It is not an understatement to say that there have been more changes to the tax regimes in the Middle East region than anywhere else globally. From the introduction of the first form of corporate taxes ('CT') by Egypt in 1939 1, indirect tax in the Gulf Cooperation Council in 2016 2, and to the recent introduction of full CT / Transfer Pricing ('TP') rules in UAE in 2023 3, the pace of change is unprecedented.

A fundamental part of these tax systems will be ensuring a robust transfer pricing rule environment exists. The transfer pricing rules provide a framework to ensure that related parties transact with each other on an arm's length basis. Without these rules, corporate tax bases in the region would be at risk of being eroded. Additionally, the implementation of globally accepted transfer pricing rules is helpful for multinationals looking to invest in the region.

The concept of transfer pricing has been in existence for a while, but it was the significant rewrite in 2015 (now known as "BEPS 1.0" 4) that most transfer pricing regimes in the region are based on, with full TP rules existing in the Kingdom of Saudi Arabia ('KSA'), UAE, Qatar, Egypt, and Jordan. While they are based on the OECD TP Guidelines, there are specific local nuances for any multinational with global TP policies to consider – both in respect of pricing intercompany transactions and compliance.

The Challenges and Complexities of Transfer Pricing Rules

With new tax regimes in the region, it is inevitable that disputes with tax authorities have and will continue to occur. Transfer pricing disputes are notoriously known to be complex, lengthy and expensive – primarily because transfer pricing is subjective and it can be hard to agree on, as shown by recent TP case law around the world, what is perceived to be the "right answer." Also, with the newly introduced "BEPS 2.0" 5 Pillar 2, and Pillar 1 - Amount B, the complexity will only rise.

The good news is that most of the countries in the region are part of the OECD's / G20 Inclusive Framework and one aspect of this is being committed to dispute resolution (either through unilateral relief or internationally agreed processes such as Mutual Agreement Procedures 6). Additionally, the commitment to develop Advance Pricing Agreement ('APA') programs in the region will give a further boost to tax certainty and investment.

Ways Taxpayers in the Region Can Set the Right Transfer Pricing Foundations in Place

1) Review TP policies for risks and opportunities – there are complexities in the application of corporate tax and Zakat that are unique to the region. For example, intra-UAE transactions between "mainland UAE" and "freezones" (designated multidisciplinary zones located in the UAE that provide foreign investors with certain benefits, including but not limited to, preferential tax rates and full ownership of companies) are priced on an arm's length basis, include different definitions for related parties / connected persons, and specifics for benchmarking and language, among others.

2) Back up with strong TP governance to ensure your tax house is in order. This includes:

  • Ensuring clear and strong TP documentation (master file, local file, disclosure forms, affidavits, and Country-by-country reporting) are prepared and submitted where needed. Do not forget the need to translate materials into Arabic to comply with local regulations (if required).
  • Putting financial processes in place to ensure TP policies are implemented correctly. Smart, low-cost technology solutions, such as popular data software and visualization platforms, can help taxpayers increase efficiencies and improve reporting to key stakeholders.
  • Aligning intra-group legal agreements with transfer pricing policies. There has always been more importance in implementing robust intra-group legal agreements in the Middle East region than anywhere else around the world. Increased focus on the OECD TP Guidelines six step process to understanding the role of risk in transactions includes understanding the contractual terms of the arrangements. It is also important to review the agreements from a corporate and indirect tax perspective, as they are used for more than just transfer pricing purposes.
  • Ensuring there is a system in place to monitor important business changes in the organisation that can have a direct impact on your transfer pricing, ideally before the event itself. This is a hurdle that many businesses fall under and struggle with to provide the level of information required by tax authorities during an audit.

Tax risk has a long tail, and your future self will thank you for the steps you take today! We look forward to exploring these topics in detail in the coming weeks and months.

Footnotes

1. https://www.elibrary.imf.org/view/journals/024/1966/001/article-A006-en.xml

2. https://tax.gov.ae/DataFolder/Files/Legislation/02-GCC-VAT-Agreement.pdf

3. https://mof.gov.ae/wp-content/uploads/2022/12/Federal-Decree-Law-No.-47-of-2022-EN.pdf

4. First phase of the Organization for Economic Cooperation (OECD) / Group of Twenty Base Erosion and Profit Shifting Project

5. Second phase of the Organization for Economic Cooperation (OECD) / Group of Twenty Base Erosion and Profit Shifting Project

6. MAPs, short for Mutual Agreement Procedures, refer to the formal process outlined in Article 25 of the United Nations Model Double Taxation Convention between Developed and Developing Countries. It enables representatives from two countries that have entered into a bilateral tax treaty to address and settle disputes, difficulties, or uncertainties regarding the interpretation or implementation of the treaty for the avoidance of double taxation.

Originally published 23 April 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.