Public Clarification CTP011

#Issue

In accordance with Article 34(1) of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business and its amendments (“Corporate Tax Law”) , all transactions and arrangements between Related Parties must meet the arm’s length standard.¹

Accordingly, a Taxable Person’s F inancial Statements should reflect transactions and arrangements with its Related Parties on an arm’s length basis. However, where a transaction or arrangement is not recorded at arm’s length in the Financial Statements, a Taxable Person must make an appropriate transfer pricing adjustment in the Tax Return to comply with the arm’s length principle. The transfer pricing adjustment may either increase the Taxable Income (upward adjustment) or decrease the Taxable Income (downward adjustment).

Further, according to the Tax Return form prescribed by the FTA, a Taxable Person is required to disclose transactions and arrangements with its Related Parties, if they exceed the applicable thresholds.

This Public Clarification intends to clarify the disclosure requirements and key considerations associated with downward adjustments made by a Taxable Person in the Tax Return.

#Summary

A Taxable Person must make appropriate transfer pricing adjustments in the Tax Return where transactions or arrangements with its Related Parties are not recorded at arm’s length in the Financial Statements. The transfer pricing adjustments may be upward or downward.

A Taxable Person must self-assess the requirement to make appropriate transfer pricing adjustments in the Tax Return. A Taxable Person is not required to obtain prior approval from the FTA to make transfer pricing adjustments in the Tax Return.

A Taxable Person must disclose all transactions and arrangements with its Related Parties for which a downward adjustment is made in the Tax Return, irrespective of the value or nature of the transactions and arrangements.

For downward adjustments made by a Taxable Person in the Tax Return, the Taxable Person should maintain/ensure the following:

•rationale for making downward adjustments in the Tax Return,

•a rm’s length analysis , including benchmarking study,

•reconciliation between the values recorded in the Financial Statements and the arm’s length values disclosed in the Tax Return, and

•symmetrical corresponding adjustments by the relevant Related Parties to the transactions and arrangements.

#Detailed Analysis

In accordance with Article 34(1) of the Corporate Tax Law, all transactions and arrangements between Related Parties must meet the arm’s length standard.¹

Accordingly, the values recorded in the Financial Statements in respect of the transactions and arrangements with the Related Parties should be consistent with the arm’s length principle. In practice, however, it is possible that the transactions or arrangements with Related Parties may not have been conducted at arm’s length, and therefore, the Financial Statements may not reflect arm’s length values. In such cases, a Taxable Person is required to make appropriate transfer pricing adjustments in the Tax Return to ensure compliance with the arm’s length principle.

Transfer pricing adjustments may take, one or both, of the following forms:

•upward adjustments, which increase the Taxable Income, and

•downward adjustments, which decrease the Taxable Income.

As the Corporate Tax Law operates on a self- assessment basis, a Taxable Person is not required to obtain prior approval from the FTA to make transfer pricing adjustments in the Tax Return. However, any adjustment made by a Taxable Person in the Tax Return, may be subject to a Tax Audit.

#Disclosure requirements in the Tax Return

According to the Tax Return form prescribed by the FTA, a Taxable Person is required to disclose transactions and arrangements with its Related Parties, if they exceed the applicable thresholds. All transactions and arrangements between Related Parties for which a downward adjustment is made by a Taxable Person must be disclosed in the Tax Return, irrespective of the value or nature of the transactions and arrangements.

#Other Considerations

Where a Taxable Person makes a downward adjustment in the Tax Return, they should maintain sufficient documents, including but not limited to the following:

•the rationale for making downward adjustment in the Tax Return, demonstrating why the original pricing as recorded in the Financial Statements did not reflect arm’s length principle and how the revised outcome aligns with the arm’s length standard,

•arm’s length analysis, including benchmarking study, to evidence that the transfer pricing adjustment is consistent with the applicable transfer pricing methodologies and regulations,

•reconciliation between the values recorded in the Financial Statements and the arm’s length values disclosed in the Tax Return, and

•symmetrical corresponding adjustments by the relevant Related Parties to the transactions and arrangements.

This Public Clarification applies solely to adjustments required under Article 34(1) of the Corporate Tax Law and does not extend to corresponding adjustments under Articles 34(10) and 34(11) of the Corporate Tax Law.^2,3

Examples:

•A Taxable Person sells goods to its Related Parties at a price below the arm’s length price and makes an upward adjustment in the Tax Return to align its Taxable Income with the arm’s length result. The disclosure in the Tax Return is only required if the transactions with Related Parties exceed the applicable thresholds.

•A Taxable Person sells goods to its Related Parties at a price above the arm’s length price and makes a downward adjustment in the Tax Return to align its Taxable Income with the arm’s length result. The disclosure in the Tax Return is required irrespective of the value or nature of the transactions.

This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business, and its amendments.

This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.

The examples in this Public Clarification show how these elements operate in isolation and do not show all the possible interactions with other provisions of the Corporate Tax Law that may occur. They do not, and are not intended to, cover the full facts of the hypothetical scenarios used nor all aspects of the Corporate Tax regime, and should not be relied upon for legal, accounting, regulatory or tax advice purposes. These examples are only meant for providing the readers with general information on the subject matter of this Public Clarification. They are exclusively intended to explain the rules related to the subject matter of this Public Clarification and do not relate at all to the tax, accounting, regulatory or legal position of any specific juridical or natural persons.

#Legislative References

In this clarification, Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business, and its amendments is referred to as the “Corporate Tax Law” , Ministerial Decision No. 114 of 2023 on the Accounting Standards and Methods for the Purposes of Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as the “Ministerial Decision No. 114 of 2023” and Federal Decree-Law No. 28 of 2022 on Tax Procedures and its amendments is referred to as the “Tax Procedures Law” .

Article 1 of the Corporate Tax Law defines the following terms: “Corporate Tax” – The tax imposed by the Corporate Tax Law on juridical persons and Business income.

“Related Party” – Any Person associated with a Taxable Person as determined in Article 35(1) of the Corporate Tax Law.

“Tax Return” – Information filed with the FTA for Corporate Tax purposes in the form and manner as prescribed by the FTA, including any schedule or attachment thereto, and any amendment thereof.

“Taxable Income” – The income that is subject to Corporate Tax under the Corporate Tax Law.

“Taxable Person” – A Person subject to Corporate Tax in the UAE under the Corporate Tax Law.

Article 1 of the Ministerial Decision No. 114 of 2023 define Financial Statements as a complete set of statements as specified under the Accounting Standards applied by the Taxable Person, which includes, but is not limited to, statement of income, statement of other comprehensive income, balance sheet, statement of changes in equity and cash flow statement.

Article 1 of the Tax Procedures Law define Tax Audit as a procedure undertaken by the FTA to inspect the commercial records, information, data or goods related to a Person to determine whether the Person has fulfilled his obligations under the Tax Procedures Law or the Corporate Tax Law.