Why SMEs should care about transfer pricing.

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Why SMEs should care about transfer pricing.

Transfer Pricing is one of the key tax requirements to consider when expanding your business outside Dubai and the Middle East. Operations in more than one country (at least two countries) is sufficient for a business to be caught up under the transfer pricing regulations.

Transfer Pricing is still a new discipline in the Middle East and Asia Pacific regions. However, Tax Authorities in the regions are super committed to ensure compliance with the legislation.

Whether you are a transfer pricing newbie, a transfer pricing enthusiast or if you just want to understand what transfer pricing is all about, we have summarized below the key things you need to know:

When is transfer pricing applicable to a company?

Transfer pricing legislation applies to any company that enters into transactions between companies that are part of the same group (also known as related parties) located in different countries. Some countries also have transfer pricing regulations for domestic transactions between related parties, particularly, when the country has different tax rates.

Does Transfer Pricing apply to SMEs and entrepreneurs?

Yes. One common question from Entrepreneurs, Start-Ups and SMEs is:

Why should I care about transfer pricing, it all one company? Or
I owned all the companies so transfer pricing shouldn't matter

Yes, it does matter, and you should care. Tax Authorities do not see the Group as ‘One Company’. It is the opposite; Transfer Pricing is about pricing transactions based on market prices assuming that two or more companies of the same group are totally independent and separate (this is also known as the arm’s length principle).

Are there any countries without transfer pricing legislation?

Unfortunately, not many. Unless your business is operating in a remote area where the ‘Transfer Pricing Tentacles’ has not reached (we cannot think of any place at the moment!). Every country has/ is adopting the transfer pricing legislation.

What are the potential risks from transfer pricing?

Mispricing transactions can increase a company’s tax bill in more than one country. Any mistakes when pricing a transaction can affect the amount of taxed paid or deductions claim in two countries.

It is very common to come across businesses that are facing big headaches that could have been prevented. Some examples include mismatches of income and expenses resulting in losses in one entity and disproportionate profit in other entity, incorrect pricing of services transactions and mark-ups, implementation of incorrect royalty rates, incorrect management of cost centres entities; the list goes on.

What is the principle applied in determining the transfer price?

The price of a transaction between related parties should follow the arm's length. The Inland Revenue Authority of Singapore (“IRAS”), other tax authorities worldwide and the Organisation for Economic Co-operation and Development (“OECD”) endorse the arm's length principle as the standard to guide transfer pricing.

The arm's length principle requires that transfer prices between related parties are equivalent to prices that unrelated parties would have charged in the same or similar circumstances. In layman’s term, it means ‘market price’.

How can I comply with the Transfer Pricing Rules?

Ensure the price for related party transactions are at arm’s length (i.e. market price) since the moment the transaction is set up. Some of the documents that are recommended to show evidence of compliance with transfer pricing includes:

Transfer pricing documentation to facilitate any reviews by the tax authorities. TP Documentation is the number one tool to show evidence of compliance.
Contracts covering the transaction entered between related parties.

We can help SMEs.

If you are an Entrepreneur, Start-Up or SME don’t disregard transfer pricing and fall under the trap of thinking that transfer pricing affects large MNEs only. Be proactive, and manage your transfer pricing compliance and risks at the beginning to avoid future headaches.

10 Jul '23

UAE TP Adjustments

For domestic TP adjustments, a corresponding adjustment may be made to the taxable income of the other related party by the FTA.

Related parties and connected persons in UAE

A transaction is considered to meet the arm's length principle when the results of the transaction between related parties are consistent with the results of a transaction between unrelated parties.