TP Risks in Intercompany Transactions

Introduction

Intercompany transactions form the backbone of many multinational business operations. These transactions involve the transfer of goods, services, financing, and intellectual property between related parties. While they are vital for efficient resource sharing and global operations, they also create significant Transfer Pricing (TP) risks.

Under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), such related-party transactions must comply with the arm’s length principle, consistent with OECD Transfer Pricing Guidelines. Failure to comply may result in FTA adjustments, penalties, and reputational damage.

Major Risks in Intercompany Transactions

1. Incorrect Pricing of Goods and Services

Risk of setting prices above or below fair market value in related-party sales or purchases.

Example: Selling goods at artificially low prices to shift profits into the UAE entity.

Impact: Tax adjustments by the FTA, disallowance of deductions, or upward revision of taxable income.

2. Improper Cost Allocations

Shared services such as administration, IT, or R&D must be allocated using reasonable and transparent methods.

Charging for shareholder activities (which provide no direct benefit) is non-compliant.

Impact: Denial of deductions and higher scrutiny from the FTA.

3. Mispricing of Intangible Assets

Valuing intangibles like brands, trademarks, and patents is complex.

Undercharging or overcharging royalties can erode the UAE tax base.

Impact: Non-deductibility of royalty payments, reallocation of profits, or double taxation.

4. Intra-Group Financing Risks

Loans, cash pooling, and guarantees are often mispriced or unsupported.

Common issues: interest-free loans, excessive interest rates, or unsubstantiated guarantee fees.

Impact: Denial of interest deductions, thin capitalization issues, and penalties.

5. Lack of Economic Substance

TP rules require income to align with functions, assets, and risks.

Profits allocated to shell or low-substance entities will not withstand audit scrutiny.

Impact: Profit reallocation by the FTA and disqualification of structures.

6. Documentation Gaps

Even at arm’s length, missing or weak documentation exposes businesses to adjustments.

UAE requirements include:

Local File

Master File

Country-by-Country Report (for groups with consolidated revenue ≥ AED 3.15 billion)

Impact: Penalties, presumptive assessments, and reputational harm.

7. CbC Reporting Inconsistencies

Inconsistencies between Local File, Master File, and CbC reporting increase audit risk.

Impact: Regulatory scrutiny and potential double taxation.

Best Practices to Manage TP Risks

Benchmark Transactions using reliable market databases and update annually.

Substantiate Cost Allocations with transparent methodologies.

Draft Intercompany Agreements aligned with economic substance and benchmarking.

Maintain Robust Documentation (Local File, Master File, CbC reporting).

Use Advance Pricing Agreements (APAs) for certainty in complex transactions.

Conduct Annual TP Risk Reviews to identify and mitigate compliance gaps.

Conclusion

Transfer Pricing risks in intercompany transactions are unavoidable but manageable. With the UAE Corporate Tax regime now fully in place, businesses must ensure compliance with arm’s length pricing, documentation, and substance requirements. By doing so, companies not only avoid penalties but also build sustainable tax strategies.

✍️ Prepared by Sheikh Anwar Accounting and Auditing LLC – Registered Auditor with the Ministry of Economy (Auditor Entry No. 5817, Company Entry No. LC4695-01). We are UAE specialists in Corporate Tax, Transfer Pricing, VAT, and AML Compliance, trusted by businesses across gold, diamond, trading, and service sectors.

🌐 Visit us: www.sa-auditors.com