Benchmarking Analysis in UAE

Background

On 31 January 2022, the Ministry of Finance (MoF) of the United Arab Emirates (UAE) announced the introduction of a Federal Corporate Tax (CT) on business profits. This tax is applicable to financial years starting on or after 1 June 2023. The introduction of the CT Decree Law in December 2022 signifies a significant shift in the UAE’s taxation framework, transforming the country into a full-fledged tax jurisdiction.

With the implementation of corporate tax, Transfer Pricing (TP) regulations have also been introduced, aligning with international best practices, particularly the Organization for Economic Co-operation and Development (OECD) TP Guidelines. This alignment ensures that businesses in the UAE adhere to globally accepted TP principles when transacting with related parties.

Overview of the UAE Transfer Pricing Regime

The UAE’s TP regulations are designed to ensure that transactions between related parties are conducted in a manner consistent with market conditions. These regulations apply to both domestic and cross-border transactions. Key aspects of the TP framework include:

• Applicability: Transfer pricing rules cover transactions between related parties (controlled transactions) and payments made to connected persons. This includes transactions such as the sale of goods, provision of services, lending or borrowing, licensing arrangements, and cost-sharing agreements.
• Arm’s Length Principle (ALP): The cornerstone of TP regulations is the Arm’s Length Principle (ALP), which mandates that related-party transactions be priced as if they were between independent enterprises.
• Documentation Requirements: Taxpayers meeting prescribed thresholds must maintain Local File and Master File documentation, as well as submit a TP disclosure form. These regulations apply to both domestic and cross-border transactions between related parties, as outlined in our detailed guide to related parties in UAE transfer pricing.
• Special Considerations for Qualifying Free Zone Entities: Businesses operating in Free Zones, which enjoy preferential tax rates, must demonstrate compliance with ALP to ensure they do not receive undue tax benefits through non-arm’s-length pricing.

Eligible taxpayers must maintain a Local File, Master File, and also submit the UAE TP disclosure form to remain compliant.

Benchmarking Analysis in Transfer Pricing

Benchmarking analysis is a fundamental aspect of TP compliance. It is conducted to assess whether related-party transactions adhere to ALP by comparing them with similar transactions between independent parties.

How Benchmarking Analysis is Conducted

Benchmarking analysis relies on two primary sources of data:

• Internal Comparables: These involve transactions conducted by the same enterprise with independent third parties under similar circumstances. If such transactions exist and meet the OECD/UAE TP guidelines, they provide the most reliable benchmark.
• External Comparables: When internal comparables are unavailable or insufficient, businesses must rely on publicly available external databases to identify comparable transactions conducted by independent companies.

Common TP Methods Used for Benchmarking

The UAE TP framework, in line with OECD TP Guidelines, prescribes the following methodologies for benchmarking transactions:

1. Comparable Uncontrolled Price Method (CUP): Compares prices of controlled transactions with those of independent transactions under similar conditions.
2. Resale Price Method (RPM): Analyzes the gross margin earned by a reseller in controlled transactions versus independent transactions.
3. Cost Plus Method (CPM): Examines the markup on costs applied to controlled transactions relative to independent transactions.
4. Profit Split Method (PSM): Allocates profits between related entities based on their relative contributions.
5. Transactional Net Margin Method (TNMM): Compares net profit margins relative to a specific base (e.g., sales, costs, assets).
6. Other Method: any alternative method if the 5 methods cannot be reasonably applied.

If internal comparables are unavailable, businesses use external benchmarking databases, such as TP Catalyst, Amadeus, TP Orbis, Bloomberg, etc.

Steps in Conducting a Benchmarking Study

The benchmarking study typically involves the following steps:

1. Selection of an appropriate database: Determining the best source of external comparables.
2. Defining the timeframe for analysis: Deciding whether to use single-year or multi-year data to account for business fluctuations.
3. Analyzing the taxpayer’s business operations: Understanding the functional profile, risk profile, and industry-specific factors.
4. Applying data screening and filtration criteria:
   1. Geographical scope (e.g., UAE, GCC, broader Middle East, global comparisons where relevant)Industry classification (using NACE/SIC codes for precise segmentation)Quantitative filters, such as
      1. Revenue threshold (to exclude companies below a defined size)Turnover range (e.g., excluding firms with unusually high or low turnover)Elimination of companies with incomplete financial dataExclusion of persistent loss-making entities
   1. Qualitative filters, including
      1. Review of business activities through public reports
      1. Examination of corporate websites to confirm operational relevance
5. Identification of comparable companies: Shortlisting independent companies with similar functions and risk profiles.
6. Calculation of margins and determination of the ALP range: Establishing the interquartile range to benchmark related-party transactions.

Key Takeaways and the Way Forward

With the introduction of Corporate Tax and Transfer Pricing (TP) regulations in the UAE, businesses must ensure compliance with the Arm’s Length Principle (ALP) by conducting robust benchmarking studies. Over the past decade, TP has gained significant global attention, including in the Middle East and Africa, with many countries implementing regulatory frameworks. Tax authorities are increasingly scrutinizing intra-group transactions to detect tax evasion and enhance tax revenues.

To mitigate potential tax risks, businesses engaged in related-party transactions should undertake timely TP studies, maintain comprehensive documentation aligned with OECD standards, and seek expert guidance for accurate benchmarking analysis. Given the complexities of TP compliance, leveraging reliable benchmarking databases and engaging experienced professionals is crucial. A proactive approach to TP compliance will not only help businesses align with market conditions but also ensure adherence to the UAE’s TP framework, mitigating risks and aligning with global best practices.

Businesses must also stay aware of the latest UAE transfer pricing reporting deadlines to avoid non-compliance risks.

How BCL Globiz Helps with Transfer Pricing Compliance in the UAE?

BCL Globiz offers comprehensive Transfer Pricing (TP) solutions to help businesses navigate the evolving regulatory framework in the UAE. With the introduction of Corporate Tax (CT) and TP regulations, ensuring compliance with the Arm’s Length Principle (ALP) is crucial to avoid compliance risks and tax penalties. Our expertise allows businesses to efficiently manage intra-group transactions, benchmarking studies, and TP documentation while aligning with global best practices.

Our Key Services

• Transfer Pricing Documentation & Compliance – Preparation of Local File, Master File, and TP disclosure forms in accordance with UAE regulations and OECD guidelines.
• Benchmarking Analysis & Risk Assessment – Conducting robust benchmarking studies using reliable databases (e.g., TP Catalyst, Amadeus, Orbis, Bloomberg) to justify intra-group transaction pricing.
• TP Policy & Advisory – Assisting in the development of TP policies, assessing potential tax risks, and ensuring compliance with UAE TP regulations.
• Audit Support & Dispute Resolution – Helping businesses prepare for TP audits and scrutiny, mitigating the risk of tax adjustments and penalties imposed by authorities.
• Tailored TP Solutions & Expert Guidance – Providing customized strategies that align with market conditions, ensuring smooth tax compliance and business operations.

Multinational enterprises must also assess whether they are subject to Country-by-Country Reporting requirements under UAE tax regulations.

With BCL Globiz, businesses can proactively manage their Transfer Pricing obligations, minimize tax risks, and maintain regulatory compliance while focusing on growth in the UAE.

For more detail, contact our expert at rakesh@bclglobiz.com and visit www.bcl.ae today.