Focus on Operational Transfer Pricing in UAE tax season

In brief

Businesses based in the UAE are navigating the first tax compliance cycle for FY24, a milestone that reinforces the importance of having a robust operational Transfer Pricing (OTP) framework, particularly for larger domestic and multinational groups.

OTP spans the entire TP lifecycle, from budgeting and policy design, to implementation, monitoring, reporting and compliance, and audit support. Gaps at any stage can lead to risk, unnecessary costs and inefficiency, often only becoming visible when tax returns and TP documentation have been completed months after year-end books have closed.

In detail

First UAE TP compliance cycle​

For FY24, companies prepared annual TP Disclosure Forms and Local Files for the first time. While several companies prepared early, many encountered challenges. From our experience, we’ve seen consistent issues that created tax risks, extra costs, and inefficiencies for companies, for example:​

• Lack of formal TP policies​.

• Missed filing deadlines leading to penalties and risk exposure​.

• Last-minute, tax return adjustments to align with TP policies, often resulting in double taxation​.

• Reported losses in limited-risk entities​.

• Centrally prepared documentation, not correctly localised for UAE TP compliance​.

• Multiple advisers and stakeholders preparing the TP compliance reports, causing inconsistencies, duplication, errors, and wasted efforts​.

• Weak governance and control frameworks, increasing time and cost to prepare disclosure forms and local files on time.​

These challenges can be mitigated by having a robust OTP process and governance framework in place that aligns accountabilities for data gathering, people, processes and enabling technology across the lifecycle.​

Defining a robust OTP and governance framework​

Document the OTP framework in a governance manual owned by the Head of Tax and endorsed by the C-suite and Board of Directors. Its purpose is to reduce compliance effort whilst ensuring TP risk is managed and opportunities are identified and optimised for cash tax burden, impact on P&L earnings (ETR) and balance sheet (deferred tax liabilities and uncertain tax positions).

The OTP framework should: ​

• Set out the group’s approach to transfer pricing and require all stakeholders across tax, finance and business to understand and adhere to the approved policies.

• Define clear roles and accountabilities mapped to each stage of the TP lifecycle.

• Embed internal controls and monitoring mechanisms to ensure TP policies remain compliant with tax rules and ensure accurate implementation during the year with the least amount of time and resources.

• Specify critical reporting dates and review and approval cadences, using monitoring tools to proactively manage TP policy execution and provide real-time insights for the business.
  

Key steps in an effective year-end TP process​

Suggested actions​

• Assess year-to-date positions and make any required TP adjustments to bring results in line with TP policies, prior to year-end close.​

• Communicate any TP exposures with Senior Management and the Board of Directors. ​

• Design a fit-for-purpose OTP governance framework that documents the annual OTP timeline mapped to accountabilities, data flow source and extraction process, enabled within a technology ecosystem - creating a sustainable and compliant OTP governance process.​