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Mandatory disclosure of related-party transactions in the new corporate tax regime

Mandatory disclosure of related-party transactions in the new corporate tax regime

The introduction of the corporate tax regime in the UAE is a remarkable step in the commercial arena. At this juncture, many important questions arise relating to its procedural modalities, exemptions, and other possible factors.

Moreover, it is extremely important to curb the tax evasion practices by adopting suitable measures. To attain the aforesaid objectives, the Ministry of Finance (MoF) has recently announced that the corporate taxation regime would be based on the Organization for Economic Co-Operation and Development (OECD) model. In simple words, the well-known principle of ‘transfer pricing’ will be introduced in the country. Let’s unpack the concept of transfer pricing with the help of our best lawyers of UAE.

What is transfer pricing?
The transactions between the related entities are a major source of tax evasion, and there is a strong need to bring transparency and complete disclosure in this process. With the introduction of this concept, the transactions between the related entities will be on the ‘arm-length principle’ which provides that the related parties should act in a manner as if they are unrelated.

Let’s understand this concept with a practical example
A and B are two related companies. A needs raw material for the purpose of manufacturing and the market value of the same is AED 10000. Now, instead of purchasing it from the market, A purchased the same from B (who is related to A) at the cost of AED 12000. A sold the final product at a value of AED 20,000.

Now, the taxation liability of A is reduced and he is only required to pay tax on the remaining amount of AED 8000. Thus, this internal arrangement with the related party curtailed the tax liability of A.

To put a restriction on such sham transactions, the transfer pricing model follows 5 popular methods:

  • Profit split method
  • Cost plus method
  • Comparable uncontrolled price method
  • Transactional Net Margin Method.
  • Resale price method

 

Additionally, our best taxation lawyers of Dubai have highlighted that the companies will be required to maintain separate records of transactions with their related counterparties. The 2 popular documents are master file and local file. The former document encompasses the details of related companies across the globe whereas the latter document only focuses on the related entities operating in the UAE.

Conclusion
For all the companies operating in UAE, it is mandatory to make complete disclosures relating to their related party transactions. You are strongly advised to contact one of our best taxation lawyers to avoid non-compliance which may result in hefty penalties and penal proceedings also.

BSB legal is a specialized law firm of UAE. Our best lawyers will assist you in getting regulatory approvals, visa- advisory, handling court litigation, and other legal compliances. To get more information, kindly contact one of our best lawyers in the UAE. You can email us at info@bsb.legal or call +971 508014003 for a quick and authentic legal solution.

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