Gradually yet consistently, the government of the United Arab Emirates (UAE) continues to enrich its tax policies. In a recent development, the UAE, facilitated by the UAE Federal Tax Authority (FTA), has issued comprehensive instructions for the implementation of transfer pricing regulations, targeting its taxpayers.
The policy adopted from the Organization for Economic Co-operation and Development (OECD) transfer pricing guidelines, aims to provide certainty and guidance on transfer pricing practices for UAE taxpayers.
There are several intriguing aspects to the transfer pricing guidelines in the UAE. First, regarding the definition of a special relationship in the context of family relationships. Second, the mechanism for determining the comparable company in assessing the arm's length principles of a transaction. Third, related to the approach used in setting transfer prices. Fourth, regarding the preparation of sustainable transfer pricing.
Broader Definition of Special Relationship
A company is considered to have a special relationship if there is a relationship of ownership or capital statement, control, or family relationship.
In the context of family relationships, the UAE's transfer pricing provisions are broader. Especially, when compared to those applicable in Indonesia, which are limited to blood or marital family relationships in a a straight line and/or one degree to the side.
Meanwhile, the UAE government divides it into four levels.
- First, it includes the relationship between parents and children of individuals, including parents and children of spouses.
- Second, it includes the relationship of grandparents, grandchildren, and siblings of the individual, including grandparents, grandchildren, and siblings of the spouse.
- Third, it includes the relationships of grandparents, great-grandparents, great-grandchildren, uncles, aunts, and nephews of the individual, including the grandparents, great-grandparents, uncles, aunts, and nephews of the spouse.
- Fourth, includes great-grandparents, great-grandchildren, grandparents' brothers, grandparents' sisters, and first cousins of the individual, including great-grandparents, great-grandchildren, grandparents' brothers, grandparents' sisters, and first cousins of the spouse.
Instructions for Determining Comparable Data
In determining transfer prices, it is mandatory to conduct a comparability analysis according to the arm's length principle (ALP).
In the transfer pricing guidelines released, the UAE tax authority allows companies to use additive and deductive approaches in finding comparable data.
Under the additive approach, taxpayers can directly select comparables that are considered comparable to the party being tested, based on a comparability analysis. This approach is usually used in finding internal and external comparables.
Meanwhile, the deductive approach allows taxpayers to search for comparables based on the population of comparables obtained from searching through external databases, by applying certain search criteria.
In addition, the UAE Taxation Authority also provides room for taxpayers to apply a quantitative review with criteria including:
- Size criteria in terms of revenue, assets, or number of employees;
- Criteria related to intangible assets, such as the ratio of intangible assets to assets or the ratio of Research and Development expenses, to revenue if possible; and so on.
Meanwhile in Indonesia, the guidelines for finding comparable companies are explained in Director General of Taxes Regulation (PER) 22 of 2013. Through this regulation, the Indonesian tax authority requires further review of comparable candidates obtained from the database.
Among other things, by doing manual selection and studying the profile of each company that becomes a comparable candidate. Technically, it can be done by looking at the company's website, searching for information related to the comparable candidate in print or online media, or other methods.
Preparation of TP Documentation
In analyzing and preparing transfer pricing documentation (TP Doc), the UAE government provides flexibility to its taxpayers to have two approaches, namely Ex Ante and Ex Post.
The Ex Ante approach, also known as the price setting approach, is a method of preparing TP Doc conducted at the time or before the related party transaction is conducted or based on the information available at that time.
The information is not only comparable data from the previous year. However, it also includes changes in market and economic conditions that occur within the period between the previous year and the year of the related party transaction.
Meanwhile, the Ex Post approach is a method of preparing the TP Doc based on testing actual related party transactions. This approach is also called outcome testing.
The purpose is to determine whether the application of the arm's length has been consistent. The test is generally carried out as part of the preparation of the Tax Return at the end of the tax year.
The UAE Tax Authority advises taxpayers to ensure the approach is applied consistently. Apart from that, taxpayers also need to have a consistent analysis for all parties who have a special relationship regarding an affiliated transaction.
The flexibility of using this approach does not apply in Indonesia. This is because our tax authority chooses an ex-ante approach in conducting transfer pricing analysis on affiliated transactions conducted by taxpayers.
This is stated in Article 3 paragraph (1) of PMK 213 Year 2016 which states that the Transfer Pricing Documentation needs to be prepared based on data and information at the time of the affiliated transaction.
Similar to Indonesia, the UAE Tax Authority requires Taxpayers to prepare Transfer Pricing Documentation on a contemporaneous basis. The purpose is to explain the Taxpayer's compliance with the applicable transfer pricing regulations.
Interestingly, the UAE government claims that its transfer pricing guidelines are not legally binding. However, they hope that taxpayers can compile TP Docs at the time of affiliated transactions and when reporting tax returns for tax years that have affiliated transactions.
Regardless, according to the author, this transfer pricing guideline can minimize the differences in interpretation in the field that may cause losses from the taxpayers' side. After all, legal certainty in taxation is a crucial factor in a country's economic activities.
Especially, for the UAE and countries in the Middle East that are changing the direction of their economic development to be more sustainable to escape the dependence on natural resource potential.
However, the spirit of providing legal certainty is also a common problem in several countries, including Indonesia. I can say that the tax provisions in Indonesia, especially transfer pricing, need to be continuously improved to remain relevant to the development of the business world and business practices.
In that context, the author also welcomes several discourses on the changes in transfer pricing provisions in the country.
The author hopes that the forthcoming regulation will provide better certainty for taxpayers in performing their tax obligations in the context of transfer pricing.
However, there is also an expectation that every regulation issued must consider the principle of certainty. Therefore, every rule-making must be supported by more technical guidelines that are enlightening. (ASP/KEN)