Today, many businesses are utilizing the power of the Internet to speed up their growth. This is called the digital economy. In the digital economy, companies sell products and services online, utilise apps and software, and reach customers worldwide without establishing a physical presence in every country. While this is good for business, it creates some problems for tax rules — especially transfer pricing.
Let’s read more to learn about how the digital economy is challenging traditional transfer pricing methods in the UAE.
What is Transfer Pricing?
Transfer pricing refers to the price charged for goods, services, or assets between companies within the same corporate group. For example, if a company has one office in the UAE and the price they charge each other for using services or products is called a transfer price.
Governments aim for these prices to be fair and reasonable, comparable to the prices two unrelated companies would charge each other in a competitive market. This helps prevent tax evasion, where companies shift profits to countries with lower tax rates.
Traditional Transfer Pricing Methods
In the past, businesses were mostly physical. So, transfer pricing was done by looking at:
- Where the goods were made
- How much the product cost
- What work did each branch do
- How much risk each one took
Some common methods used were:
- Comparable Uncontrolled Price (CUP): comparing prices with other companies
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method (TNMM)
These methods worked well when goods were moving, and offices were in clear locations.
How is the Digital Economy Different?
In the digital economy, things are more complicated. Here’s why:
- A company can earn money in the UAE without having an office here.
- Most digital businesses utilise technology, apps, and data rather than physical goods.
- Value is created by intangible assets such as software, branding, and online services, which are not easily measurable.
So, using old transfer pricing rules becomes difficult.
Problems in the UAE
The UAE introduced the corporate tax in 2023. With that, it also brought transfer pricing rules. But digital businesses face these problems:
1. No Physical Office
Some companies offer services in the UAE without having an office here. Therefore, it’s difficult to determine where the profit was generated.
2. Intangible Assets
Digital companies utilise assets such as software, customer data, or brand names. These are referred to as intangible assets, and they are challenging to value using traditional methods.
3. Profit Allocation
Where should the profit go? Is it to the country where the software was developed or to the country where the user is located? Traditional rules don’t give a clear answer.
4. No Comparables
Old methods often use comparisons with similar companies. However, in the digital business world, it’s challenging to find a company that does the same thing.
5. Central Control
Many digital companies keep important work, such as R&D or marketing, in one country. But other branches also benefit. How much should each branch pay for using these services?
What UAE Companies Should Do?
If you are a UAE business working with related companies in other countries, here are some steps to follow:
1. Know What You Do
Clearly explain what the UAE branch is doing. Is it selling something, providing a service, or just helping the main company?
2. Value Your Assets
If you’re using software or brand names from another branch, try to put a fair price on it. This may need expert help.
3. Follow the Rules
The UAE now requires large companies to prepare Master Files and Local Files for transfer pricing purposes. Keep your records ready and updated.
4. Get Advice
If your business is in digital services or online platforms, it’s best to speak to a tax expert. The rules are still new and subject to constant change.
The world is rapidly transitioning into the digital age, and the UAE is a part of this transformation. While this presents new growth opportunities, it also introduces new tax challenges. Transfer pricing is one area where digital businesses must exercise particular care.
The old rules were made for old-style businesses. However, today, with so much happening online, it’s essential for companies to understand how their business impacts their taxes — even if they don’t have an office in every country.
By maintaining accurate records, understanding the responsibilities of each branch, and establishing reasonable prices for services and tools, UAE businesses can remain compliant and avoid potential issues with tax authorities.
At JAKS, we help businesses manage transfer pricing effectively. We ensure that the prices between your company’s branches in different countries comply with all applicable tax rules. This helps you avoid penalties, reduce audits, and keep your business running smoothly. For further details, call us at +971 503372712 or email [email protected]. We’re here to support you!
