Arm’s Length Principle for Transfer Pricing in UAE CT Law
What Does Arm’s Length Principle Mean in UAE Corporate Tax?
The UAE sets clear rules for how companies set prices for business between related parties. Mubarak Al Ketbi (MAK) Auditing always explains these rules to clients, so everyone gets a fair deal. The main goal is to make sure related companies act like they are dealing with strangers, not family.
The arm’s length principle (ALP) is a basic rule in UAE corporate tax law. It says every deal between connected companies must use the same price that two independent companies would use in the market. This rule helps prevent anyone from changing prices just to pay less tax.
Steps to Apply the Arm’s Length Principle in UAE
Companies must follow three main steps to use the ALP the right way. Each step keeps business fair and honest.
Step 1: Do a Comparability Analysis
You need to compare the controlled deal (with a related company) to deals made with unrelated companies. Mubarak Al Ketbi (MAK) Auditing reviews the facts and checks things like:
- What each company does (functions)
- What risks they take
- What assets they use
You should collect data about other market deals to make sure you’re using a fair price. It’s important to pick examples that match your real deal as closely as possible.
Step 2: Pick the Right Transfer Pricing Method
The UAE law allows different methods for transfer pricing. You need to pick the best one for your situation. Here are the main options:
- Comparable Uncontrolled Price (CUP) Method:
Compare your price with a similar market deal between independent parties. - Resale Price Method:
Start with the resale price to a third party. Subtract a normal gross margin to find the arm’s length price. - Cost Plus Method:
Add a fair profit to your cost to set the arm’s length price. - Transactional Net Margin Method (TNMM):
Compare your net profit margin to what others get in a similar market. - Profit Split Method:
Split the profit from a deal according to the value each side brings.
The law also allows companies to use more than one method if needed.
Step 3: Find the Arm’s Length Result
After choosing the method, you must calculate the price for your transaction. You must also keep all records and explain why you used a certain method.
Being clear about your reasons and keeping good records helps you prove to the tax authority that you followed the ALP. Mubarak Al Ketbi (MAK) Auditing helps clients prepare the right documentation.
Why Companies Must Follow the Arm’s Length Principle
The ALP stops companies from setting prices that are too high or too low on purpose just to lower taxes. The law makes sure that the government gets the right amount of tax. If you don’t follow the ALP, you may face fines, audits, or even court cases.
The UAE’s tax system is strict about these rules, so companies need to:
- Check their deals often for compliance
- Use the best method for their business
- Keep all documentation ready for audits
Key Points for Businesses About ALP and Transfer Pricing
- Every transaction between related companies must use the arm’s length price.
- You must check each deal and keep full records.
- Picking the right method matters for compliance.
- Using bad data or not documenting steps can bring penalties.
- Mubarak Al Ketbi (MAK) Auditing can help you stay safe and follow the law.
How Mubarak Al Ketbi (MAK) Auditing Can Help You
When you try to follow the arm’s length principle, you may feel like you’re jumping through hoops! Mubarak Al Ketbi (MAK) Auditing stands by your side at every step.
We help by:
- Explaining ALP rules for your business deals
- Reviewing your records and data for accuracy
- Helping you choose the best transfer pricing method
- Preparing and keeping documents for tax audits
- Giving up-to-date advice on UAE tax law
For more information:
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Or contact/WhatsApp: +971 50 276 2132
