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Transfer pricing methods

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

Which transfer pricing methods does the UAE accept?

CUP, resale price, cost plus, TNMM and profit split, alone or together, choosing the most reliable. Another method only if none of these can reasonably apply.

Per Federal Decree-Law No. 47 of 2022, Article 34(3)–(6), Arm's Length Principle

The arm's length result of a transaction between Related Parties must be determined by applying one or a combination of the comparable uncontrolled price method, the resale price method, the cost-plus method, the transactional net margin method and the transactional profit split method. A Taxable Person may apply another method where it can demonstrate that none of those can reasonably be applied and that the other method satisfies the arm's length standard. The choice must be made having regard to the most reliable method, taking into account the contractual terms, the characteristics of the transaction, the economic circumstances, the functions performed, assets employed and risks assumed, and the business strategies of the Related Parties.

How the arm's length result required by Article 34(1) is arrived at. Article 34(6) then bases the Authority's examination on the method the Taxable Person used, provided it is appropriate having regard to those factors — a real protection, conditional on exactly this process.

The five methods, the sixth route, and how the choice is made

34(3) — one or a combination of

  • (a) The comparable uncontrolled price method
  • (b) The resale price method
  • (c) The cost-plus method
  • (d) The transactional net margin method
  • (e) The transactional profit split method

There is no hierarchy among them

Clause 5 requires the choice to be made having regard to the MOST RELIABLE method for the transaction, not by working down the list. So this rule records which method was selected and never ranks them or recommends one.

34(4) — another method, on two demonstrations

Not 'any method that works'. The Taxable Person must demonstrate the negative and the positive, and both are its own burden.

  • That none of the listed methods can reasonably be applied to determine an arm's length result
  • That the other method used satisfies the arm's length standard in Article 34(2)

34(5) — the factors the choice must have regard to

The article says the choice MUST be made having regard to these. A selection made without regard to them is not a selection the article contemplates, so an unconsidered factor blocks here rather than being noted.

  • (a) The contractual terms of the transaction or arrangement
  • (b) The characteristics of the transaction or arrangement
  • (c) The economic circumstances in which it is conducted
  • (d) The functions performed, assets employed, and risks assumed by the Related Parties
  • (e) The business strategies employed by the Related Parties

34(6) — what following the process buys

The Authority's examination of whether the income and expenditure meet the arm's length standard is based on the method the Taxable Person used, provided that method is appropriate having regard to the Clause 5 factors.

Order of testing

  1. 1

    Inputs requiring your determination

    Any input a person must decide and has not decided stops the computation — including each Article 34(5) factor, which blocks rather than being noted. The two Article 34(4) demonstrations are asked for only where that route is taken.

  2. 2

    Both limbs of Article 34(4)

    A method outside those listed requires both demonstrations. Where either is missing, the arm's length result falls to be determined by one or a combination of the five listed methods.

  3. 3

    Selection under Article 34(3)

    The selected method is recorded, with whether it was selected as the most reliable, and each factor marked as taken into account.

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.

Comparable uncontrolled price on a commodity sale

An intra-group sale of a listed commodity, benchmarked against quoted prices, selected as the most reliable method with every factor considered.

Computed

The method recorded is Article 34(3)(a) — the comparable uncontrolled price method, and you have indicated it is the most reliable method for this transaction, with each of the Article 34(5) factors marked as taken into account. This rule records the selection; it does not rank the five methods or recommend one, because Article 34(3) sets no hierarchy among them. Article 34(6) bases the Authority's examination on the method the Taxable Person used, provided that method is appropriate having regard to the Article 34(5) factors.

Decided by the selection under article 34(3)

Transactional net margin on a service centre

A shared service centre tested on its net margin, selected as the most reliable method for the transaction.

Computed

The method recorded is Article 34(3)(d) — the transactional net margin method, and you have indicated it is the most reliable method for this transaction, with each of the Article 34(5) factors marked as taken into account. This rule records the selection; it does not rank the five methods or recommend one, because Article 34(3) sets no hierarchy among them. Article 34(6) bases the Authority's examination on the method the Taxable Person used, provided that method is appropriate having regard to the Article 34(5) factors.

Decided by the selection under article 34(3)

Another method, both demonstrations available

A unique intangible transfer where no listed method can reasonably be applied, and a valuation approach that the person can demonstrate satisfies the standard.

Computed

A method outside those listed is available as computed, per Article 34(4) — a method other than those listed: you have indicated the Taxable Person can demonstrate both that none of the five listed methods can reasonably be applied and that the method used satisfies the arm's length standard, and that the choice was made having regard to each of the Article 34(5) factors as the most reliable method. Whether either demonstration succeeds requires your determination. Article 34(6) bases the Authority's examination on the method the Taxable Person used, provided that method is appropriate having regard to the Article 34(5) factors.

Decided by the both limbs of article 34(4)

Another method, only one limb demonstrated

The same transaction, where the person can show the method meets the standard but not that the listed methods are unavailable.

Computed

A method outside those listed is not available as computed: Article 34(4) requires the Taxable Person to demonstrate both that none of the listed methods can reasonably be applied and that the other method satisfies the arm's length standard, and you have not indicated that none of the listed methods can reasonably be applied. The arm's length result falls to be determined by one or a combination of the five methods in Article 34(3).

Decided by the both limbs of article 34(4)

Cost-plus on a routine manufacturer

A routine contract manufacturer tested on a cost-plus basis, selected as the most reliable method with every comparability factor considered.

Computed

The method recorded is Article 34(3)(c) — the cost-plus method, and you have indicated it is the most reliable method for this transaction, with each of the Article 34(5) factors marked as taken into account. This rule records the selection; it does not rank the five methods or recommend one, because Article 34(3) sets no hierarchy among them. Article 34(6) bases the Authority's examination on the method the Taxable Person used, provided that method is appropriate having regard to the Article 34(5) factors.

Decided by the selection under article 34(3)

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

7 inputs still need your determination:

  • Which transfer pricing method, or combination, has been applied? Article 34(3) lists five and permits a combination; Article 34(4) allows another method on conditions you must demonstrate.
  • Article 34(5)(a) requires the choice to be made having regard to the contractual terms of the transaction or arrangement. Has it been?
  • Article 34(5)(b) requires the choice to be made having regard to the characteristics of the transaction or arrangement. Has it been?
  • Article 34(5)(c) requires the choice to be made having regard to the economic circumstances in which it is conducted. Has it been?
  • Article 34(5)(d) requires the choice to be made having regard to the functions performed, assets employed and risks assumed by the Related Parties. Has it been?
  • Article 34(5)(e) requires the choice to be made having regard to the business strategies employed by the Related Parties. Has it been?
  • Is the method selected the most reliable one for this transaction or arrangement, as Article 34(5) requires?

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