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Corresponding adjustments

Applies
FY2024 onwards
Reviewed
Rule
UAE-CT-CORRADJ-2024.1
By

Is there a corresponding adjustment in UAE transfer pricing?

Yes. When taxable income is adjusted to arm's length, the FTA adjusts the Related Party too, and after a foreign adjustment the UAE party can apply for one.

Per Federal Decree-Law No. 47 of 2022, Article 34(10) and (11), Arm's Length Principle

Where the Authority or a Taxable Person adjusts the Taxable Income for a transaction or arrangement to meet the arm's length standard, the Authority shall make a corresponding adjustment to the Taxable Income of the Related Party that is party to that transaction or arrangement. Where a foreign competent authority makes such an adjustment to a transaction involving a Taxable Person, that Taxable Person can make an application to the Authority to make a corresponding adjustment to its Taxable Income.

What follows an arm's length adjustment for the other side of the transaction. A domestic adjustment carries through as an obligation on the Authority; a foreign one carries through only if the Taxable Person applies and the Authority acts. Without the corresponding movement, the same profit is taxed twice.

Two routes, and they are not equivalent

34(10) — a domestic adjustment: an obligation

Where the Authority OR a Taxable Person adjusts the Taxable Income to meet the arm's length standard, the Authority SHALL make a corresponding adjustment to the Taxable Income of the Related Party that is party to the transaction. Nothing has to be applied for.

34(11) — a foreign adjustment: a right to ask

Where a foreign competent authority makes the adjustment, the Taxable Person CAN MAKE AN APPLICATION to the Authority for a corresponding adjustment to its own Taxable Income. The article does not require one to be made, and nothing happens until the application is.

Why the difference matters more than the arithmetic

A reader whose foreign position has been adjusted, and who assumes the UAE side self-corrects, carries double taxation until they discover otherwise. So the two routes are separate outcomes here and the foreign one names the application as a step the reader must take.

Direction

A corresponding adjustment moves the counterparty the opposite way: income added to one side is income removed from the other, or the relief is illusory. The workings state the direction rather than leaving a sign to be inferred.

Order of testing

  1. 1

    Inputs requiring your determination

    Any input a person must decide and has not decided stops the computation. Whether an application has been made is asked for only on the foreign route, where it is a step the reader has to take.

  2. 2

    A counterparty within the charge to UAE Corporate Tax

    A corresponding adjustment is made to a Related Party's Taxable Income. Where the other party has none, no corresponding adjustment arises under this article, and relief abroad is a question for that jurisdiction and any applicable international agreement.

  3. 3

    Adjustment by a foreign competent authority

    Article 34(11). A right to apply, not an entitlement — and until an application is made, no corresponding adjustment is in prospect.

  4. 4

    Adjustment by the Authority or the Taxable Person

    Article 34(10). The Authority shall make the corresponding adjustment; it is an obligation rather than an application.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

The Authority increases one party's income

The Authority adjusts a UAE company's Taxable Income upward by AED 3,000,000 on an intra-group services charge. The counterparty is another UAE Taxable Person.

Computed

A corresponding adjustment is required as computed: the adjustment to meet the arm's length standard was made by the Authority, and Article 34(10) provides that the Authority shall make a corresponding adjustment to the Taxable Income of the Related Party that is party to the transaction — an obligation, not an application. A movement of (AED 3,000,000) would correspond to the AED 3,000,000 adjusted on the first party. Any adjustment is made by the Authority; nothing here adjusts a Taxable Income, and the figures below are the arithmetic of what would correspond, based on what you supplied.

Workings

Adjustment to the first party's Taxable Incomeas supplied — its Taxable Income was increased
AED 3,000,000
Corresponding movement in the other party's Taxable Incomethe opposite direction — a reduction, matching the increase on the first party
(AED 3,000,000)

Decided by the adjustment by the authority or the taxable person

A self-adjustment on filing

A UAE company adjusts its own Taxable Income downward by AED 1,200,000 to reach an arm's length result, its counterparty being a UAE Related Party.

Computed

A corresponding adjustment is required as computed: the adjustment to meet the arm's length standard was made by the Taxable Person itself, and Article 34(10) provides that the Authority shall make a corresponding adjustment to the Taxable Income of the Related Party that is party to the transaction — an obligation, not an application. A movement of AED 1,200,000 would correspond to the (AED 1,200,000) adjusted on the first party. Because this is a downward adjustment made in the return, public clarification CTP011 expects it to be disclosed whatever its value and supported by evidence of the Related Party's symmetrical corresponding adjustment. Any adjustment is made by the Authority; nothing here adjusts a Taxable Income, and the figures below are the arithmetic of what would correspond, based on what you supplied.

Workings

Adjustment to the first party's Taxable Incomeas supplied — its Taxable Income was reduced
(AED 1,200,000)
Corresponding movement in the other party's Taxable Incomethe opposite direction — an increase, matching the reduction on the first party
AED 1,200,000

Decided by the adjustment by the authority or the taxable person

A foreign adjustment, no application yet

A foreign tax authority increases an overseas affiliate's income by AED 5,000,000 on a transaction with a UAE company, which has not yet applied to the Authority.

Computed

A foreign adjustment does not carry through of itself as computed: Article 34(11) gives the Taxable Person the right to make an application to the Authority for a corresponding adjustment to its Taxable Income — it does not require one to be made. The FTA's Transfer Pricing Guide treats the request as made under the relevant Double Taxation Agreement: the Authority reviews the foreign position and may make the adjustment where appropriate, and the agreement's own time limits and mutual agreement procedure govern. You have indicated no application has been made, so no corresponding adjustment is in prospect until one is. A movement of (AED 5,000,000) would correspond to the AED 5,000,000 adjusted abroad. Any adjustment is made by the Authority; nothing here adjusts a Taxable Income, and the figures below are the arithmetic of what would correspond, based on what you supplied.

Workings

Adjustment to the first party's Taxable Incomeas supplied — its Taxable Income was increased
AED 5,000,000
Corresponding movement in the other party's Taxable Incomethe opposite direction — a reduction, matching the increase on the first party
(AED 5,000,000)

Decided by the adjustment by a foreign competent authority

A foreign adjustment, application made

The same facts, where the UAE company has applied to the Authority under Article 34(11).

Computed

A foreign adjustment does not carry through of itself as computed: Article 34(11) gives the Taxable Person the right to make an application to the Authority for a corresponding adjustment to its Taxable Income — it does not require one to be made. The FTA's Transfer Pricing Guide treats the request as made under the relevant Double Taxation Agreement: the Authority reviews the foreign position and may make the adjustment where appropriate, and the agreement's own time limits and mutual agreement procedure govern. You have indicated an application has been made; whether the Authority makes the adjustment, and in what amount, requires its determination. A movement of (AED 5,000,000) would correspond to the AED 5,000,000 adjusted abroad. Any adjustment is made by the Authority; nothing here adjusts a Taxable Income, and the figures below are the arithmetic of what would correspond, based on what you supplied.

Workings

Adjustment to the first party's Taxable Incomeas supplied — its Taxable Income was increased
AED 5,000,000
Corresponding movement in the other party's Taxable Incomethe opposite direction — a reduction, matching the increase on the first party
(AED 5,000,000)

Decided by the adjustment by a foreign competent authority

No UAE counterparty

The Authority adjusts a UAE company's income on a transaction with a foreign affiliate that has no UAE Taxable Income.

Computed

No corresponding adjustment arises under Article 34 as computed: a corresponding adjustment is made to the Taxable Income of the Related Party that is party to the transaction, and you have indicated the other party is not within the charge to UAE Corporate Tax. Whether relief is available in the other jurisdiction is a question for that jurisdiction and any applicable international agreement, and requires your determination. Any adjustment is made by the Authority; nothing here adjusts a Taxable Income, and the figures below are the arithmetic of what would correspond, based on what you supplied.

Decided by the a counterparty within the charge to uae corporate tax

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

3 inputs still need your determination:

  • Who made the adjustment — the Authority, the Taxable Person itself, or a foreign competent authority? Article 34 treats a foreign adjustment differently from the other two.
  • What adjustment was made to the first party's Taxable Income? Positive where that income was increased, negative where it was reduced.
  • Is the other party to the transaction within the charge to UAE Corporate Tax — a Resident Person, or a Non-Resident Person with a Permanent Establishment or nexus in the State — so that there is a UAE Taxable Income for a corresponding adjustment to be made to?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader