UAE Transfer Pricing Guide: 10 Key Points for Businesses

Navigating the UAE's new corporate tax rules can be complex, especially when it comes to transfer pricing. But fear not, businesses! The recently issued Transfer Pricing Guide offers valuable insights and practical guidance to ensure seamless compliance. Here are 10 key points to remember:

1. Identifying Related Parties: The Guide provides clear examples, like significant debt influence or key management roles, expanding the scope of who qualifies as a related party. Remember, international agreements may override local definitions.

2. Substance over Form: Written contracts are great, but economic reality reigns supreme. Consider maintaining contracts for material transactions, but don't let them overshadow your actual business conduct.

3. Transaction Aggregation: While the OECD Guidelines favor transactional TNMM, aggregation is allowed for closely linked activities or to corroborate separate analyses. Carefully weigh comparability factors before aggregating.

4. Arm's Length Range: Embrace the interquartile range for a reliable central tendency. Your functional profile determines the most appropriate point within the range.

5. Extreme Comparables: Scrutinize loss-making comparisons. Exclude them if losses reflect abnormal circumstances or risks beyond your transaction.

6. TP Disclosure Form: A materiality threshold is coming soon, and a sample form is on the way! Stay tuned for more details.

7. Master File & Local File: Documentation is key! Maintain contemporaneous TP records and comply with Master/Local File requirements based on your size and group structure.

8. Financial Transactions: The Guide builds on OECD principles with additional examples. Don't miss the insights on intra-group financing arrangements and comparability adjustments.

9. Low Value-Adding Services: Simplify things! The Guide allows a cost-plus 5% mark-up for these services, but maintains supporting documentation and ensures the service qualifies.

10. Local Comparables: Prioritize local and regional comparisons, but expand your search if needed. Group-wide TP policies can be used, but ensure they consider local factors and comparables.

Corporate Tax General Guidelines

The Federal Tax Authority (FTA) has unveiled a comprehensive Corporate Tax (CT) Guide that sheds light on the intricate relationship between Accounting Standards and Corporate Tax in the UAE. Here's a glance at the key insights:

Taxable Income Determination: Standalone financial statements dictate taxable income, with IFRS as the accepted standard. IFRS for SMEs is an option for revenues below AED 50m.

Cash Basis Accounting Election: Taxable Persons with revenue not exceeding AED3m can opt for cash basis accounting, offering flexibility in financial statement preparation.

Realization-Based Taxation Election: Exploring Ministerial Decision 134 of 2023, the guide delves into tax adjustments for upward revaluations, offering clarity on depreciation and other scenarios.

Related Party Transactions Adjustment: Emphasizing arm's length pricing, the guide details tax adjustments for transactions exceeding or falling below market value, ensuring fairness for both parties.

Equity Method Replacement: The guide reinforces the exclusion of equity accounted investment profit/loss for associates and joint ventures, recognizing only dividends and profit distributions.

Non-deductible Expenses Reminder: Expenses not meeting CT Law conditions are non-deductible, emphasizing compliance with Articles 28 to 33.

Transitional Rules Adjustments: Limiting taxable gains under historical cost basis, the guide provides clarity on exemptions for Qualifying Immovable Property and Financial Assets.

Embark on a journey through the CT Guide for a nuanced understanding of the interplay between Accounting Standards and Corporate Tax in the UAE.

FTA Extractive and Non-Extractive Natural Resources Business Guide

The recent publication of the Taxation of Extractive Business and Non-Extractive Natural Resource Business guide has opened new avenues for clarity and compliance within the UAE corporate tax landscape. Here are a few key facets of this comprehensive document:

1. A Clear Distinction:

Right from the outset, the guide establishes a clear distinction between Extractive and Non-Extractive Natural Resource Businesses, elucidating the conditions under which each category enjoys exemption from corporate tax. This lays the foundation for accurate classification and compliance.

2. Expense Allocation Nuances:

Understanding how expenses are allocated can be a complex affair. The guide addresses this by providing detailed information on the standard revenue-based method, while highlighting scenarios where Emirate-specific legislation takes precedence. This ensures accurate allocation and avoids potential discrepancies.

3. Precise Adjustments for Taxable Income:

The guide meticulously explores adjustments that must be made to accounting income to determine the taxable income for an Exempt Person. This includes unrealized gains or losses, exemptions, deductions, transfer pricing considerations, and even tax losses. This comprehensive approach ensures accurate tax calculation and minimizes compliance risks.

4. Relief for Small Businesses and Free Zones:

The guide recognizes the challenges faced by smaller businesses and those operating in Free Zones. It introduces the Small Business Relief, allowing businesses with revenue below AED 3 million to opt out of deriving taxable income. Additionally, it clarifies the status of businesses within Free Zones, emphasizing the distinction between exempt and taxable activities. This provides targeted relief and simplifies compliance for specific business categories.

5. Comprehensive Compliance Requirements:

The guide outlines the obligations and compliance requirements for Exempt Persons, ensuring a clear understanding of their responsibilities. This includes record-keeping mandates, tax registration procedures, adherence to accounting standards, audited financial statement preparation, and filing tax returns for taxable activities. This comprehensive approach strengthens the tax system and facilitates seamless compliance.

UAE Guide on Taxation of Foreign Tax Income

The Federal Tax Authority's (FTA) Guide on Taxation of Foreign Source Income (FSI) streamlines your understanding of this crucial aspect of the UAE Corporate Tax (CT) regime. Here are the key takeaways for businesses operating in the UAE:

1. Who pays tax on FSI?

• Tax resident companies (worldwide income).

• Non-resident companies with a UAE Permanent Establishment (PE) attributable FSI.

• Resident individuals exceeding AED 1 million annual turnover and deriving FSI from taxable UAE business activities.

• Non-resident individuals exceeding AED 1 million annual turnover and generating FSI through a UAE PE.

2. Navigating Double Taxation:

• The CT Law offers exemptions like Participation Exemption and Foreign PE Exemption to mitigate double taxation.

• General CT rules for taxable income apply to FSI, including accounting standards and deductible expenses.

• Foreign and domestic income/expenses are aggregated for CT calculation, allowing foreign tax losses to offset UAE income.

3. Utilizing Foreign Tax Credit (FTC):

• FTC reduces UAE CT liability by deducting taxes paid in a foreign jurisdiction.

• Applies to foreign taxes similar to CT, satisfying specific conditions like government-imposed nature, compulsory payment, and profit/net income basis.

• FTC is capped at the lower of: (a) actual foreign tax paid on FSI, or (b) CT due on net FSI (after linked expenditures).

• No carry-forward of unused FTC is allowed.

4. Income-by-Income Approach:

• Excess FTC from one FSI cannot offset CT due on another for businesses with multiple income streams.

5. Timing & Payment Implications:

• FTC applies only to "paid" tax, including remitted amounts or accrued sums committed to the foreign tax authority.

• Contingent, non-formally accrued, refunded, or refundable foreign tax doesn't qualify for FTC.

• Symmetrical approach aligns foreign tax payment timing with the corresponding FSI for which it's paid.

This concise summary equips you with the essential knowledge to navigate the nuances of FSI taxation in the UAE. By leveraging the available exemptions and FTC effectively, you can optimize your tax burden and ensure seamless compliance.

UAE Corporate Cabinet Tax Decision No.100 of 2023, Determining Qualifying Income, and Ministerial Decision No. 265 of 2023 on Qualifying and Excluded Activities

The Ministry of Finance has announced new regulations making it even easier to thrive and grow. Here's what you need to know:

1. More Qualifying Income Options: You can now enjoy the 0% corporate tax rate on income from intellectual property owned or used within a free zone. This opens up exciting possibilities for tech startups and innovation-driven businesses.

2. Trade with Confidence: Physical trading of metals, minerals, energy, and agricultural commodities on recognized exchanges? Now considered a Qualifying Activity, unlocking the 0% tax benefit for your trading income and associated hedging activities.

3. Clearer Rules, Fewer Headaches: The updated regulations clarify which activities qualify for the special free zone tax regime, giving you peace of mind and the certainty you need to focus on what matters most: growing your business.

4. Committed to Your Success: These changes underscore the UAE's dedication to attracting foreign investment and fostering a vibrant business environment in its free zones. They position the UAE as a leading global hub for business and investment, driving sustainable development for everyone.

5. Find Out More: Head over to the Ministry of Finance website for all the latest details on the Corporate Tax Law and how it applies to you.

As a business leader in a UAE free zone, these new regulations present an exciting opportunity to maximize your success. Embrace the simplified rules, explore the expanded qualifying income options, and trade with confidence, knowing you're backed by a government committed to your growth. Let's make the UAE your springboard to global success!

Ministerial Decision No.262 of 2023 on the Criteria to be Followed in the Determination of Parts and Pieces of Electronic Devices

The UAE Federal Tax Authority (FTA) has issued Ministerial Decision No. 262/2023, effective October 30, 2023, providing vital clarity on the value-added tax (VAT) treatment of electronic device components and elements.

Key Provisions:

• Clear Definitions: The decision adopts established definitions from relevant legal frameworks, ensuring consistency and ease of understanding.

• Focus on Essential Components: VAT applicability extends to crucial components directly involved in operating or producing an electronic device. This includes internal parts, batteries, chargers, and power cables.

• Replacement Parts Included: Replacement components meeting the defined criteria for essential and production-related parts are likewise subject to VAT.

• Exclusions for Enhancements: Non-essential elements that enhance user experience but are not integral to basic device functionality, such as SIM cards and external smart cards, are not subject to VAT under this decision.

Implications for Stakeholders:

• Businesses: Accurate categorization of electronic device components for VAT purposes is crucial for ensuring compliance and optimizing tax efficiency.

• Consumers: A clearer understanding of taxable components empowers informed purchasing decisions.

Next Steps:

• Consult the full text of Ministerial Decision 262/2023 and related legislation for comprehensive details.

• Seek professional guidance from qualified tax advisors for specific considerations related to your business or individual circumstances.

This new regulation brings greater transparency and predictability to the UAE's VAT framework for electronic devices, promoting responsible business practices and informed consumer choices. Remember, knowledge is power – leverage this clarity to navigate the VAT landscape with confidence and ensure seamless compliance.

The UAE has Issued Federal Decree-Law No.60/2023, That Represents Small Practical Steps Towards Global Minimum Tax Implementation, Which is Part of OECD BEPS Action

The UAE Ministry of Finance has made strategic amendments to its Corporate Tax Law (Federal Decree-Law No. 47 of 2022) through Federal Decree-Law No. 60 of 2023, paving the way for the implementation of the global minimum tax framework known as Pillar Two. Here's a short summary of the key changes:

• New Definitions: The law introduces clear definitions for Top-up Tax (levied on Multinational Enterprises to ensure a minimum effective tax rate of 15%) and Multinational Enterprise (identifying eligible entities under Pillar 2).

• Top-up Tax Framework: The Cabinet, upon the Minister's recommendation, will determine the specific rules and procedures for imposing and exempting Top-up Tax on Multinational Enterprises.

• Revenue Sharing: Corporate Tax, Top-up Tax, and administrative penalties will be shared between the Federal Government and Local Governments, as per existing federal laws.

• Effective Date: The exact implementation date for the Top-up Tax provisions will be established in a future Cabinet decision, published in the Official Gazette.

These amendments are a positive step towards a fairer global tax system. They'll level the playing field and benefit everyone in the long run. That being said, If you’re a multinational company operating in the UAE, you should stay informed about the forthcoming Cabinet decisions and consider consulting with a tax professional to navigate the new regulations smoothly.

Ministerial Decision No. (247) of 2023 on the Issuance of Tax Residency Certificate for the Purposes of International Agreements

If you meet the tax residency requirements outlined in your applicable international agreement with the UAE, you can now officially apply for a tax residency certificate. This handy document acts like a tax passport, verifying your residency status for any cross-border business deals.

Simple Application Process:

No need to navigate bureaucratic mazes! The application process is straightforward and streamlined, with a clear form and all necessary information requirements spelled out.

Fast and Efficient Verification:

The authorities will promptly review your application and, if everything checks out, issue your residency certificate in a format your international partners accept.

Effective Dates:

This initiative has been in effect since March 1st, 2023, so go ahead and apply!

Benefits for Everyone:

This streamlined process benefits both businesses and the UAE. Streamlined tax residency verification means smoother international transactions, fostering a vibrant and attractive business environment for everyone.

2023 Business Takeaway UAE

As we approach 2024, the looming implementation of the UAE Corporate Tax (CT) demands meticulous preparation. Oblique Consult offers comprehensive guidance on key priorities to address before year-end, encompassing evaluating Free Zone benefits, scrutinizing group structures, aligning financial policies for tax efficiency, ensuring compliance with transfer pricing rules, mitigating foreign entity exposure, leveraging CT legislation for optimal benefits, and establishing operational readiness. We emphasise internal awareness sessions and cross-functional training as essential components for navigating this transformative phase.

At Oblique, we are poised to support businesses in adapting to the forthcoming era of UAE CT, ensuring strategic resilience and compliance in the evolving tax landscape.

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