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Companies in Multiple Countries? Beware of Transfer Pricing

Do you own or plan on owning companies in multiple countries?

If so, you may be interested in trading between those companies, and setting prices for the goods and services you trade at levels that shift profits from companies located in high-tax countries to companies in low-tax countries.

The practice of shifting profits between companies for tax purposes is called transfer pricing.

If you are planning to engage in transfer pricing, be careful. Governments in high-tax countries have introduced strict anti-transfer pricing regulations.

In this article, we are covering the basic principles behind transfer pricing.

Transfer pricing regulations address the prices at which products and services are traded at between related business entities.

An Example Based on a UK Business Group with a UAE Subsidiary

Let's consider a hypothetical example of a UK-based multinational company that has a subsidiary in the UAE.

The UK company manufactures sporting goods, while its UAE subsidiary handles the distribution of these products in the Middle East region.

For tax purposes, it would be advantageous for the UK-based company to sell the products to the UAE-based company at the lowest possible price.

This way, profits are shifted from the UK to the UAE.

In the UAE, the profits are earned tax-free, and can then be reinvested or distributed to shareholders.

Governments of high-tax countries use transfer pricing regulations to prevent this disproportionate movement of profits to low-tax countries.

The Arm's Length Principle

A pillar of transfer pricing regulations is the arm’s length principle, which states that any goods sold between connected companies must be exchanged at market value.

In other words, the prices should be set as if the two related companies were independent entities engaged in similar transactions under similar market conditions.

This principle ensures that profits are “fairly” distributed among the entities involved and prevents the manipulation of prices to minimize tax obligations.

In the UK or any other Western country, if you own a larger company with international subsidiaries, you need to maintain comprehensive documentation to demonstrate that you comply with the arm's length principle. The documentation should include details of the company's transfer pricing methodology, analysis of comparable transactions, and any adjustments made to ensure compliance.

Transfer pricing regulations are broadly similar across developed countries, as in many cases, they are drafted and proposed by the Organisation for Economic Co-operation and Development, or OECD in short.

The UAE adheres to the same OECD transfer pricing rules in return for not being blacklisted by Western governments as a tax haven.

If you own a company outside the UAE and plan to set up a subsidiary in the UAE or relocate your business altogether, you need to be careful.

Without proper strategies and planning, you are at risk of running afoul of tax and transfer pricing regulations.

The good news is that with proper strategies in place, you can run your international businesses virtually tax-free, all 100% legal.

This is where we can help. At The Dubai Navigator, we help clients relocate their business and or residence to Dubai, and reduce their taxes in the process.

We handle everything from drafting bespoke tax strategies to incorporating companies.

We also offer a variety of complementary services, from property investment strategies to tax-optimized stock investment strategies, as well as international estate planning.


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