The UAE Federal Tax Authority has recently released a detailed paper – the Corporate Tax Guide: Advance Pricing Agreements (CTGAPA). It begins to flesh out what an arm’s-length transaction means in the UAE. Conceptually, it is straightforward. Let us step into this first draft master plan.
I say master plan because almost all such guides arrive with a clearly stated proviso: they are instantly subject to change and should not be legally relied upon.
The UAE’s first APA master plan
An advance pricing agreement is reached between an entity and the regulatory authorities. It sets out what pricing approach will be acceptable in related and connected-party transactions. In consolidated form, this feeds into the preparation, submission and settlement of any corporate tax liability.
As non-compliance and errors can trigger audits, penalties and interest, everyone involved wants certainty in the rules and internal controls, ensuring no additional time or cost is incurred.
Let us define some of these terms. A related party is where two or more entities share common ownership above a threshold percentage. A connected party is an individual employed by an entity while also holding a shareholding in it. The same treatment applies to individuals who are related by up to four degrees – grandfather to great-grandchild, or second cousin twice removed.
Impact of an APA
The principle of APA is used in many other jurisdictions and is widely regarded as best practice. That said, they can be moulded into many different forms, and the UAE has shaped its own version.
This has immediate impact for multinationals and large local groups that operate across each other’s channels. For this reason, it is imperative that management understand the rules under which they must operate.
These set out the approved criteria under which pricing is determined. It is not an agreement that sets the price itself.
This pricing does have a sunset clause, so processes must be put in place to continually monitor and prepare for its next phase. Each agreement covers three to five fiscal years.
Types of APA
Three forms are detailed. The simplest is unilateral advanced pricing agreements [UAPA]. This is between the entity and the Federal Tax Authority and covers all trading and employee relationships. It is here that the roll-out will begin.
Remember the reason that transfer pricing regimes exist is to prevent a country or multinational entity from abusing local tax rules to mitigate a high tax liability elsewhere.
The second type is called bilateral advanced pricing agreements [BAPA], which are agreements between two national regulatory authorities. Demonstrating how complicated and of concern this area is, the final one is called multilateral advanced pricing agreements [MAPA], representing three or more nations.
The beginning, not the end
As roll-out will be phased, this is potentially a mixed blessing. What happens if you discover that your transition trading approach is non-compliant when the detailed phase rules, particularly the regulatory regime sign off that is required - goes live? Will consideration be given for good faith actors?
UAPAs are not binding on non-UAE entities or regulators. Indeed, should a foreign regulatory body disagree with an entity’s UAE-based decision, it could result in double taxation being incurred. This is where BAPAs and MAPAs, if they exist in your particular case, must be relied upon.
To apply, there are revenue thresholds that must be reached by the applicant. Relevant transactions must be more than Dh100 million in a fiscal year. The Federal Tax Authority has the final say on whether the calculation for this is acceptable.
This number applies to the totality of a tax group, if one exists rather than each individual entity, making it easier to achieve.
There is a fee to initiate the process, which is non-refundable. However, an entity can withdraw at any time before an agreement is concluded. As exit is possible, the fee is suitably material to ward off time wasters.
A multi-stage process from application to completion and ongoing monitoring is laid out. Any business considering engaging should fully review and understand the commitment of manpower and time that will be required.
What is certain is that finance departments already managing transformation will inherit another complex, ongoing obligation. This white paper is not an endpoint. It is an opening chapter. Transfer pricing in the UAE is moving from abstraction to architecture, and businesses must now decide how early they are willing to step in.
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The UAE issued its federal corporate tax law that will levy a headline 9 per cent rate on taxable income exceeding Dh375,000. Silvia Razgova / The National -
Taxable income below the aforementioned threshold will be subject to a 0 per cent rate of corporate tax. Chris Whiteoak/ The National -
No corporate tax will apply on salaries or other personal income from employment — be it in the government, semi-governmental, or private sector, the Ministry of Finance said. Chris Whiteoak/ The National -
Businesses will become subject to the UAE corporate tax from the beginning of their first financial year that starts on or after June 1, 2023. Victor Besa / The National -
The UAE corporate tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. Victor Besa / The National
