The current geo-political situation has led to significant disruption in global supply chains. These disruptions have resulted in increased oil prices, inflationary pressure, rising transportation and freight costs, changes in shipping and trade routes, shortages of raw materials, delays in inventory movement, and increased operational uncertainty for multinational businesses. As global businesses continue to adapt to these changing economic conditions, multinational groups are being forced to reconsider how profits, costs, and risks should be allocated across different jurisdictions.
These developments have created uncertainty regarding how intercompany pricing should be determined, which entity should bear additional costs, whether existing transfer pricing policies remain reliable, and whether routine entities should continue earning stable returns during periods of economic disruption.
For businesses operating in the United Arab Emirates, these developments have created major transfer pricing challenges. As the UAE recently introduced a corporate tax regime together with transfer pricing rules aligned with OECD standards. Many multinational groups use the UAE as a regional headquarters, procurement and sourcing hub, logistics and distribution centre, financing platform, or holding company jurisdiction. As a result, transfer pricing has become one of the most important tax and compliance considerations for UAE businesses involved in cross-border transactions.
This article highlights some of the key transfer pricing challenges and considerations that multinational companies operating in the UAE should evaluate while managing supply chain disruptions and evolving global business conditions.
This becomes particularly complex where UAE entities are structured as limited risk distributors (‘LRDs’) or routine service providers. While contractual arrangements may assign limited risks to the UAE entity, actual business conditions may require it to incur extraordinary costs that were not anticipated in the original transfer pricing model. This creates pressure on whether year-end adjustments or revised pricing mechanisms are required to maintain arm’s length outcomes.
From a transfer pricing perspective, the critical question is how independent parties would have dealt with similar cost pressures. In normal circumstances, costs such as freight or fuel or logistics, may be considered routine. However, under extraordinary situations, these may include extraordinary or non‑recurring elements. Under comparable circumstances, independent parties would typically respond by renegotiating contracts, applying temporary surcharges, or adjusting margins to reflect the changed risk environment. Transfer pricing models are therefore expected to reflect this commercial behavior.
In this context, the taxable person should clearly identify and separate extraordinary costs from routine operating expenses, determine whether such costs should be retained in the UAE or recharged within the group, and assess whether benchmarking adjustments are required to account for the lack of comparability between disrupted and stable market conditions.
Tax authorities may closely examine whether these costs should properly sit with the UAE entity or be compensated by the principal entity that exercises control over key strategic and commercial decisions. This analysis typically depends on whether the UAE entity had any control over the underlying events giving rise to the costs and whether an independent party in a similar position would have been able to avoid or pass on such expenses. Accordingly, robust documentation, clear evidence of market wide disruption, and well supported functional and economic analysis are essential to justify any cost allocation or reimbursement within the group.
This creates a key transfer pricing consideration around whether the existing functional and risk profile of the entities involved in the transaction remains accurate. If an entity is effectively exercising greater control over supply chain decisions or bearing additional commercial risks, its remuneration may need to be adjusted accordingly. Conversely, if losses are incurred, it becomes important to assess whether such losses are consistent with the entity’s contractual risk profile or whether a recharacterisation of functions is required.
This raises a key challenge for taxpayers and tax authorities whether existing comparables remain valid under current economic conditions. In many cases, pre-disruption benchmarking sets may no longer reflect current market realities, especially in industries such as logistics, trading, and manufacturing. As a result, taxpayers may need to reassess their benchmarking approach, potentially using updated data sets, multi-year analysis, or alternative profit level indicators to support their transfer pricing positions.
From a transfer pricing perspective, tax authorities may question whether a routine or limited risk entity should experience declining margins or losses. Businesses must therefore demonstrate that such financial outcomes are commercially justified, consistent with the entity’s functional and risk profile, and reflective of broader market conditions. This may include analysing whether independent parties operating in similar industries and under comparable circumstances also experienced reduced profitability during the same period.
Tax authorities may also examine whether the reduced margins or losses indicate that the existing transfer pricing model no longer aligns with the actual conduct and economic reality of the business. Accordingly, maintaining adequate supporting documentation, including financial analysis, industry trends, and benchmarking support, is essential to substantiate the arm’s length nature of the reduced returns.
From a transfer pricing perspective, it is important that intercompany agreements accurately reflect the actual conduct of the parties and the current economic reality of the business. Where entities have assumed additional functions, managed new risks, or incurred unexpected costs during periods of disruption, existing agreements may no longer align with the operational arrangements followed in practice.
Businesses should therefore review whether intercompany agreements appropriately address matters such as allocation of extraordinary expenses, revised pricing mechanisms, risk allocation, compensation adjustments, and changes in functional responsibilities. Tax authorities may closely examine whether contractual terms are consistent with the actual behaviour of the parties, particularly where profitability outcomes have changed significantly.
Accordingly, multinational groups should ensure that intercompany agreements are updated on a timely basis and supported by appropriate transfer pricing analysis and documentation.
One important consideration is capacity utilisation adjustment. Many businesses may operate below normal production or operational capacity due to supply shortages, delays in raw material availability, or reduced market demand. In such situations, fixed operating costs may be disproportionately high compared to normal business conditions, resulting in distorted profit margins. Capacity utilisation adjustments may therefore be necessary to improve comparability with independent companies operating under different levels of utilisation.
Another key consideration is working capital adjustment. Supply chain disruptions may lead to higher inventory holding periods, delayed receivables collection, or changes in payment cycles. These factors can materially affect profitability and may impact the comparability of financial results between related-party entities and independent companies. Working capital adjustments may therefore be required to account for differences in inventory levels, receivables, and payables.
In certain cases, businesses may also consider whether financial results for particularly affected periods should be excluded or separately evaluated for benchmarking purposes. Exceptional periods of disruption may distort profitability to such an extent that the financial performance may not represent ordinary business operations. Tax authorities, however, are likely to closely scrutinise the rationale for excluding or adjusting financial data, and therefore robust supporting analysis and documentation are essential.
Accordingly, businesses operating in the UAE should carefully evaluate whether economic adjustments are necessary to improve the reliability of benchmarking analyses and ensure that transfer pricing outcomes appropriately reflect prevailing market conditions.
This creates potential permanent establishment (‘PE’) risks from both a corporate tax and transfer pricing perspective. Tax authorities may examine whether the presence of employees in a particular jurisdiction results in the creation of a taxable presence for a foreign group entity, particularly where employees are involved in decision making, contract negotiation, or revenue generating activities.
For multinational groups operating in the UAE, this may become relevant where personnel displaced from overseas entities begin managing regional operations or conducting strategic activities from the UAE. Similarly, UAE entities with employees temporarily operating in other jurisdictions may also face exposure to PE risks outside the UAE.
From a transfer pricing perspective, displacement of employees may also impact the functional profile of the entities involved. If key functions, risks, or decision making activities shift between jurisdictions, the existing transfer pricing model may no longer accurately reflect the actual business operations and allocation of value within the group.
This raises important transfer pricing issues around interest rates, credit risk, and the economic substance of financing activities. It must be assessed whether the pricing of intercompany loans must reflect arm’s length conditions, taking into account heightened risk profiles and market liquidity constraints.
Robust transfer pricing documentation should include detailed functional analyses, economic explanations for deviations from expected margins, benchmarking updates, and evidence supporting extraordinary cost allocations. Without adequate documentation, businesses face increased risk of transfer pricing adjustments during audits.
Below are key practical takeaways for taxable persons operating in the UAE to manage transfer pricing risks arising from the current supply chain disruptions and the evolving economic conditions:
The current geo-political situation and ongoing global supply chain disruptions have significantly increased transfer pricing challenges for companies operating in the UAE. Rising costs, operational uncertainty, changes in business functions, and increased volatility in profitability have created greater complexity in determining arm’s length pricing outcomes.
As the UAE continues to strengthen its corporate tax and transfer pricing framework in line with OECD standards, businesses will be expected to demonstrate that their transfer pricing policies accurately reflect economic reality, actual conduct, and prevailing market conditions. Areas such as allocation of extraordinary expenses, justification of reduced margins and losses, economic adjustments, intercompany financing, and permanent establishment risks are likely to attract increased scrutiny from tax authorities.
Multinational groups should adopt a more dynamic and commercially aligned approach to transfer pricing, supported by robust documentation, updated intercompany agreements, and regular review of pricing models. A proactive approach to managing transfer pricing risks will be essential for UAE businesses to ensure compliance and minimise potential disputes.
These developments have created uncertainty regarding how intercompany pricing should be determined, which entity should bear additional costs, whether existing transfer pricing policies remain reliable, and whether routine entities should continue earning stable returns during periods of economic disruption.
For businesses operating in the United Arab Emirates, these developments have created major transfer pricing challenges. As the UAE recently introduced a corporate tax regime together with transfer pricing rules aligned with OECD standards. Many multinational groups use the UAE as a regional headquarters, procurement and sourcing hub, logistics and distribution centre, financing platform, or holding company jurisdiction. As a result, transfer pricing has become one of the most important tax and compliance considerations for UAE businesses involved in cross-border transactions.
This article highlights some of the key transfer pricing challenges and considerations that multinational companies operating in the UAE should evaluate while managing supply chain disruptions and evolving global business conditions.
Key challenges
Allocation of extraordinary expenses
One of the most significant transfer pricing challenges during periods of supply chain disruption is the treatment and allocation of extraordinary expenses. These expenses may include abnormal freight and logistics charges, expedited shipping costs, storage and warehousing overruns, demurrage and detention charges, increased insurance costs, etc. The core issue is whether such incremental costs should be absorbed by the local UAE entity, passed on to customers, or borne by the principal entity.This becomes particularly complex where UAE entities are structured as limited risk distributors (‘LRDs’) or routine service providers. While contractual arrangements may assign limited risks to the UAE entity, actual business conditions may require it to incur extraordinary costs that were not anticipated in the original transfer pricing model. This creates pressure on whether year-end adjustments or revised pricing mechanisms are required to maintain arm’s length outcomes.
From a transfer pricing perspective, the critical question is how independent parties would have dealt with similar cost pressures. In normal circumstances, costs such as freight or fuel or logistics, may be considered routine. However, under extraordinary situations, these may include extraordinary or non‑recurring elements. Under comparable circumstances, independent parties would typically respond by renegotiating contracts, applying temporary surcharges, or adjusting margins to reflect the changed risk environment. Transfer pricing models are therefore expected to reflect this commercial behavior.
In this context, the taxable person should clearly identify and separate extraordinary costs from routine operating expenses, determine whether such costs should be retained in the UAE or recharged within the group, and assess whether benchmarking adjustments are required to account for the lack of comparability between disrupted and stable market conditions.
Tax authorities may closely examine whether these costs should properly sit with the UAE entity or be compensated by the principal entity that exercises control over key strategic and commercial decisions. This analysis typically depends on whether the UAE entity had any control over the underlying events giving rise to the costs and whether an independent party in a similar position would have been able to avoid or pass on such expenses. Accordingly, robust documentation, clear evidence of market wide disruption, and well supported functional and economic analysis are essential to justify any cost allocation or reimbursement within the group.
Reassessment of functional and risk profiles
This creates a key transfer pricing consideration around whether the existing functional and risk profile of the entities involved in the transaction remains accurate. If an entity is effectively exercising greater control over supply chain decisions or bearing additional commercial risks, its remuneration may need to be adjusted accordingly. Conversely, if losses are incurred, it becomes important to assess whether such losses are consistent with the entity’s contractual risk profile or whether a recharacterisation of functions is required.
Reliability of benchmarking analysis
This raises a key challenge for taxpayers and tax authorities whether existing comparables remain valid under current economic conditions. In many cases, pre-disruption benchmarking sets may no longer reflect current market realities, especially in industries such as logistics, trading, and manufacturing. As a result, taxpayers may need to reassess their benchmarking approach, potentially using updated data sets, multi-year analysis, or alternative profit level indicators to support their transfer pricing positions.
Justification of reduced margins and losses
From a transfer pricing perspective, tax authorities may question whether a routine or limited risk entity should experience declining margins or losses. Businesses must therefore demonstrate that such financial outcomes are commercially justified, consistent with the entity’s functional and risk profile, and reflective of broader market conditions. This may include analysing whether independent parties operating in similar industries and under comparable circumstances also experienced reduced profitability during the same period.
Tax authorities may also examine whether the reduced margins or losses indicate that the existing transfer pricing model no longer aligns with the actual conduct and economic reality of the business. Accordingly, maintaining adequate supporting documentation, including financial analysis, industry trends, and benchmarking support, is essential to substantiate the arm’s length nature of the reduced returns.
Revisiting intercompany agreements
From a transfer pricing perspective, it is important that intercompany agreements accurately reflect the actual conduct of the parties and the current economic reality of the business. Where entities have assumed additional functions, managed new risks, or incurred unexpected costs during periods of disruption, existing agreements may no longer align with the operational arrangements followed in practice.
Businesses should therefore review whether intercompany agreements appropriately address matters such as allocation of extraordinary expenses, revised pricing mechanisms, risk allocation, compensation adjustments, and changes in functional responsibilities. Tax authorities may closely examine whether contractual terms are consistent with the actual behaviour of the parties, particularly where profitability outcomes have changed significantly.
Accordingly, multinational groups should ensure that intercompany agreements are updated on a timely basis and supported by appropriate transfer pricing analysis and documentation.
Economic Adjustments
One important consideration is capacity utilisation adjustment. Many businesses may operate below normal production or operational capacity due to supply shortages, delays in raw material availability, or reduced market demand. In such situations, fixed operating costs may be disproportionately high compared to normal business conditions, resulting in distorted profit margins. Capacity utilisation adjustments may therefore be necessary to improve comparability with independent companies operating under different levels of utilisation.
Another key consideration is working capital adjustment. Supply chain disruptions may lead to higher inventory holding periods, delayed receivables collection, or changes in payment cycles. These factors can materially affect profitability and may impact the comparability of financial results between related-party entities and independent companies. Working capital adjustments may therefore be required to account for differences in inventory levels, receivables, and payables.
In certain cases, businesses may also consider whether financial results for particularly affected periods should be excluded or separately evaluated for benchmarking purposes. Exceptional periods of disruption may distort profitability to such an extent that the financial performance may not represent ordinary business operations. Tax authorities, however, are likely to closely scrutinise the rationale for excluding or adjusting financial data, and therefore robust supporting analysis and documentation are essential.
Accordingly, businesses operating in the UAE should carefully evaluate whether economic adjustments are necessary to improve the reliability of benchmarking analyses and ensure that transfer pricing outcomes appropriately reflect prevailing market conditions.
Permanent establishment risks
This creates potential permanent establishment (‘PE’) risks from both a corporate tax and transfer pricing perspective. Tax authorities may examine whether the presence of employees in a particular jurisdiction results in the creation of a taxable presence for a foreign group entity, particularly where employees are involved in decision making, contract negotiation, or revenue generating activities.
For multinational groups operating in the UAE, this may become relevant where personnel displaced from overseas entities begin managing regional operations or conducting strategic activities from the UAE. Similarly, UAE entities with employees temporarily operating in other jurisdictions may also face exposure to PE risks outside the UAE.
From a transfer pricing perspective, displacement of employees may also impact the functional profile of the entities involved. If key functions, risks, or decision making activities shift between jurisdictions, the existing transfer pricing model may no longer accurately reflect the actual business operations and allocation of value within the group.
Intercompany financing and working capital pressures
This raises important transfer pricing issues around interest rates, credit risk, and the economic substance of financing activities. It must be assessed whether the pricing of intercompany loans must reflect arm’s length conditions, taking into account heightened risk profiles and market liquidity constraints.
Documentation and audit preparedness
Robust transfer pricing documentation should include detailed functional analyses, economic explanations for deviations from expected margins, benchmarking updates, and evidence supporting extraordinary cost allocations. Without adequate documentation, businesses face increased risk of transfer pricing adjustments during audits.
Key practical takeaways
Below are key practical takeaways for taxable persons operating in the UAE to manage transfer pricing risks arising from the current supply chain disruptions and the evolving economic conditions:
- Reassess existing transfer pricing policies to ensure they reflect current economic and business conditions.
- Review the allocation of extraordinary expenses such as increased freight, warehousing, insurance, and logistics costs.
- Evaluate whether UAE entities are performing additional functions or assuming greater risks than originally intended.
- Revisit intercompany agreements to ensure they align with actual business conduct and operational changes.
- Review benchmarking studies and consider economic adjustments such as capacity utilisation adjustments, working capital adjustments, and exclusion or separate analysis of abnormal financial periods.
- Maintain robust documentation to support reduced margins, operating losses, pricing adjustments, and extraordinary cost allocations.
- Monitor employee movement and cross-border working arrangements to assess potential permanent establishment risks.
- Conduct periodic reviews of transfer pricing models to ensure ongoing compliance with UAE Corporate Tax and OECD aligned principles.
Conclusion
The current geo-political situation and ongoing global supply chain disruptions have significantly increased transfer pricing challenges for companies operating in the UAE. Rising costs, operational uncertainty, changes in business functions, and increased volatility in profitability have created greater complexity in determining arm’s length pricing outcomes.As the UAE continues to strengthen its corporate tax and transfer pricing framework in line with OECD standards, businesses will be expected to demonstrate that their transfer pricing policies accurately reflect economic reality, actual conduct, and prevailing market conditions. Areas such as allocation of extraordinary expenses, justification of reduced margins and losses, economic adjustments, intercompany financing, and permanent establishment risks are likely to attract increased scrutiny from tax authorities.
Multinational groups should adopt a more dynamic and commercially aligned approach to transfer pricing, supported by robust documentation, updated intercompany agreements, and regular review of pricing models. A proactive approach to managing transfer pricing risks will be essential for UAE businesses to ensure compliance and minimise potential disputes.