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Transfer pricing has become a key area of focus under the UAE Corporate Tax regime, particularly for businesses undertaking transactions with related parties. While many organisations understand that upward transfer pricing adjustments can increase taxable income, fewer realise that downward adjustments are not automatically accepted. In the UAE, businesses seeking to reduce taxable income through a downward transfer pricing adjustment must first obtain approval from the Federal Tax Authority (FTA) before reflecting the adjustment in their Corporate Tax return. Understanding this process is essential for businesses aiming to avoid double taxation while remaining fully compliant with UAE tax legislation.
What Is a Downward Transfer Pricing Adjustment?
Correcting taxable income
A downward transfer pricing adjustment reduces a taxpayer's taxable income by adjusting the value of a related-party transaction to reflect the arm's length principle. These adjustments may arise when a transaction has previously been priced above its arm's length value or when a corresponding adjustment is required following an upward adjustment made elsewhere within a related group.
The objective is to ensure that profits are taxed fairly without creating unintended double taxation.
Different treatment from upward adjustments
Under the UAE Corporate Tax framework, upward transfer pricing adjustments that increase taxable income are generally self-assessed by the taxpayer. Downward adjustments, however, are treated differently because they reduce the tax base and therefore require additional regulatory oversight.
Why Is FTA Approval Required?
Prior approval before reporting
Businesses cannot simply include a downward transfer pricing adjustment in their Corporate Tax return. Before claiming the adjustment, approval must first be obtained from the Federal Tax Authority. Without this approval, the adjustment should not be reported as part of the tax return.
This requirement helps ensure that reductions in taxable income are supported by appropriate evidence and comply with the UAE's transfer pricing rules.
Preventing inappropriate tax reductions
The approval process enables the FTA to review whether the proposed adjustment accurately reflects the arm's length principle and whether it is supported by sufficient commercial and economic justification.
When Can a Downward Adjustment Be Accepted?
Identifiable assets or deductible costs
To obtain approval, the taxpayer must generally demonstrate that the value being transferred relates to identifiable assets, deductible expenditure, or amortisable assets, whether tangible or intangible. The adjustment should be capable of being clearly allocated to specific economic value.
If no identifiable asset, cost, or deductible expenditure can be demonstrated, the FTA may decline the request for a downward adjustment.
Supporting evidence is essential
Businesses should be prepared to provide comprehensive documentation supporting both the commercial rationale and the valuation methodology used. Functional analysis, comparable market data, and independent valuation evidence may all form part of the supporting documentation required.
Avoiding Double Taxation
Corresponding adjustments within related groups
One of the most common situations where a downward adjustment may arise is when another related party within the group has already made an upward transfer pricing adjustment. Without a corresponding adjustment where appropriate, the same profits could effectively be taxed twice.
The UAE's approval mechanism provides a pathway for businesses to seek relief, provided the relevant legislative requirements are satisfied.
Transfer Pricing Disclosure Requirements
Related Party Transaction Schedule
Businesses whose aggregate related-party transactions exceed AED 40 million are generally required to submit a Related Party Transaction Schedule as part of their Corporate Tax compliance obligations. This schedule includes disclosure of related-party transactions and the corresponding arm's length values.
Any transfer pricing adjustments should be accurately reflected within the required reporting framework, subject to the applicable rules and approval requirements.
Documentation obligations
The UAE transfer pricing framework broadly aligns with the OECD's internationally recognised three-tier documentation approach, which includes the Master File, Local File, and Country-by-Country Reporting requirements where applicable. Maintaining comprehensive documentation is essential for demonstrating compliance with the arm's length principle during any regulatory review.
Practical Steps for Businesses
Review related-party transactions regularly
Businesses should periodically assess whether related-party transactions continue to reflect arm's length pricing and whether any adjustments may be necessary before Corporate Tax returns are prepared.
Prepare supporting documentation early
Transfer pricing analyses, valuation reports, and functional assessments often require considerable time to prepare. Early planning helps avoid delays if approval is required before filing.
Seek professional guidance
Given the technical nature of transfer pricing, obtaining specialist advice can help businesses evaluate whether an adjustment is appropriate, prepare the required documentation, and manage communications with the FTA where approval is required.
How Danix Consultancy Can Help
Supporting Corporate Tax and transfer pricing compliance
Transfer pricing requirements form an increasingly important part of the UAE Corporate Tax regime. Danix Consultancy assists SMEs and growing businesses with Corporate Tax advisory, accounting, bookkeeping, financial reporting, and compliance support. By helping businesses maintain accurate records, review related-party transactions, and strengthen tax governance, Danix Consultancy enables organisations to manage evolving regulatory obligations with greater confidence.
Conclusion
Downward transfer pricing adjustments can provide important relief from double taxation, but they are not automatically available under the UAE Corporate Tax framework. Businesses must obtain prior approval from the Federal Tax Authority before including these adjustments in their Corporate Tax returns and should ensure they have robust documentation to support their application. Taking a proactive and well-documented approach to transfer pricing compliance will help businesses reduce tax risk while maintaining confidence in an increasingly sophisticated regulatory environment.
