U.A.E.

1. Introduction

 

​​​This summary provides an in-depth overview of the U.A.E.’s transfer pricing framework, covering the legal and regulatory background, key guiding laws, the scope of application, documentation and methodological requirements, compliance measures, high-risk industries and transactions, and future outlook.

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2. Legal and Regulatory Framework

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2.1 Core Legislation and Regulations

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The U.A.E.’s approach to transfer pricing has evolved as the jurisdiction modernizes its tax system. Key elements include:

• Economic Substance Regulations (ESR): Introduced in 2019, the ESR require entities engaged in specific activities (such as banking, insurance, intellectual property, and others) to demonstrate that they have substantial economic activity in the UAE. The regulations are designed to combat harmful tax practices and ensure that entities with significant operations in the UAE are subject to appropriate levels of taxation. While not focused solely on transfer pricing, the ESR are part of the broader framework for ensuring tax fairness and economic substance, which impacts transfer pricing arrangements.

• Federal Decree-Law No. 8 of 2017 on Economic Substance: This law mandates that entities engaged in certain business activities must have substantial economic presence in the UAE. Though not directly a transfer pricing regulation, this law is part of the broader legislative framework for tax compliance, and companies involved in international transactions must align their operations with the UAE's broader tax framework.

• Federal Tax Authority (FTA) Transfer Pricing Guidelines (2019): The FTA issued its formal Transfer Pricing Guidelines in 2019, aligning with the OECD’s BEPS (Base Erosion and Profit Shifting) Action Plan. These guidelines define the arm's length principle and set out requirements for documentation to support the pricing of intercompany transactions.

• Ministerial Decision No. 215 of 2020 on Transfer Pricing: This Ministerial Decision further clarifies the transfer pricing regime in the UAE. It requires entities to maintain detailed documentation, including a master file and local file, and outlines the penalties for non-compliance.

• Country-by-Country Reporting (CbCR): As part of the UAE’s commitment to the OECD's BEPS Action Plan, the Country-by-Country Reporting (CbCR) regulations came into effect in 2023. Multinational groups operating in the UAE must now file reports detailing their financial activities on a country-by-country basis. This ensures transparency and helps the tax authorities assess whether profits are being properly allocated according to the arm's length principle.

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2.2 Alignment with International Standards

 

The transfer pricing regulations in the U.A.E. align with international standards primarily through their adherence to the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan and the arm's length principle. Here’s how the U.A.E.’s transfer pricing framework aligns with global norms:

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• Arm’s Length Principle: The U.A.E.’s transfer pricing regulations are based on the arm's length principle, which is a cornerstone of international transfer pricing standards. This principle ensures that intercompany transactions are priced in a manner consistent with what unrelated parties would charge for similar transactions. This is in line with the guidelines set by the OECD Transfer Pricing Guidelines, which the U.A.E. follows to prevent the manipulation of prices between related entities to shift profits and avoid taxes.

• OECD BEPS Action Plan: The U.A.E. is committed to the OECD’s BEPS initiative, which aims to address tax avoidance strategies that exploit gaps and mismatches in tax rules. The OECD’s BEPS Action Plan provides a comprehensive framework for aligning transfer pricing rules with global standards, and the U.A.E.’s regulations, including its Transfer Pricing Guidelines (issued in 2019), are specifically designed to comply with these international tax standards.

• Documentation Requirements: The U.A.E.’s regulations align with international practices by requiring multinational enterprises (MNEs) to maintain transfer pricing documentation, including a master file and a local file. These documents must outline the structure of the MNE, the intercompany transactions, and the methods used to price those transactions. This is consistent with the OECD’s transfer pricing documentation requirements to ensure transparency and provide tax authorities with necessary information for assessing compliance.

• Country-by-Country Reporting (CbCR): As part of its commitment to the OECD’s BEPS Action Plan, the U.A.E. introduced Country-by-Country Reporting (CbCR) requirements in 2023. This aligns with the OECD’s CbCR standards, which require MNEs to provide detailed financial and tax information for each country in which they operate. This enhances transparency and allows tax authorities to assess whether profits are properly allocated across jurisdictions.

• Multilateral Instrument (MLI): The U.A.E. signed the Multilateral Instrument (MLI) under the OECD’s BEPS framework, demonstrating its commitment to aligning its tax treaties with international standards to prevent tax avoidance and the manipulation of transfer pricing.

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3. Scope and Application of Transfer Pricing Rules

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3.1 Definition of Related Parties

 

In the U.A.E., the definition of a related party for transfer pricing purposes aligns with the guidelines set by the OECD (Organization for Economic Cooperation and Development) and international standards. A related party generally refers to entities or individuals that have a close financial, managerial, or ownership connection, which could influence the terms of transactions between them. Specifically, a related party in the U.A.E. is defined as follows:

• Entities in which one party has control or significant influence over the other: This includes direct or indirect control over the company or a significant influence on its financial or operational decisions. Control is typically defined as owning more than 50% of the voting rights or shares in another entity.

• Ownership and Control Relationships: If one entity owns, either directly or indirectly, 50% or more of the voting rights or shares in another company, the two companies are considered related parties. The same applies to situations where the ownership is less than 50% but still allows the entity to exert significant influence over the operations and financial policies of another entity.

• Financial and Managerial Influence: Related parties can include not just parent and subsidiary companies, but also situations where there is significant financial or managerial influence. This could involve shared directors, common financial interests, or other relationships that could result in control or influence over the business decisions of both entities.

• Group Companies: In the context of multinational enterprises (MNEs), related parties can include entities that are part of the same corporate group, including subsidiaries, parent companies, and branches, provided they meet the control or influence criteria.

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3.2 Types of Transactions Covered

 

The transfer pricing guidelines in the U.A.E. cover a wide range of intercompany transactions that involve the transfer of goods, services, or intangible assets between related parties. These transactions must comply with the arm's length principle, ensuring that the pricing of such transactions is consistent with what independent parties would charge under similar circumstances. The following specific transactions are typically covered by the U.A.E. transfer pricing guidelines:

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• Sale of Goods: This includes the transfer of tangible goods between related entities. The pricing of these transactions should reflect what independent parties would agree upon under comparable conditions, taking into account factors like market conditions and product characteristics.

• Provision of Services: Intercompany services, such as management services, technical support, marketing, and administrative services, are covered under transfer pricing guidelines. The pricing of these services must be based on what would be charged by independent service providers for similar services, considering factors like the nature of the service and the level of expertise required.

• Intangible Assets: Transactions involving the transfer of intangible assets such as patents, trademarks, copyrights, software, and goodwill are covered by the guidelines. These transactions are subject to detailed rules regarding the appropriate pricing methods to ensure that profits are allocated correctly between entities in different jurisdictions, in line with the value contributed by each entity in the development and exploitation of the intangible asset.

• Financing and Treasury Transactions: Intercompany loans, guarantees, and other financing arrangements between related parties are also covered by the guidelines. The U.A.E. requires that the terms and conditions of these financial transactions (such as interest rates, repayment terms, and credit ratings) be consistent with what would be agreed upon between unrelated parties in similar circumstances.

• Cost Contribution Arrangements (CCAs): These are arrangements where related parties share the costs and risks of certain activities, such as research and development (R&D) or marketing efforts. The U.A.E. transfer pricing guidelines set out the requirements for determining the appropriate allocation of costs and sharing of risks among related entities in these arrangements.

• Royalties and Licensing: Royalties paid for the use of intellectual property, such as trademarks, patents, or proprietary technology, fall under the scope of the transfer pricing guidelines. These transactions must be priced in accordance with the arm's length principle, considering factors like the value of the intellectual property and the terms of the license agreement.

• Recharges and Reimbursements: Transactions where one related party charges another for specific costs incurred on its behalf, such as expenses related to corporate overhead, administrative costs, or other shared expenses, are also addressed under the guidelines. The pricing of such recharges must reflect what would be agreed upon between independent parties under similar conditions.

 

3.3 Exemptions and Simplifications

 

In the U.A.E., there are certain exemptions and thresholds under the transfer pricing regulations that apply to documentation requirements and other compliance aspects. These exemptions are primarily designed to reduce the administrative burden on smaller or less complex entities, while ensuring that larger multinational enterprises (MNEs) adhere to transfer pricing standards. The key exemptions include:

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• Small and Medium-Sized Enterprises (SMEs): The U.A.E. provides an exemption for smaller businesses, typically based on their revenue or other size criteria. For example, businesses that meet certain thresholds for annual revenues or total assets may be exempt from the requirement to submit detailed transfer pricing documentation (such as the master file and local file). These thresholds are set to ensure that only larger, more complex entities with significant intercompany transactions are subject to the full documentation requirements.

• Intra-group Transactions Below a Certain Threshold: Companies with low-value intercompany transactions, such as those below a specified monetary threshold, may also be exempt from detailed documentation requirements. This is to ensure that businesses with minimal transfer pricing risks do not face the administrative burden of comprehensive reporting. The U.A.E. regulations allow for exemptions in cases where the value of related-party transactions is considered insignificant.

• Entities With No Taxable Income: Entities that do not generate taxable income in the U.A.E. may be exempt from certain transfer pricing documentation requirements. For example, companies in the U.A.E. that only engage in activities that are subject to exemption from taxation (such as those in designated free zones, subject to specific conditions) might be exempt from detailed transfer pricing reporting, assuming they do not have significant intercompany transactions that require review.

• Limited Documentation Requirements for Low-Risk Entities: The U.A.E. allows for a simplified documentation approach for low-risk entities, such as those that engage in routine functions or activities with limited value-added. These entities may not be required to submit a full range of documents (such as the master file), but they must still comply with the general transfer pricing rules and be able to demonstrate that their intercompany transactions are priced according to the arm's length principle.

• Exemptions for Certain Free Zone Entities: Some entities operating in free zones in the U.A.E., which are subject to specific tax exemptions or favorable tax treatment, may be exempt from detailed transfer pricing compliance. However, the transfer pricing rules apply to free zone entities in cases where their activities fall outside of the tax exemptions, or where the U.A.E. tax authorities determine that the transfer pricing rules should apply due to the nature of the transactions.

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4. The Arm’s Length Principle

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Central to the U.A.E.’s approach is the arm’s length principle, which requires that related-party transactions be conducted on terms similar to those negotiated between independent entities.

 

4.1 Determination of Arm’s Length Price

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Taxpayers in the U.A.E. must determine the arm’s length price using reliable, internationally accepted methods. These include:

• Comparable Uncontrolled Price (CUP) Method: Comparing the price in a controlled transaction with that of a comparable uncontrolled transaction.

• Cost Plus Method: Adding a reasonable profit margin to the costs incurred by the supplier of goods or services.

• Transactional Net Margin Method (TNMM): Comparing net profit margins from controlled transactions with those of similar independent companies.

• Resale Price Method: Determining the price based on the margin earned by a reseller in an uncontrolled transaction.

• Profit Split Method: Dividing the combined profits from intercompany transactions based on the economic contributions of the entities involved.

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4.2 Comparability and Functional Analysis

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A robust analysis is necessary to justify the chosen method:

• Functional Analysis: A detailed examination of the functions performed, risks assumed, and assets used by each party in the transaction.

• Economic Analysis: Consideration of market conditions, competitive dynamics, and industry-specific factors.

• Contractual Analysis: Review of agreements between related parties, including pricing terms, payment conditions, and performance metrics.

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5. Documentation and Disclosure Requirements

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While the U.A.E. transfer pricing framework is still maturing, the emphasis on documentation is increasing, particularly for multinational enterprises operating in high-risk sectors.

 

5.1 Key Documentation Elements

 

U.A.E. taxpayers should maintain robust documentation to support their transfer pricing policies:

• Master File: Provides a global overview of the multinational group’s organizational structure, business operations, and overall transfer pricing policies. This file is particularly important for larger groups and cross-border transactions.

• Local File: Contains detailed information about the transactions of the U.A.E. entity, including functional analyses, financial details, and the methodologies used to establish arm’s length prices.

• Country-by-Country (CbC) Report: For large multinational groups that meet specific revenue thresholds, a CbC report must be prepared, detailing key financial and tax information across jurisdictions.

 

5.2 Timing and Accessibility

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The U.A.E. requires multinational enterprises (MNEs) to submit transfer pricing documentation in compliance with the arm's length principle. The deadlines for submitting these documents are clearly defined under the U.A.E. transfer pricing regulations. These deadlines are linked to the filing of the Annual Tax Return for the relevant financial year. Here are the key deadlines:

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• Transfer Pricing Documentation Submission Deadline: The primary deadline for submitting transfer pricing documentation in the U.A.E. is within 12 months from the end of the financial year of the entity. This means that if a company's financial year ends on December 31, the deadline for submitting the transfer pricing documentation would be December 31 of the following year.

• Master File and Local File: The U.A.E. requires companies to maintain the Master File and Local File as part of their transfer pricing documentation. These must be available upon request by the Federal Tax Authority (FTA) within the same 12-month period following the end of the financial year. There is no specific submission deadline unless requested by the FTA, but companies must ensure they can provide the documents if audited.

• Country-by-Country Reporting (CbCR): For multinational enterprises that meet the Country-by-Country Reporting thresholds, the deadline for submitting the CbCR is 12 months from the end of the reporting fiscal year. This must be filed annually to the FTA for the reporting group.

• Transfer Pricing Disclosure Form: The U.A.E. also requires entities to submit a Transfer Pricing Disclosure Form as part of the annual tax return. This form provides basic details on the intercompany transactions and confirms whether the company is complying with the transfer pricing rules. The deadline for submitting this form is the same as the annual tax return, which is typically nine months after the end of the financial year.

 

5.3 Penalties for Non-Compliance

 

In the U.A.E., failure to comply with the transfer pricing regulations can result in various penalties. These penalties are designed to ensure that multinational enterprises (MNEs) adhere to the arm’s length principle and maintain proper transfer pricing documentation. The penalties for non-compliance with the U.A.E. transfer pricing rules include:

• Failure to Submit Transfer Pricing Documentation:

  • If a company does not maintain the required transfer pricing documentation (such as the master file and local file), the U.A.E. tax authorities may impose a fine of up to AED 50,000. This applies if the tax authority requests the documentation and the company fails to provide it in a timely manner.

• Failure to Submit the Transfer Pricing Disclosure Form:

  • If a company does not submit the required Transfer Pricing Disclosure Form along with the annual tax return, the penalty can be up to AED 10,000. This form provides a high-level overview of intercompany transactions and whether they comply with transfer pricing regulations.

• Failure to Comply with Documentation Requests:

  • If a company fails to provide its transfer pricing documentation upon request by the Federal Tax Authority (FTA), the company may face a penalty of up to AED 50,000. This penalty is assessed if the required documentation is not provided within the time frame set by the tax authorities.

• Adjustments to Taxable Income:

  • If the U.A.E. tax authorities determine that intercompany transactions do not comply with the arm’s length principle, they may make adjustments to the company’s taxable income. This means that the profits allocated between related entities could be adjusted, leading to higher taxes owed. In addition to this adjustment, the company may face a penalty on the additional taxes owed, which could be up to 300% of the tax due.

• Interest on Late Payment:

  • If a company does not pay the taxes owed due to adjustments in its transfer pricing arrangements, the U.A.E. imposes interest on the outstanding amounts. The interest rate for late payment is generally 4% per annum.

• Failure to Comply with Country-by-Country Reporting (CbCR):

  • For multinational enterprises that meet the CbCR thresholds but fail to submit the required Country-by-Country Reporting (CbCR), the penalty can be up to AED 100,000 for non-compliance.

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6. Transfer Pricing Adjustments

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If the FTA determines that the pricing of intercompany transactions does not meet the arm’s length standard, adjustments may be made:

• Reallocation of Income: The FTA may reallocate taxable income between related entities to reflect the economic substance of transactions.

• Increased Tax Liabilities: Adjustments can result in higher tax assessments, affecting not only corporate tax but also other related tax measures.

• Follow-Up Reviews: Subsequent audits or reviews may be initiated to ensure ongoing compliance with transfer pricing rules.

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7. Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs)

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To provide greater certainty and resolve disputes, the U.A.E. is exploring mechanisms similar to those used internationally:

 

7.1 Advance Pricing Agreements (APAs)

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• The Advance Pricing Agreement (APA) procedure in the U.A.E. is designed to provide certainty for multinational enterprises (MNEs) regarding the tax treatment of their intercompany transactions in advance. The procedure allows businesses to agree on transfer pricing methods and ensure that their transactions comply with the arm's length principle before they are executed. The key features of the APA procedure in the U.A.E. are as follows:

• Initiating the APA Request: An MNE seeking an APA in the U.A.E. must submit a formal request to the Federal Tax Authority (FTA). The request should include a detailed description of the intercompany transactions for which the APA is being sought, the transfer pricing method proposed, and the relevant documentation supporting the requested method. The business should also provide the context of its operations, including financial and tax data, as well as the specific arrangements being contemplated.

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7.2 Mutual Agreement Procedures (MAPs)

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The Mutual Agreement Procedure (MAP) in the U.A.E. is a process that allows taxpayers to resolve disputes related to transfer pricing or other tax issues that arise due to the application of tax treaties between countries. The MAP procedure is used when a taxpayer believes that the actions of one or both tax authorities result in double taxation or in an allocation of income that is inconsistent with the arm's length principle or the terms of a double tax treaty.

 

Here’s how the MAP procedure works in the U.A.E.:

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• Initiating the MAP Procedure:

  • A taxpayer seeking to initiate the MAP procedure must submit a request to the Federal Tax Authority (FTA) in the U.A.E.. The request must be made within a specific time period, typically within three years from the date the taxpayer first becomes aware of the potential double taxation or tax dispute. This period may vary depending on the terms of the applicable double tax treaty.

• The request should include:

  • A description of the facts and issues related to the dispute.

  • The relevant tax treaty provisions involved.

  • Any documents or evidence supporting the taxpayer’s position.

  • The specific relief or outcome being sought by the taxpayer.

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8. Industries and Transactions with Higher Transfer Pricing Risk

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Certain industries and transaction types in the U.A.E. are inherently more complex and pose higher risks for transfer pricing matters.

 

8.1 High-Risk Industries

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• Oil, Gas, and Petrochemicals:

  • Nature of Transactions: Large-scale projects, technical support, and shared services within a capital-intensive sector.

  • Risk Factors: Significant asset values, fluctuating commodity prices, and strategic economic importance result in complex intercompany arrangements that require rigorous functional analyses and robust documentation.

• Financial Services:

  • Nature of Transactions: Intra-group financing, guarantees, derivative contracts, and other financial instruments.

  • Risk Factors: Pricing must accurately reflect credit risk and market conditions, with mispricing leading to significant tax adjustments.

• Technology and Intellectual Property:

  • Nature of Transactions: Licensing of technology, royalty arrangements, and transfers of intangible assets.

  • Risk Factors: Valuation challenges, lack of direct comparables, and rapid technological change increase the complexity of these transactions.

• Pharmaceuticals and Life Sciences:

  • Nature of Transactions: R&D activities, licensing of research outcomes, and distribution arrangements.

  • Risk Factors: High investment in innovation and the allocation of returns on R&D require detailed functional and economic analyses to justify pricing.

 

8.2 High-Risk Transaction Types

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• Intercompany Financing:

  • Key Considerations: Establishing appropriate interest rates, fees, and risk premiums in loans and guarantees.

  • Risk Factors: Volatile market conditions and credit risk mispricing can lead to significant adjustments.

• Intangible Asset Transfers and Licensing:

  • Key Considerations: Valuation of intellectual property and other intangibles is inherently complex.

  • Risk Factors: Difficulty in finding reliable comparables and rapidly changing market dynamics increase risk.

• Service Agreements and Cost Sharing:

  • Key Considerations: Accurate allocation of costs and benefits for shared services, centralized management, or support functions.

  • Risk Factors: Complex functional analyses are required to ensure that costs are allocated on an arm’s length basis.

• Capital Asset Transactions:

  • Key Considerations: Transfers of significant assets or equity interests require independent, robust valuation methods.

  • Risk Factors: Incorrect valuation may affect tax liabilities related to capital gains, depreciation, and overall taxable income.​

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9. Challenges and Emerging Trends

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9.1 Digital Economy and New Business Models

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• Valuation of Digital Assets: Traditional valuation methods may need adaptation to accurately capture the value of digital assets and data-driven business models.

• Complex Global Supply Chains: Establishing comparability and appropriately allocating income across increasingly digitalized networks poses significant challenges.

 

9.2 Evolving International Standards and BEPS Initiatives

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• Integration of BEPS Measures: The U.A.E. continues to align its transfer pricing practices with OECD BEPS recommendations, influencing documentation, adjustment mechanisms, and disclosure standards.

• Enhanced Transparency: Global initiatives to increase tax transparency lead to more detailed reporting requirements and improved information sharing among tax authorities.​

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10. Future Outlook and Recommendations

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10.1 Continuous Monitoring and Proactive Management

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• Dedicated Transfer Pricing Teams: Establish specialized teams to monitor regulatory changes, market trends, and internal compliance.

• Regular Policy Updates: Continuously review and update transfer pricing policies to ensure they reflect current business operations and regulatory requirements.

• Investment in Technology: Leverage data analytics and advanced IT systems to enhance benchmarking accuracy and improve documentation processes.

 

10.2 Strengthening Engagement with the FTA

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• Advance Pricing Agreements (APAs): Engage early with the FTA to negotiate APAs and secure clarity on the pricing of intercompany transactions.

• Utilize Mutual Agreement Procedures (MAPs): Where disputes arise, participate in MAP processes to resolve cross-border issues and avoid double taxation.

 

10.3 Preparing for Heightened Regulatory Scrutiny

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• Enhanced Documentation: Ensure that all transfer pricing documentation is comprehensive, up-to-date, and aligned with both domestic requirements and international standards.

• Ongoing Training: Regularly update the expertise of personnel involved in transfer pricing to stay informed about evolving methodologies and regulatory expectations.