• Two UAE entities, both local residents, are engaged in a transaction. Entity A is subject to corporate tax at 9%, while Entity B is subject to corporate tax at 0%. Both entities are related parties.

• Should this transaction between related parties, where one is subject to a lower tax rate, be included in the Local File for Transfer Pricing Compliance?

• Yes, this transaction is required to be included in the Local File for Transfer Pricing Compliance.

• Reasoning:

  • The inclusion of this transaction is necessary to ensure transparency and prevent potential tax manipulation.
  • Transactions between related parties, especially when there is a significant tax rate difference, can be manipulated to reduce corporate tax liability.
  • By documenting and scrutinizing such transactions in the Local File, tax authorities can ensure that transfer pricing is fair and that entities are not artificially reducing their tax liability through pricing adjustments.

Key Point: Inclusion of transactions in the Local File for Transfer Pricing Compliance is crucial to prevent tax avoidance and maintain tax fairness, especially when related parties are involved and there are disparities in tax rates.

Practical Case Study

ABC LLC and XYZ LLC are both UAE-based companies engaged in a business transaction. ABC LLC produces electronic components, while XYZ LLC is a retailer that purchases these components for its products. Both entities are related parties, and they face a situation where ABC LLC is subject to a 9% corporate tax rate, while XYZ LLC enjoys a 0% corporate tax rate due to their business activities.

Key Questions:

1. Should the transaction between ABC LLC and XYZ LLCbe included in the Local File for Transfer Pricing Compliance?

Resolution:

1. Corporate Tax Rate Disparity: ABC Manufacturing is subject to a 9% corporate tax rate, while XYZ Retail enjoys a 0% corporate tax rate due to their business activities and respective tax classifications.

2. Inclusion in Local File: Despite the difference in tax rates, the transaction between ABC LLC and XYZ LLC must be included in the Local File for Transfer Pricing Compliance. This inclusion is essential to ensure that the pricing of the transactions is fair and not manipulated to reduce corporate tax liability in the UAE.

Conclusion:

In the case of ABC LLC and XYZ LLC, the transaction between related parties with differing corporate tax rates must be documented and included in the Local File for Transfer Pricing Compliance.