Why Is Transfer Pricing Important for Multinational Companies?
Every multinational company must use transfer pricing when it deals with its branches or subsidiaries in different countries. The company can set transfer prices for goods, services, or intellectual property exchanged between its own divisions. If companies manage transfer pricing properly, they can follow tax laws and cut the risk of penalties. Many firms use transfer pricing to shift profits to countries with lower taxes, helping them reduce the total tax they pay.
Companies can use different methods to move profits:
- Finance subsidiaries with loans or equity
- Choose a company structure or joint-venture
- Charge management fees or royalties between parent and subsidiary
Good planning for transfer pricing lets companies meet many goals, but those goals sometimes clash. That’s why companies need to set up clear models and policies for their transfer pricing systems.
What Does Transfer Pricing Mean?
Transfer pricing is the price a company sets for goods or services traded between parts of the same group. This process helps allocate profits among its subsidiaries or branches. When one company under a group sells goods to another in the group, the sale price is the transfer price.
For example:
If Subsidiary A sells products to Parent X, the amount charged is the transfer price. This process happens all over the world as multinational companies grow and expand their business units.
Key Benefits of Transfer Pricing
Transfer pricing offers these main benefits:
- Reduces overall tax bills by booking profits in countries with lower tax rates.
- Lowers costs by managing tariffs on goods and services within the group.
- Helps managers measure performance by showing profit at division level.
- Improves investment decisions by tracking divisional profitability.
But transfer pricing can also create trade-offs. If one manager wants a higher transfer price to show more profit, another may want a lower price to keep costs down. Companies must find the right balance.
Types of Transfer Pricing
Companies use two types:
- Domestic Transfer Pricing:
Used for resource allocation between divisions in one country. The goal is to optimize profits across all divisions. - International Transfer Pricing:
Used when divisions trade across countries. Firms must manage different tax rates, exchange rates, and laws.
Key challenges for international transfer pricing include:
- Tax rates in each country
- Currency exchange rates
- Laws and government controls
- Economic changes and social factors
Transfer Pricing Example for Clarity
Let’s look at this example:
| Particulars | Division A (AED) | Division B (AED) |
| Transfer Price | – | 5000 |
| Own Cost | 3000 | 2000 |
| Divisional Profit | 2000 | 2000 |
| Sales Price | 5000 | 9000 |
- Division A makes goods for AED 3000, sells to Division B for AED 5000.
- Division B adds costs of AED 2000 and sells to customers for AED 9000.
- Each division earns AED 2000 profit, so the group makes AED 4000/unit.
If you raise the transfer price by AED 100, Division A gains AED 100 profit, while Division B loses AED 100. The total group profit stays the same, but it can affect decisions in each division.
Transfer Pricing Regulations in the UAE
UAE companies that belong to multinational groups must follow strict transfer pricing rules. If the group earns AED 3.15 billion (EUR 750 million) or more in the previous year, you must:
- File a notification with the Ministry of Finance (MoF) at the end of the financial year.
- Submit a Country-by-Country (CbC) Report within 12 months of year-end.
Entities need to keep proper transfer pricing documentation and comply with UAE tax laws to avoid penalties.
How Mubarak Al Ketbi (MAK) Auditing Supports Transfer Pricing
Mubarak Al Ketbi (MAK) Auditing has a skilled team to help companies:
- Lower tax burdens for business transactions
- Monitor international tax changes and their effects
- Optimize profits across the whole business group
- Set transfer prices that measure real performance
- Support investment and restructuring decisions
- Minimize risks and avoid penalties from non-compliance
Mubarak Al Ketbi (MAK) Auditing also delivers:
- CFO Services
- Auditing & Assurance
- Accounting & Bookkeeping
- Accounting Software Services
- Payroll Accounting
How Mubarak Al Ketbi (MAK) Auditing Can Help You
If you want to stay ahead of the curve, you should rely on Mubarak Al Ketbi (MAK) Auditing for your transfer pricing needs. The team guides you at every step and helps your business grow without tax worries.
- Get expert advice on transfer pricing
- Comply with UAE and global tax laws
- Optimize profits and cut risks
- Prepare and review all needed documents
- Book a free one-hour consultation now
For more information:
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Contact/WhatsApp: +971 50 276 2132
