As June approaches, we are four months from the filing deadline faced by the majority of the country's businesses.
Of course, it would be far better for everyone concerned if they didn’t wait until the final weeks to file returns. Hundreds of thousands of entities trying to submit documents at the same time might cause a strain on the online systems that must be used to complete the process.
Having managed many corporate tax returns already, the one element confusing people the most is arm’s length trading. While I have written about elements of transfer pricing in the past, the subject is so broad that it could have its separate regular column.
Today, I want to address the topic from two fronts. Firstly, explaining what it is and why it matters. Secondly, with so many people and their businesses moving to the UAE, why these types of migration come with their own compliance frameworks. Yes, very often it’s plural.
An arm’s length transaction means the seller would charge the same price to all buyers. This is where the goods or services are of the same value and volume for all purchasers. Delivery can be anywhere in the world.
For simplicity, imagine that the seller faces no competition. You either purchase from this entity or go without. That means it is extremely difficult to conceive of a circumstance where there would be different pricing for different people.
I hear you say: “How about if it’s a family member or close friend? Am I not allowed to sell my wares for whatever price I like?” Interestingly, you are. Unless it’s a legislated government-controlled item and there are few of these.
While you can set whatever price you like to whomever you like, for tax purposes, the regulatory authorities want to be assured that you are not setting the price with an objective of gaining a tax advantage.
Therefore, in your reporting, you would need to account for any changes in pricing driven by familiarity with one or more customers so that your UAE tax liability is not affected.
How is that done? My advice is not to do it in the first place. If reviewed in an audit, this type of activity will raise questions that will remove you from driving your business forward.
You might understand how trading with family members is a regulated space, but at what level of relationship does a friend get covered by the same requirements?
To avoid doubt, a relation is anyone from great grandfather to great grandchild, and an individual to their second cousin twice removed. That said, what is the equivalent measurement for friends?
I have not been able to find anything specific, however, transactions might be challenged if discrepancies in pricing are discovered and it is found that two parties know each other.
Where ambiguity like this is found to exist and the amounts are sufficiently material, it would likely be inevitable that the matter might end up in court, with an adjudication being made in adherence to the spirit of the law.
On to our second topic. An individual with an existing business in Europe has decided to move to the UAE. The intent is to replicate the operation of the original company.
The first emigration is that of the business owner. For tax purposes, you cannot simply leave one country, particularly where you are a national, and move to another. There are rules and processes, coupled with much careful planning that is required to minimise having to satisfy two nations’ reporting regimes simultaneously.
While the foundational rules for this are reasonably similar in approach by most countries, there can be variability and continuing evolution. For example, when moving to the UAE, how many days of a tax year have you spent in the country you are leaving before you can avoid being a tax resident in that year?
A potential second emigration is that of your business. This occurs if you seek to close the existing one and open it in the UAE. That will likely be deemed a sale. Sometimes the old business continues, there might be employees and certain customers who refuse to move, while a carbon copy is set up in the UAE.
It’s inevitable that some trading among the entities, management and operational staff will be shared and you have to now prove that transactions are being conducted at arm’s length plus a connected party operating in two jurisdictions. This can be very messy. Get help.
