What the new transfer pricing rule means for family businesses


As businesses adjust their legal and accounting structures ahead of the UAE’s new corporate tax regime, which comes into effect next June, it is family businesses that may need to rethink their traditional ways of operating.

Transfer pricing regulation, a fundamental part of any corporate tax policy, will see greater scrutiny of companies that support each other financially, a practice more commonly associated with family businesses. That was the view of expert speakers at a recent discussion on corporate taxation, led by ICAEW.

The UAE’s introduction of a 9% corporate tax levy aligns with the broader OECD Pillar II framework and its recent global minimum corporate tax requirement. corporations, which subjects large multinationals to a minimum tax rate of 15%. As part of this, OECD members, including the UAE, are required to include transfer pricing regulations to prevent multinational companies from exploiting tax loopholes.

The UAE government is expected to announce its corporate tax policy framework this summer, including its transfer pricing regulations. In anticipation of this, ICAEW has convened the panel of experts to provide an in-depth look at the new corporate tax regime, as businesses prepare for the changes.

Expert speakers included Istina Delivan, Director, Transfer Pricing, KPMG; Chris Searing, Associate Director, Corporate & International Tax, KPMG; and Ankit Mathur, Associate Director, Corporate & International Tax, KPMG.

In line with the OECD Transfer Pricing Policy Framework, the UAE will introduce its own transfer pricing regulations which will come into effect as part of its corporate tax regime. Transfer pricing is a tax planning strategy whereby companies that operate in different tax jurisdictions pay inflated prices to a subsidiary or related company in a lower tax area, to appear less profitable and therefore less taxed.

Speakers explained that while tangible transactions can be easily recorded and compared to standard market rates, intangible transactions, such as loans, are more difficult to identify. Accordingly, the UAE’s transfer pricing policy will include the “arm’s length” principle for all transactions. This means that commercial transactions between related parties must have the same conditions as between unrelated parties, and these transactions must be declared.

Family businesses, which are outsized in the region and constitute the majority of private sector businesses, have been highlighted as a group that may need to adapt some of their practices to comply with transfer pricing regulations.

Traditionally, regional family businesses are interconnected and act to support each other, using their relationships within the community to promote a favorable business environment. While family businesses did not use these strategies to circumvent regulation, under the new corporate tax regime offering favorable terms to a related business could be construed as base erosion or profit shifting, experts say.

Mark Billington, International Managing Director of ICAEW, said: “As part of its corporate tax regime, the UAE is required to establish a transfer pricing policy. The introduction of this regulation is necessary to create a fair and transparent trading environment and prevent exploitation through tax planning strategies. Interestingly, companies in the free zone will also have to comply with the “arm’s length” principle, although they are not subject to tax.

“Overall, the corporate tax regime is a positive move by the UAE. Although there will certainly be challenges ahead, further complicated by the UAE’s 40 free zones and the key role family-owned businesses in the marketplace, the measured introduction of the policy suggests that those leading its implementation are committed to creating a mutually beneficial business landscape.”

Speakers also discussed the possibility for organizations to form a tax group, allowing subsidiaries to be treated as a single taxable entity. However, the UAE government was quick to insist that regional companies with little experience in corporate tax regimes should maintain standard accounting practices to avoid compliance issues.

While the corporation tax will reshape business operations from a legal and accounting perspective, its implementation is believed to be used to support the business environment. This includes maintaining the tax exemptions offered to companies in the free zone and the possibility of forming tax groups.

The event took place at the Capital Club in the Dubai International Financial Center and was attended exclusively by young ICAEW members.

Copyright © 2022 Khaleej Times. All rights reserved. Provided by SyndiGate Media Inc. (Syndigate.info).


About Author

Comments are closed.