15 May 2023

Ministry of Finance releases further Guidance on Transfer Pricing Documentation

Authored by: Theunis Claassen

Following last year’s release of the Federal Decree-Law No. 47 of 2022 (the CT Law), corporate tax is set to commence for financial years starting on or after 1 June 2023. In anticipation of this commencement date a number of Ministerial and Cabinet Decisions have been released to provide further guidance on the application of the CT Law. This newsflash briefly considers a recent Ministerial Decision in relation to Transfer Pricing Documentation.

Transfer Pricing Documentation

Article 55(1) of the CT Law provides that the Federal Tax Authority (the FTA) may, by notice or through a decision, require a Taxable Person to file together with their Tax Return a disclosure containing information regarding the Taxable Person’s transactions and arrangements with its Related Parties and Connected Persons in the form prescribed by the Authority.

Furthermore, Article 55(2) provides that where a Taxable Person’s transactions with its Related Parties and Connected Persons for a Tax Period meet the conditions prescribed by the Minister, the Taxable Person must maintain both a master file and a local file in the form prescribed by the Authority. Such documentation must be submitted to the FTA within 30 days following a request by the FTA (or such other date as provided by the FTA).

Aside from the obligations above, the CT Law provides, in Article 55(4), that any Taxable Person shall be required (upon request) to provide the FTA with information to support the arm’s length nature of its transactions or arrangements with its Related Parties and Connected Persons, within 30 days following a request by the FTA, or by such later date as directed by the FTA.

Ministerial Decision No. 97 of 2023 (MD97) has now been released to provide further guidance in relation to when a taxpayer would need to provide a master and local file as contemplated above.  

When is a Master File and Local File required?

In terms of MD97, a Taxable Person that meets either of the following conditions will be required to maintain both a master file and a local file in the relevant Tax Period:

  1. Where the Taxable Person, for any time during the relevant Tax Period, is a Constituent Company of a Multinational Enterprises Group as defined in the Cabinet Decision No. 44 of 2020 that has a total consolidated group Revenue of AED 3,150,000,000 or more in the relevant Tax Period.
  1. Where the Taxable Person’s Revenue in the relevant Tax Period is AED 200,000,000 or more.

Transactions to be included in Local File

Subject to the exclusions set out below, the Taxable Person shall include transactions or arrangements with all of the following Related Parties and Connected Persons in the local file:

  1. A Non-Resident Person.
  2. An Exempt Person.
  3. A Resident Person that has made an election for Small Business Relief under Article 21 of the CT Law and meets the conditions of such election.
  4. A Resident Person whose income is subject to a different Corporate Tax rate from that applicable to the income of the Taxable Person (for example transactions between mainland Taxable Person and a Qualifying Free Zone Person).

Transactions to be excluded from Local File

The Taxable Person shall not include transactions or arrangements with the following Related Parties and Connected Persons in the local file:

  1. Resident Persons other than those specified in paragraphs (b), (c) and (d) above.
  2. A natural person, provided that the parties to the transaction or arrangement are acting as if they were independent of each other.
  3. A juridical person that is considered to be a Related Party or a Connected Person solely by virtue of being a partner in an Unincorporated Partnership, provided that the parties to the transaction or arrangement are acting as if they were independent of each other.
  4. A Permanent Establishment of a Non-Resident Person in the State whose income is subject to the same Corporate Tax rate as that applicable to the income of the Taxable Person.

For the purpose of paragraphs (b) and (c), the parties engaged in the transaction or arrangement shall be considered acting as if they were independent of each other where both of the following conditions are met:

  1. The relevant transaction or arrangement is undertaken in the ordinary course of Business.
  2. These parties are not exclusively or almost exclusively transacting with each other.

Furthermore, where the activities of one Person in the transaction or arrangement are subject to detailed instruction or to comprehensive control of the other Person in the same transaction or arrangement, such Persons shall not be regarded as acting as if they were independent of each other.

Key Takeaways

Taxable persons that fall under either of the two categories mentioned above (i.e. Constituent Company of large MNE; or Revenue equal to or more than AED 200,000,000) will have to maintain both a master file and a local file that covers the transactions described above.

Taxable persons that do not fall within either of these categories should still be mindful of the other Transfer Pricing Documentation requirements as provided under Article 55. As mentioned above, a Taxable Person can be required (upon request from the FTA) to provide within 30 days information to support the arm’s length nature of its transactions or arrangements with its Related Parties and Connected Persons. Therefore, regardless of whether a Taxable Person is required to maintain a master and local file, it should still maintain documentation in support of the arm’s length nature of its transactions or arrangements with Related Parties and Connected Persons.

Our Tax Service Offering

It is important for taxpayers to remain up to date on the most recent Ministerial and Cabinet Decisions as released from time to time as these contain important information on the application of the CT Law as well as taxpayer rights and obligations.

In order to ensure that your business adopts the most beneficial tax structure while simultaneously mitigating unwanted tax risk, the Tax team at Hadef & Partners is available to discuss these and other questions you might have regarding the tax affairs and general preparedness of your business in respect of the new corporate tax regime.  

In particular, Theunis Claassen from our Tax Team, can guide you in identifying key areas of your business that will be impacted by the new corporate tax regime and assist you with specialist tax planning and the implementation of appropriate mechanisms to achieve optimal tax outcomes for your business.

Please feel free to contact Theunis Claassen, our Head of Tax, to arrange an initial discussion regarding your business and its taxes.

 
 

This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.