrum, encompassing the exchange of goods and services, financial transactions, and interactions involving permanent establishments. This practice, known as transfer pricing, carries significant implications for taxation, accounting, and risk management.

The crucial role of transfer pricing


At its core, transfer pricing revolves around the pricing of transactions that are influenced by the relationships between the parties involved. Unlike independent parties, who typically establish their terms based on market dynamics and negotiations, related parties and connected persons may not face the same competitive pressures. Consequently, they may resort to non-arm’s length pricing in their controlled transactions to manipulate profits reported in specific jurisdictions and optimise tax liabilities.

The arm’s length principle


To counter such practices, the international standard for pricing these transactions is the arm’s length principle, now integrated into the UAE Corporate Tax law under Article 34. This principle dictates that transactions between related parties or connected persons should be priced as if they had occurred between independent parties in similar circumstances. The key is to determine the price that two independent parties would agree upon, supported by direct or indirect evidence of their behaviour whenever possible.

No formal agreement, no excuse

It’s important to note that the absence of a formal pricing arrangement or legal agreement between related parties does not negate the application of the arm’s length principle. In cases where property transfers or services are exchanged without a formal agreement or at remuneration below market value, the principle should be applied to assess whether such transactions would occur between independent parties under comparable circumstances and at what value.

Prateek Tosniwal, Partner, MI Capital Services
Prateek Tosniwal, Partner, MI Capital Services

Treating related parties as separate entities

The arm’s length principle treats related parties as separate entities, even within the same corporate group. It underscores the importance of a comparability analysis to align profits with functions, assets, risks, and contributions. This principle extends to domestic transactions, ensuring related parties and connected persons receive their equitable share of profits as if they were independent entities.

Understanding related parties and connected persons

Transfer pricing rules primarily concern related parties, as defined under Article 35 of the UAE Corporate Tax law. Related parties are associated persons, demonstrating a certain degree of association, regardless of their UAE residency. Connected persons are persons associated with taxable persons. Payments or benefits provided by a taxable person to a connected person are deductible for corporate tax purposes, provided they correspond to the arm’s length price of the service or benefit and are incurred exclusively for the taxable person’s business purposes.

Exemptions and fairness

Article 36(6) of the UAE Corporate Tax Law specifies exemptions from the restriction on deducting payments or benefits provided to connected persons based on the arm’s length price. These exemptions apply to taxable persons whose shares are traded on recognised stock exchanges, those subject to regulatory oversight in the UAE, and others as determined by a decision issued by the Cabinet.

Promoting fairness and compliance

In conclusion, comprehending transfer pricing and the arm’s length principle is vital for businesses engaged in related party transactions, both domestically and internationally. These principles aim to ensure fairness, transparency, and accountability in financial dealings, guarding against profit manipulation and tax avoidance strategies. The incorporation of these principles into the UAE’s corporate tax law demonstrates a commitment to aligning the country’s tax regulations with international standards, ultimately promoting a fair and competitive business environment.

The writer is partner at MI Capital Services (MICS).



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