UAE companies to benefit from transfer pricing as profit-shifting plan comes into force

The international tax landscape has been changing rapidly and the Organisation for Economic Co-operation and Development (OECD) has recently agreed on a base erosion and profit shifting (Beps) action plan that could significantly affect businesses operating in the UAE.

The plan addresses the issue of artificial shifting of profits and its proposals will introduce unprecedented disclosure and substance requirements affecting industries and businesses with substantial international exposure. Closely linked to Beps is the issue of transfer pricing.

So what is transfer pricing and how does it affect organisations in the UAE?

In simple terms, transfer pricing is the rate at which two related parties of the same group carry out transactions with each other. If a subsidiary of a Middle East group sells goods or services to another group subsidiary in Europe at an agreed price, this arrangement will be subject to transfer-pricing rules.

Transfer pricing is important because it gives a group with large international operations the opportunity to manage profits across jurisdictions.

Transfer pricing is legal, however, it can be abused if companies manipulate the price charged between related parties to artificially save taxes.

According to the OECD, revenue losses from Beps are conservatively estimated at between US$100 billion and $240bn annually, or anywhere from 4 per cent to 10 per cent of global corporate income tax revenues. The interest in the recent public accounts committee and senate hearings in the UK and US respectively demonstrate how important the issue has become.

Essentially, the Beps proposals are focused on mitigating tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low-tax or no-tax locations, even though a company may have little or no economic activity there.

The rules affect any group with international transactions or operations and, therefore, affect GCC-headquartered businesses regardless of whether they are subject to corporate tax in their home jurisdiction.

An increasing number of tax authorities globally have already implemented the Beps proposals, and they remain committed to continued international cooperation to address offshore tax evasion and work towards a fairer and more transparent international tax system.

The following months and years will be a transitional period for the Middle East region because the new proposals mean that a number of GCC groups will be subject to Beps and an unprecedented level of disclosure and scrutiny.

Complying with these new rules should be seen as an opportunity for global companies headquartered in the UAE and across the region to streamline their supply chains with reference to value creation and substance, and to mitigate their tax risks.

There is increasing demand for tax services from multinationals that are navigating these incredible complexities. These could include large multinationals with widely dispersed workforces that have centralised finance functions and now realise they cannot keep pace with their compliance requirements everywhere they do business.

Multinationals not only need to ensure they are complying wherever they operate, they also need to do it in a way that contributes value to their business and does not increase risk.

Increasingly, we at KPMG expect that there will be a need to help organisations develop and implement economically supportable transfer prices, document policies and outcomes and respond to tax authority challenges.

Some of the key areas we expect companies will require assistance are: identifying potential Beps risks and opportunities; defining and implementing appropriate measures to address the potential risks arising from regulatory changes; and complying with new tax and transfer pricing obligations.

Complying with transfer pricing and Beps regulations could drive up costs. However, for GCC groups, applying transfer pricing correctly could also cut tax burdens, increase returns to shareholders and reduce prices for consumers by simplifying cross-charging. For instance, head office costs from a non-corporate tax jurisdiction like the UAE could be transferred to subsidiaries or branches in tax-paying jurisdictions as long as it is properly adopted and documented in a post-Beps world.

Shabana Begum is the head of transfer pricing at KPMG Middle East and South Asia.

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