Transfer Pricing Adjustments in the UAE:

The UAE Federal Tax Authority (FTA) has issued Public Clarification CTP011, bringing greater clarity to the treatment of transfer pricing (TP) downward adjustments under the UAE Corporate Tax regime. However, TP adjustments, whether upward or downward, can also have important VAT consequences that businesses should consider.

Key highlights from CTP011:

• Taxpayers may make self-assessed downward TP adjustments without prior FTA approval
• All transactions impacted by a downward adjustment must be disclosed in the Transfer Pricing Disclosure Form, regardless of value or disclosure thresholds
• Robust documentation is essential- TP analysis, benchmarking support, reconciliations, and corresponding adjustments by related parties
• The clarification reinforces the FTA's expectations around consistent TP positions

Why VAT matters too:

TP adjustments whether they increase or decrease the price of a related-party supply can have direct VAT consequences. The value of supply taxable under UAE VAT for related party transactions is considered to be the market value (in line with the TP requirements) if the following conditions are met:

1. Value of supply is less than the market value
2. The recipient of taxable supply does not have the right to recover full UAE VAT that would have been charged on the supply, as input VAT.

Where the value of supply conditions mentioned above are met, the following approach should be adopted under VAT for TP adjustments:

↑ Upward adjustments - This will effectively increase the consideration for a taxable supply, potentially triggering additional output VAT and requiring a tax invoice or credit note adjustment. It is pertinent to note that this could be just accounting adjustment, and no payment of underlying additional amount is required to trigger the additional VAT liability.

↓ Downward adjustments - This may reduce the consideration, raising questions on whether a corresponding VAT credit note is required, and whether input VAT recovery by the counterparty needs to be revisited.

Potential eInvoicing impact of TP adjustments

• If the adjustment is regarded as an increase in consideration for a taxable supply, then an additional eInvoice would likely need to be generated and reported through the eInvoicing system to reconcile the original invoice value with the market value.
• If the adjustment constitutes a reduction in consideration, then a tax credit note under eInvoicing may be required and supplier and customer records would need to remain aligned.

The characterization of the adjustment is critical and getting it incorrect may lead to under or over declared VAT, mismatched documentation between CT and VAT positions, and potential exposure on audit.

As FTA scrutiny on transfer pricing increases, businesses should ensure their TP adjustments are assessed holistically across Corporate Tax, VAT, eInvoicing and Customs, where relevant, with documentation that supports a consistent position across all tax types.

For further insights, please free to reach out to our tax experts.

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