UAE FTA Issues Public Clarification (CTP011): A Practical Guide to Transfer Pricing Downward Adjustments
Stay Compliant with the Latest UAE Corporate Tax Guidance on Related Party Transactions
The UAE Federal Tax Authority (FTA) has released Public Clarification CTP011, providing important guidance on Transfer Pricing Downward Adjustments made by a Taxable Person in the Corporate Tax Return.
The clarification explains how businesses should apply the Arm’s Length Principle, when transfer pricing adjustments are required, the disclosure obligations in the Corporate Tax Return, and the documentation businesses should maintain to support such adjustments.
For businesses engaged in Related Party Transactions, understanding this clarification is essential to ensure compliance with the UAE Corporate Tax Law and to strengthen their tax governance.
What is FTA Public Clarification (CTP011)?
Under Article 34(1) of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, all transactions and arrangements between Related Parties must comply with the Arm’s Length Standard.
This means that prices charged between related parties should be consistent with the prices that would have been agreed between independent parties under similar circumstances.
Where transactions are not recorded at arm’s length in the Financial Statements, a Taxable Person is required to make an appropriate Transfer Pricing Adjustment in the Corporate Tax Return. These adjustments may either:
- Increase Taxable Income(Upward Adjustment), or
- Decrease Taxable Income (Downward Adjustment).
Why Has the FTA Issued This Clarification?
The purpose of Public Clarification CTP011 is to explain:
- The disclosure requirements relating to Transfer Pricing Downward Adjustments.
- The key considerations businesses should evaluate before making such adjustments.
- The supporting documentation expected by the FTA.
Key Highlights from FTA Public Clarification CTP011
- Related Party Transactions Must Follow the Arm’s Length Principle
Businesses should ensure that all transactions with Related Parties reflect market conditions and comply with the Arm’s Length Standard required under Article 34(1) of the Corporate Tax Law.
- Transfer Pricing Adjustments Must Be Made Where Required
If Related Party Transactions are not recorded at arm’s length in the Financial Statements, appropriate Transfer Pricing adjustments should be made in the Corporate Tax Return.
These adjustments may be upward or downward depending on the circumstances.
- No Prior Approval from the FTA is Required
The UAE Corporate Tax system operates on a self-assessment basis.
Accordingly, businesses are responsible for determining whether a Transfer Pricing adjustment is necessary.
The clarification confirms that prior approval from the FTA is not required before making a Transfer Pricing adjustment in the Corporate Tax Return. However, any adjustment may be reviewed during a Tax Audit.
- Downward Adjustments Must Be Disclosed
Where a Taxable Person makes a Downward Adjustment in the Corporate Tax Return, all Related Party Transactions connected with that adjustment must be disclosed.
Importantly, this disclosure requirement applies regardless of the value or nature of the transaction.
- Maintain Robust Supporting Documentation
Businesses making Downward Adjustments should maintain sufficient documentation to support their tax position.
The FTA expects businesses to retain:
- Business rationale for making the adjustment
- Arm’s Length analysis and benchmarking study
- Reconciliation between Financial Statements and the Tax Return
- Evidence of corresponding adjustments made by the relevant Related Parties, where applicable
Maintaining comprehensive documentation can significantly strengthen a business’s position in the event of an FTA review or Tax Audit.
Practical Example
The clarification includes examples to illustrate when disclosure is required.
For example:
- If goods are sold to a Related Party below the Arm’s Length Price, resulting in an Upward Adjustment, disclosure is required only if the transaction exceeds the applicable thresholds.
- However, where goods are sold above the Arm’s Length Price and a Downward Adjustment is made, disclosure is required regardless of the value or nature of the transaction.
Why This Matters for UAE Businesses
Transfer Pricing is not relevant only for multinational enterprises.
Many UAE businesses transact with:
- Parent companies
- Subsidiaries
- Sister companies
- Shareholders
- Directors
- Other Related Parties
These transactions should be reviewed periodically to ensure compliance with the Arm’s Length Principle and the UAE Corporate Tax Law.
A proactive review today can reduce future compliance risks and strengthen your overall tax governance.
How TFAB Can Help
At TFAB Accounting & Business Consulting, we assist businesses with:
- Transfer Pricing compliance reviews
- Related Party Transaction assessments
- Arm’s Length analysis
- Corporate Tax Return reviews
- Transfer Pricing documentation
- Corporate Tax advisory services
Our team can help you understand how the latest FTA clarification may impact your business and ensure your Corporate Tax compliance remains robust.
Conclusion
The issuance of FTA Public Clarification CTP011 reinforces the importance of accurate Transfer Pricing practices under the UAE Corporate Tax regime.
Businesses with Related Party Transactions should review their pricing arrangements, maintain adequate supporting documentation, and ensure that any required Transfer Pricing adjustments are appropriately disclosed in the Corporate Tax Return.
Early preparation and proper documentation will help businesses remain compliant and confidently respond to future FTA reviews.
Need Professional Assistance?
If your business has Related Party Transactions or you would like to assess your Transfer Pricing compliance, TFAB Accounting & Business Consulting is here to help.
Contact our team for expert guidance on UAE Corporate Tax, Transfer Pricing, VAT, and business compliance.