Transfer pricing in UAE: FTA clarified the procedure for reporting downward adjustments to controlled transactions in corporate tax returns

The UAE Federal Tax Authority (FTA) issued Public Clarification CTP011, which addresses downward transfer pricing (TP) adjustments reported independently by taxable persons in their corporate tax returns.

CTP011 confirms that taxable persons may decrease their taxable income for corporate tax purposes to align controlled transactions with the arm’s length principle without obtaining prior approval from the FTA. However, such adjustments are subject to mandatory disclosure and must be supported by robust documentation.

Background

Pursuant to paragraph 1, Article 34 of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the Law), transactions and arrangements between related parties must comply with the arm’s length principle.

Where the value of an intra-group transaction recorded in the financial statements is not at arm’s length, the taxable person is required to make an appropriate adjustment when calculating its taxable income. Such an adjustment may either:

• Increase taxable income (an upward adjustment), or
• Decrease taxable income (a downward adjustment)

CTP011 focuses specifically on the second case.

Key points

Adjustments within the scope of CTP011

CTP011 applies exclusively to self-initiated adjustments taxable persons make to comply with the arm’s length principle in accordance with paragraph 1, Article 34 of the Law.
CTP011 does not extend to:

• A corresponding adjustment made by the FTA following an adjustment to the taxable income of the UAE resident transaction counterparty under paragraph 10, Article 34 of the Law
• An adjustment made by the UAE resident following a primary adjustment by a foreign tax authority under paragraph 11, Article 34 of the Law

Consequently, CTP011 applies solely to scenarios where a taxable person initiates a primary adjustment to its taxable income, and extends to neither corresponding (symmetrical) adjustments falling under the responsibility of the tax authority nor those requiring a separate application by the taxable person (e.g., through the mutual agreement procedure).

Practical implications for businesses

While CTP011 confirms that taxable persons may independently decrease their taxable income, it also establishes a high standard of proof. Downward adjustments are likely to be closely scrutinized by the FTA, as they directly reduce the corporate tax amount.

Prior to submitting the tax return, taxable persons are recommended to:

• Identify all intra-group transactions that do not comply with the arm’s length principle
• Separately identify transactions that require a downward adjustment
• Verify the appropriateness of the functional analysis and the selected TP method
• Update or prepare a relevant benchmarking study (arm's length prices/profitability analysis)
• Document the reasons for the deviation between the actual and arm’s length values
• Coordinate the corresponding adjustment with the counterparty to the transaction
• Prepare a reconciliation between the financial statements and the tax return
• Disclose all affected transactions irrespective of their value, and
• Retain supporting documents for the period prescribed by law

Our comment

CTP011 confirms that taxable persons are entitled to independently report downward TP adjustments without seeking prior approval from the FTA. However, the ability to decrease taxable income entails stricter disclosure and documentation requirements.

Before submitting the tax return, a company must ensure that:

• The adjustment is supported by an arm’s length price or profitability analysis for the controlled transaction.
• A reconciliation is prepared between the financial statements and the tax return.
• The transaction is disclosed irrespective of its value.
• There is confirmation that a corresponding upward adjustment has been made by the UAE resident counterparty to the transaction.

Please note that CTP011 does not contain specific provisions or restrictions on the applicability of downward adjustments to transactions with foreign counterparties. Nevertheless, TP approaches generally practiced by tax authorities in other jurisdictions suggest that the FTA may challenge such adjustments.

We recommend adopting a highly conservative approach when determining the amount of downward adjustments for transactions with foreign counterparties, and preparing all necessary documentation to substantiate the adjustment amount.