FACEBOOK Vs IRS on CSA – RECALIBRATING ARM’S LENGTH STANDARDS

A. Introduction

The United States tax court (“the court”) had issued a landmark ruling in the case of Facebook Inc., (“FB US” / MS.NITHYA SRINIVASAN & CA. S. RANJANI “Petitioner”) which is significant in the transfer pricing arena on CSAs. The epicentre of the ruling deals with the manner of valuation of intangible property rights transferred to FB US’s Irish subsidiaries who are forming part of Cost Sharing Arrangement (“CSA”)

Among various other things, the court opined on the method of valuation by drawing reference to the 2009 US cost sharing regulations, where the court challenged only the manner of application of the income method while prima facie validating the selection of method.

The ruling throws light on certain crucial aspects such as selection / application of method of valuation, IRS’s regulatory power, arm’s length principles, etc., which might have an impact on the approach towards Cost sharing arrangement transactions globally.

B. Background:

a. Overview

The ruling throws light on certain crucial aspects such as selection / application of method of valuation, IRS’s regulatory power, arm’s length principles, etc., which might have an impact on the approach towards Cost sharing arrangement transactions globally.

In 2010, FB US entered into a CSA and two related license agreements with its Irish subsidiaries i.e., Facebook Ireland Holdings Unlimited (FIH) and Facebook Ireland Limited (FIL), collectively referred to as “FB Ireland.” The arrangement was executed for developing FB’s platform technology i.e. Facebook Online Platform (FOP) Technology, including hardware and software components wherein FB US retained the rights to exploit the cost-shared intangibles in the U.S. and Canada, while FB Ireland obtained the rights for Rest of the world (ROW) territories. In connection with CSA FB US and FB Ireland entered into multiple agreements including the FOP Technology License, the UBMI License, and the Data Hosting Services Agreement (DHSA).

As per the CSA, FB US was to be remunerated by FB Ireland in the form of:

• Platform Contribution Transactions (PCTs): Payments for the pre-existing intangibles contributed by FB US, including the FOP technology, user data, and marketing intangibles.
• Cost Sharing Transactions (CSTs): Ongoing payments for Intangible Development Costs (IDCs), based on FB Ireland’s Reasonably Anticipated Benefit (RAB) share.

b. Pre-CSA Structure and intercompany arrangements

Prior to CSA in 2010, FB US as a part of its expansion of global operations, in 2008, established Facebook Ireland Limited (FIL) as its operating entity in Ireland, followed by the incorporation of Facebook Ireland Holdings Unlimited (FIH) in early 2009. FIH acted as a holding company and did not have employees, while FIL functioned as the entity performing routine sales and marketing support. From 2009 onwards, FB US entered into the following intercompany agreements with FB Ireland entities:

Arrangement	Description & Pricing policy
Sales and Marketing Services Agreements	• Promoting FB’s products and services in ROW territory • FB Ireland was compensated on a cost-plus basis
Statement of Rights and Responsibilities	Formalized Facebook Ireland’s operational responsibilities
Technology licenses	Gave Facebook Ireland limited rights to assist in regional marketing and business development

Despite these arrangements, FB Ireland did not own or develop any intellectual property prior to the CSA, and it has not employed any asset other than cash and intercompany receivables

Interestingly FIL became a disregarded entity for U.S. tax purposes effective September 1, 2010, just two weeks prior to the execution of the CSA which facilitated the centralization of rights in FIH and simplified the legal structure. Until the CSA became effective, FB Ireland performed only routine functions and bore limited risks. This historical profile underpinned the IRS’s argument that Facebook Ireland did not contribute non-routine value to the CSA and should be treated as a routine participant.

c. Issue under consideration

As per the Transfer pricing documentation of FB Ireland, it has made contingent annual payments to FB US towards the PCT, based on a Net Present Value (NPV) of $6.3 billion by adopting an unspecified method.

The IRS (“Respondent”) challenged both the valuation method and key assumptions, thereby upholding a much higher PCT value of $19.945 billion.

The prime contention of FB US was that the IRS improperly applied the income method by selecting the wrong values for three key inputs:

• IRS overstated FB Ireland’s future income potential by including speculative “Other Revenue” streams.
• IRS used an unrealistically low discount rate that failed to reflect market and firm-specific risk faced by FB Ireland
• IRS erroneously characterized FB Ireland as a contract service provider and claimed its best alternative was a third-party reseller relationship that would justify a much higher residual return.

b. Key disputes

At this outset the key disputes emanated from the ruling are:

1. Whether the IRS’s income method under the 2009 cost sharing regulations was the best method?
2. Whether the three inputs adopted by IRS were reliable and whether the IRS’s adjustments and interpretations were legally permissible
3. Whether the contribution made by FB Ireland is justified and aligned with its characterization i.e., if it is a true contributor for the development of the platform?

4. Whether FB used the correct discount rate for valuing the PCT under the CSA, especially the Beta input in the CAPM model, since Facebook was not publicly traded and its Beta could not be directly determined?

A quick glance of the key disputes and corresponding position / contention of the court is provided on the table below:

Key dispute	Court’s position / contention
Income method adopted by IRS under 2009 cost sharing arrangements	• The Court affirmed that FB US was the only party to make a non-routine contribution to the platform and hence the income method under § 1.482-7T(g)(4) was validly applied with modification to the inputs. • Opined that since platform contribution comprised of FOP, user rights, marketing intangibles which are interlinked, a bundled approach under the Income method would be best suited
Reliability of the inputs adopted by IRS and whether the IRS’s adjustments and interpretations were legally permissible	• Method selection was appropriate whereas the manner of application of the same by IRS was flawed. • Valuation inputs used by IRS i.e., revenue projections, discount rates, and growth assumptions, were economically unreasonable thereby inflating the value
Justification of payment made by FB Ireland’s to FB US in alignment with its value contribution	• Opined in IRS’s favour by stating that FB US is the only contributor to the platform whereas FB Ireland did not perform any development activities in alignment to its characterization. Hence IRS’s manner of reallocation of returns among FB US and FB Ireland was justified. • Accordingly, the court upheld IRS’s contention of increasing FB US’s RAB share, subject to corrected inputs

A deep dive into these aspects is discussed in the ensuing paragraphs.

C. Analysis and Court’s standpoint

The Court conducted a rigorous evaluation of the financial, operational, and functional characteristics of FB US and FB Ireland in relation to the CSA.

a. 2009 Cost sharing regulations (2009 Regs”)

Definition of arm’s length result

Arm’s length result in connection with a CSA is defined in the 2009¹ Regs states that

“A CSA produces results that are consistent with an arm’s length result within the meaning of § 1.482-1(b)(1) if, and only if, each controlled participant’s IDC share . . . equals its RAB share, each controlled participant compensates its RAB share of the value of all platform contributions by other controlled participants, and all other requirements of this section are satisfied”

From the above it can be inferred that PCT allocations are intended to ensure that the participant of the CSA compensates RAB share value of platform contributions. Further the 2009 Regs authorizes the commissioner to make necessary allocations to adjust the result of a PCT / CST to ensure consistency with arm’s length result.

Classification of contributions

Court analysed the IRS’s Cost Share Transactions (“CST”) allocation and the veracity of the method adopted by drawing reference to classification of types of assets that CSA participants contribute to a CSA (i.e., Platform contributions, user rights, FOP technology and RAB share of IDC as per the 2009 Regs.

Platform contributions and operating contributions are external to the CSA while cost contributions and operating cost contributions are made as part of the CSA. They contribute to Development / Exploitation of the intangibles as below:

• Development – Platform contributions and Cost contributions
• Exploitation – Operating cost contributions and Operating contributions

Aggregation of Contributions:

Considering the interlink between the FOP technology, user rights base, and marketing intangibles, the Court opined that valuation should occur on an integrated basis i.e., bundled approach like Income method and not as separate streams of intangibles

Regulatory Validity

The Court carefully reviewed the framework of the 2009 Regs in alignment with the US Treasury regulations and found them to be

a reasonable interpretation of IRS S 482 and thereby rejected arguments of the Petitioner that the regulations contravenes the arm’s-length principle.

b. Reliability of inputs adopted by IRS

• Revenue Projections: The Court found the IRS’s inclusion of $1.9 billion in Other Revenue unjustified, as it comprised aspirational figures added by Facebook’s CEO and was not linked to any specific resource, capability, or right developed or maintained by FB US. This inclusion unrealistically inflated the anticipated benefits to Facebook Ireland.
• Discount Rate: The Court favoured the 17.7% discount rate proposed in Facebook’s transfer pricing documentation, as it accurately reflected the systemic and company-specific risks. It rejected IRS’s lower market-based rate, balancing the inputs to reflect realistic investment returns.
• Best Realistic Alternative: FB Ireland was neither merely a reseller (as FB contended) nor merely a contract service provider (as IRS argued). The Court arrived at a mid-point by selecting advertising agencies as a comparable and established a 13.9% cost-plus markup that better reflected entrepreneurial risk.

c. FB Ireland’s remuneration

Substance over form

Despite the terms of the arrangement between FB US and FB Ireland as per the CSA, the Court placed reliance on the FAR analysis of FB Ireland wherein it performed only routine functions and bore limited risks. Basis this strong footing, the Court held that FB Ireland did not make any platform contribution under the CSA as it did not own or develop any intangibles. The Court emphasized that contributions to a CSA must involve valuable, pre-existing intangibles and that mere participation or funding of future development does not qualify as a Platform Contribution. Accordingly, ownership rights and economic returns must be aligned with the actual functions, assets, and risks borne by the parties. RAB Share Methodology

The Court endorsed IRS’s use of a perpetual NPV approach based on of projected gross profits over the entire period of exploitation to estimate Reasonably Anticipated Benefits but insisted on use of corrected inputs. It found that the IRS’s approach yielded a reliable and regulation-consistent output.

d. Court’s conclusion

While Facebook had valued the PCT Payment at $6.3 billion, the Court concluded that the correct amount to be $7.786 billion (higher than original figure purported by FB US, however much lower than the amount asserted by IRS) by applying the income method with refined inputs.

The CST Payment and RAB share of 53.5% (as against 44% of FB US) were similarly upheld, with adjustments as needed. The Court issued a Rule 155 order directing both parties to recompute tax liability using the Court-approved framework.

e. Our observations and key takeaways

The ruling is a reminder that the tax authorities can recharacterize intercompany payments and revise allocations years after the transaction, based on updated or actual financial outcomes. Multinationals (MNEs) entering into CSAs must be mindful of the fact that irrespective of the method adopted, the MNEs to be able to justify the numbers / inputs used in application of such method.

In this ruling the US tax court has opined the manner of relying on ex-post outcomes wherein it has stated that inference can be

made from post-transaction to validate the reasonableness of an assumption, however using it as an input into the valuation model is objectionable. This calls for meticulously documenting not only the basis for their original assumptions but also anticipate how those assumptions could be challenged in hindsight.

In the light of OECD’s 2022 guidelines on Hard to Value Intangibles (HTVI), this ruling underscore the importance of using reliable assumptions about future outcomes when valuing intangibles. The Court’s critical opinion on the unrealistic financial and growth assumptions of the Petitioner is in alignment with the OECD’s Guidelines on HTVI wherein it states that where reliable ex-ante projections are unavailable or flawed, tax administrations may use ex-post outcomes (actual results) to evaluate the reasonableness of the pricing of intangibles.

Points to ponder

• MNEs must prepare thorough contemporaneous documentation that supports projections, discount rates, and comparables, so as to ensure that their contemporaneous documentation can endure the retrospective analysis.

• All inputs used in transfer pricing analysis must be internally consistent and supported by documentary evidence because even if a methodology is accepted, flawed inputs can undermine the reliability of the result.
• Taxpayers must ensure that intercompany agreements and payments reflect the underlying economic arrangements, rather than relying solely on labels or formal structures.
• Courts may favor bundled valuation where intangibles are economically interdependent / interrelated.
• The Court’s willingness to select a middle-ground comparable (advertising agencies) signals that hybrid economic realities must be accommodated.

(Inputs contributed by V. Bharathi – Transfer Pricing Associate at VSTN Consultancy Private Limited.

The authors are part of VSTN Consultancy Private Limited, Transfer Pricing boutique firm and can be reached at snithya@vstnconsultancy.com, ranjani@vstnconsultancy.com and bharathiv@vstnconsultancy.com)

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As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

India | UAE | USA | KSA | Dubai | Asia Pacific | Europe | Africa | North America

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

Contact us today to explore how we can partner with you to optimize your global transfer pricing approach.

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ITR WORLD TAX

Key Transfer Pricing Considerations – UAE Landscape

28 July 2025 | by VSTN Consultancy – India

Tags: VSTN Consultancy Nithya Srinivasan India General corporate tax Tax Transfer pricing Banking Financial services Investment management and funds

The UAE’s Corporate Tax regime, which was introduced in 2022, has ushered in Transfer pricing regulations for UAE businesses, that are applicable to taxpayers having related party transactions – within UAE or across the borders. The UAE Transfer Pricing regulations clearly cast the onus on the taxpayer to ensure that all related party transactions adhere to arm’s length principle. Further, the FTA (Federal Tax Authority) in the UAE Transfer pricing Guide categorically lays down that taxpayers have to maintain contemporaneous transfer pricing documentation for their related party transactions and transactions with connected persons to demonstrate compliance with transfer pricing regulations (Section 6.3 of the UAE TP Guide).

Another key transfer pricing compliance is the filing of Disclosure Form for transactions with Related Parties and Connected Persons. The Disclosure form is part of the Corporate Tax return and is part of the annual tax compliance. For the accounting period / year ending December 2024, the first due date for filing Corporate Tax return is September 30, 2025.

With statutory audits coming to a close for business having accounting period as year ended December 2024, the Statutory Auditors have also been requesting and examining the transfer pricing documentation maintained by the business for determining the arm’s length nature of related party transactions.

Therefore, businesses must diligently assess and ensure that all the relevant related party transactions are accurately identified, and arm’s length nature of these transactions are appropriately determined and contemporaneously documented.

In this light, some of key aspects and nuances that warrant careful consideration in relation to related party transactions in UAE transfer pricing arena is captured below.

A. Compensation to Key Managerial Personnel (‘KMP’)

One of the unique aspects of UAE’s Transfer pricing regulations is determination of the arm’s length nature of payments to connected persons, viz., compensation to Key Management Personnel (KMP).

To be aligned with the UAE TP Guidance issued by the Federal Tax Authority (FTA), which clearly states transfer pricing method should be applied at a transactional level rather than aggregate basis, it is important that the approach for benchmarking the compensation to KMP ought to be based on economic principles and stand the test of transfer pricing.

Some of the key aspects with regard to compensation to KMP are as follows:

1. Remuneration to KMPs in Loss-Making Companies:

We often notice that the most common approach for benchmarking KMP compensation which has been adopted in the region is aggregating and testing the profitability of the entity, at the net-level. However, this approach suffers a fundamental flaw viz., if one were to adopt this approach, would one conclude that no compensation is to be paid to KMP if the company incurs losses. And no independent third party will agree on to this proposition.

The transfer pricing approach to benchmark KMP compensation should be ‘all-weather’ approach – irrespective of profitability of the company, and hence adopting profitability-based approach for benchmarking KMP compensation is not appropriate from a transfer pricing perspective.

Similarly, another approach generally adopted is to understand the salary packages available in public domain for the said position for example CEO / MD. However, the salary paid would also depend on the business that is being managed – for example, the compensation to the CEO managing USD 1 million Company will differ from the compensation paid to CEO heading USD 100 million Company. Hence, use of data from generic salary database may not be used as a comparable information on an as- is basis.

Hence, taxpayers ought to undertake an arm’s length analysis at a transactional level and also ensure being correct from a transfer pricing / economic perspective.

2. Compensation to KMP being the only related party transaction:

In many instances, taxpayers might only have compensation to KMP as their related party transaction. In such cases, testing the profitability of the company at the entity level would result in subjecting the entire company to transfer pricing – which is not the correct approach. This is in addition to the above-mentioned underlying shortcoming of using profitability-based approach for benchmarking compensation to KMP.

3. KMPs as both related party and connected persons:

In many UAE entities especially closely held or family-owned businesses, KMPs may qualify as Related Parties and Connected Persons under transfer pricing regulations. This overlap will require justification of compensation w.r.t. being “wholly and exclusively for business purposes”. The FTA might view some of the activities undertaken as shareholder activities, for which no compensation is required and accordingly a portion of the compensation paid to KMP will be disallowed.

Further there might arise uncertainty in connection with disclosure of such payments in the Disclosure Form (DF) – whether under section for Related Party or Connected Person, especially since there is a difference in the threshold limits for disclosure of such payments for each of the said categories.

B. Arm’s Length Analysis Is More Than Just Benchmarking

The UAE TP regulations mandate that all related party transactions must comply with the arm’s length principle. Yet, a common misperception persists that undertaking a profitability-based benchmarking analysis is adhering to arm’s length analysis.

Benchmarking is only one phase of a comprehensive arm’s length analysis. A robust TP assessment begins with understanding the commercial and economic context of the transaction, followed by a detailed Functional, Asset, and Risk (FAR) analysis to characterize the role of each party whether as an entrepreneur, limited risk entity, or routine service provider. This also involves mapping the broader value chain to identify value creation points and strategic contributions. Only after this can the most appropriate method (MAM) such as TNMM, CUP, RPM, Cost Plus, or Profit Split be selected – based on the taxpayer’s specific facts and functions.

Benchmarking then becomes relevant to test the selected method using third-party comparables. Additionally, the analysis must go beyond contractual form and consider actual conduct and delineate the transaction.

A classic example is where UAE taxpayer / entity makes payments to related parties for “management services”. Merly testing the mark-up applied would not suffice, as the FTA might question the arm’s length nature of the cost base itself and require documentation on Need-benefit test, actual rendition test and that the services are not duplicative in nature. If the FTA deems that the cost base itself is not appropriate, even the most robust benchmarking w.r.t. mark-up cannot be used to defend the arm’s length nature of the cost base.

Therefore, one will have to ensure that a wholistic arm’s length analysis of the related party transactions will have to be undertaken, as against a mere benchmarking analysis.

C. Deputation of employees within group entities

In the Middle east region at large, and more specifically for UAE, there are many instances where one of the group entities obtains the required work permits(visas) / license for the entire group. This company usually onboards all the employees on behalf of all the group entities manages their payroll and deputes these employees to the premises of the other group entities, as may be required. The related party transaction consists of a cost-to-cost recharge of such deputed employees to the respective group entities.

A mere cost-to-cost recharge to the other group entities might not be appropriate since obtaining the work permits is a critical part of undertaking the overall operations of the company / group entities, and a mark-up would be warranted. Hence, it is necessary that that the accurate delineation of the transaction is undertaken, and considering the same as a “salary recharge” and reimbursing on a cost-to-cost basis would not suffice from a transfer pricing perspective.

In certain instances, the taxpayers consider opting under the Low value adding services Safe Harbour, which states that for low value adding intragroup services mark-up of 5% would be considered arm’s length in nature. However, taxpayer may have to evaluate if these services qualify as low value adding in nature, considering the role of employees deputed.

Therefore, taxpayer will have to undertake a detailed and robust analysis to ensure that the transaction is accurately delineated and analysed and an appropriate transfer pricing method is adopted, supported by relevant benchmarking analysis.

D. Cash Pooling: Centralised Liquidity Management

In many UAE groups, funds often move freely between related entities as part of centralised treasury operations, without formal agreements or defined interest terms. While this free flow of funds aids liquidity management, the UAE TP Regulations require each of such movement to be assessed independently based on its economic substance, rather than being justified solely by informal group policy.

To ensure compliance, businesses must carefully analyse the nature, purpose, and duration of each transfer to determine its true character – whether it qualifies as short-term operational funding, a loan, or another financial arrangement. Even in the absence of formal agreement, the conduct of the parties, frequency of fund movements, and any implicit expectation of repayment must be evaluated. Clear documentation, alignment with arm’s length principles, and having an appropriate arm’s length interest is essential to avoid any Transfer Pricing adjustment by the FTA.

Another key aspect with regard to these fund movements is that in case the credit rating of the borrower is at one of the lowest at the rating scale or there is no intention of the borrower to repay such amounts received, inability of the borrower to obtain funds from third party lenders due to high debt levels etc., the fund transfer can be recharacterized as equity in nature and any consideration for such funds would be treated as dividend rather than interest. Accordingly, the deductibility of such payment made lieu of the ‘interest’ will be disallowed. Therefore, it is imperative that movement of funds accurately characterised both in form as well as in substance to ensure that such recharacterization does not take place and does not result in payment of additional taxes.

Among others, these free flow of funds can partake the character of loan or cash pooling, based on the facts and circumstances.

1. Intercompany Loans:

Where the arrangement is not very short-term or is medium-term or long-term in nature, the fund transaction may be recharacterized as a loan. In such cases, the TP considerations include:

• Understanding terms of fund / loan transaction
• Supporting documentation demonstrating the rationale and commercial substance of the transaction – including a robust debt capacity analysis.
• Credit risk assessment of the borrower
• Interest rates, benchmarked against comparable third – party loans

In groups where the requirement of funds is dynamic and involves multiple loans transactions, the group can enter into an agreement for borrowing of funds based on a loan matrix – which captures the arm’s length interest spread for various credit ratings across various maturities. This approach would be efficient for Groups considering intragroup loans within the same currency. Through this the group entities will have visibility on the borrowing costs and can take an informed decision.

2. Cash Pooling:

The UAE TP guidelines recognize cash pooling as a treasury management strategy aimed at optimizing group liquidity. Cash Pooling arrangement is typically where there is two-way movement between cash participants and for a very short term. However, these arrangements can pose significant challenges due to their inherent complexity—such as the use of multiple currencies, daily balance fluctuations, etc.

Some of the key Considerations w.r.t. cash pooling include:

• Accurate delineation of the arrangement: The true nature of the transaction must be identified based on the functions performed, risks assumed, and assets used—not merely the contractual terms. This determines whether the setup qualifies as a cash pool or another type of financial transaction such as loan.
• Remuneration to the Cash Pool Leader (CPL): The CPL should be compensated based on its role. If its role is limited to coordination of funds, limited remuneration may suffice. However, if it bears significant financial risks, a larger share of the interest spread between depositors and borrowers may be justified.
• Compensation to cash pool participants: Cash pool participants should earn a return equivalent to what they could obtain from an independent party, and borrowing entities should be charged an interest rate in line with comparable market rates.
• Compliance – Entities must first identify the existence and type of cash pooling in their group. A thorough functional and risk analysis must follow to accurately delineate the transaction. Based on this, an arm’s length policy should be established for benefit allocation and CPL remuneration. This must be supported by robust intercompany agreements and benchmarking analyses.

When cash pooling is considered across various geographies, it is important that the group has robust cash pooling agreement in place to ensure compliance and acceptability of the said arrangement from a legal and foreign exchange regulatory perspective of the respective jurisdictions.

E. Introduction of new transaction:

In certain MNE groups operating in the UAE, certain intercompany transactions are either not formally recognised, not documented, or are implemented without clear contractual arrangements. While such transactions may not appear on the books as standalone transactions, they still have transfer pricing implications, and the absence of a formal arrangement does not exempt these transactions from remaining compliant from a UAE Transfer pricing perspective.

1. Royalty or Brand Usage Without Formal Agreement

For UAE-headquartered groups owning intellectual property (IP), such as trademarks, brand, or proprietary know-how, the group entities in other jurisdictions or even entities within the UAE might use these IPs in their operations. However, no formal agreement might be in place for payment of royalty for use of such IP. In such cases the FTA can impute royalty income to the UAE HQ parent.

Therefore, groups will have to reassess their intangible related group policies and in absence of the same ensure a transfer pricing framework is set for the use of intangible assets by the group entities.

2. Guarantees

There are instances where UAE parent or group company provides a financial guarantee for a subsidiary’s borrowing, through a guarantee to the banks of the group entity borrowing funds. Certain Groups treat the guarantee that is provided as shareholding activity and do not make any payment. Where the financial statements are audited, there would be disclosure of the same, based on which the FTA can impute guarantee fee to be charged and effect transfer pricing adjustment.

The UAE parent entity or the UAE entity providing guarantee will have to ensure that the transaction is delineated and analysed to identify if any arm’s length consideration will have to be received or not. For example, the guarantee given is by virtue of being a shareholder or there might be no additional liability that would be arise to the guaranteeing entity, since the loan is capped to assets of the borrower and the banks will have recourse to the assets of the borrower. However, one will have to evaluate the benefit that the borrower that would have received due to the guarantee provided, and any opportunity cost for provision of such guarantee to the guarantor.

Therefore, in either of the cases – guarantee fees received or not, the UAE entity will have to maintain robust documentation on the facts & circumstances as well as on arm’s length nature of the guarantee fees.

F. Free zone vs Mainland:

UAE has several Free Zones where taxpayers enjoy preferential tax rates on qualifying income, and hence transactions between related parties in Free zone and Mainland needs to be ensured to be at arm’s length to claim free zone benefits. The transactions involving movement of goods would be easily identifiable and disclosed / reported in the financial statements, there might be certain transactions which might not be separately identified and compensated between related parties – such as provision of services by the Mainland, charges incurred by the mainland entity on behalf of the Free zone entity, etc.

These transactions will have to be identified, and appropriate compensation will have paid by the Free zone entity to its Mainland related party, else it will be viewed by the FTA as a means of increasing the profits of the Free Zone entity to claim the benefit of preferential tax rates.

To conclude, considering that 2025 is the first tax filing season for business, since the implementation of the Corporate Tax in UAE it is critical that business have their transfer pricing framework and policy set in place, also since the first year would set the tone for the future years and act as a frame of reference. Any gaps or weaknesses in year one could have compounding effects, exposing businesses to adjustments / penalties, and embroiling the business into transfer pricing litigation. Companies that adopt a proactive approach, supported by robust documentation and commercial clarity, will be better positioned to defend their transfer pricing positions.

Co-authored by Nithya Srinivasan (Founder & CEO, snithya@vstnconsultancy.com) and Rajesh E (Principal, rajeshe@vstnconsultancy.com), with inputs from Bharathi V (Associate, bharathiv@vstnconsultancy.com)

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As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

India | UAE | USA | KSA | Dubai | Asia Pacific | Europe | Africa | North America

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

Contact us today to explore how we can partner with you to optimize your global transfer pricing approach.

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Kuwait Pillar 2 update

Executive Regulations released on 29 June 2025 on Introduction of Supplementary Guidance to DMTT

Scope of DMTT

On June 29, 2025 the Ministry of Finance of Kuwait published the ‘Executive Regulations’ for the Domestic Minimum Top-up Tax (DMTT) for Multinational Enterprises (MNEs) under Ministerial Resolution No. (55) of 2025. The Executive Regulations supplement the DMTT Law (Decree by Law No. 157) released on 30 December 2024 providing further details and clarity on the definition, computation method, compliance process and administrative matters. The Executive Regulations are mostly aligned with Global Model Rules and its commentary.

Entities

Covered

• • Kuwait entities in a MNE group meeting the revenue threshold
  • Joint ventures (‘LP’) or affiliates in Kuwait part of a MNE group, where the ultimate parent owns 50% or more, or the combined revenue of the JV and its affiliates meets the threshold
  • Non-resident entities operating in Kuwait as part of a MNE group (unless excluded under Article 5)
  • A government entity engaged in trade or business

Exempt

• Government entities
• Non-profit organizations
• International organisations
• Retirement funds
• Real estate investment vehicle that are an ultimate parent entity
• sovereign wealth fund meeting specified conditions

If an entity is considered taxable, the top-up tax applies to its entire taxable profit, regardless of the UPE’s ownership percentage. The tax must be paid when filing the return, with no advance payment required.

Taxes

Covered

• Corporate taxes included in the financial accounts of a participating entity (including its share in profits of other group entities)
• Taxes paid instead of corporate tax, such as withholding tax on interest, rent, and royalties
• Taxes on retained earnings or corporate equity, if based on income/equity and not treated as supplementary tax

Uncovered

• Tax paid by the parent under the Qualified Income Inclusion Rule (BIL)
• Tax paid by the entity under the Qualified DMTT
• Taxes resulting from adjustments under the Under Taxed Profits Rule (UTPR)
• Tax levied on the group based on special laws
• Non-qualified recoverable attribution taxes
• Taxes paid by insurance companies related to policyholders’ returns
• Contributions made to entities outside general government, unless permitted by Pillar 2 rules and Tax Administrator guidance

Amounts previously accrued under other domestic tax laws that are no longer applicable to the taxable entities (e.g., Zakat, National Labour Support Tax, or Corporate Income Tax)

Determination of Net Pillar 2 Income

Group

• Entities connected through ownership or control, having consolidated financials by the Ultimate Parent Entity (UPE), including those excluded due to size, materiality, or being held for sale.
• A single entity operating in one jurisdiction with one or more permanent establishment in other jurisdictions, provided it is not part of a consolidated group as defined above.

Constituent Entity

• Any entity that is part of a MNE Group, excluding those specifically exempt as Excluded Entities under the Executive Regulations.
• Any Permanent Establishment of a Main Entity, which is treated as a separate entity from both the Main Entity and other permanent establishments.

Designated Entity

• Under Article 80 of Kuwait’s Executive Regulations, in-scope entities of an MNE Group must appoint a single designated CE to handle all tax matters with the Tax Administration. This entity is responsible for filings and documentation, though each group member remains individually liable. If the UPE is in Kuwait, it must be the designated CE; if multiple UPEs exist, one must be chosen. A new CE must be appointed within 30 days if the existing one sells Kuwait or the group.

Net Financial Accounting Income / Loss of Constituent Entity (“CE”)

• Separate financial statements with accounting period matching the ultimate parents tax period, following IFRSs and audited by a Ministry-accredited firm.
• Determine net financial accounting income or loss based on the above financial statements.
• Arrive at the Pillar 2 income/ loss by making necessary adjustments to the net financial accounting income / loss for regulatory requirements, allocation between parent and permanent establishments, and income received from pass-through entities.
• If the above financial statements are unavailable, the entity’s income or loss shall be determined using the ultimate parent’s consolidated financial statements, prior to any group-level adjustments. Where this approach cannot be applied, an alternative accounting standard approved by the Tax Administration may be used.

Adjustments to Net Financial Accounting Income to determine Pillar 2 Income/Loss amongst others:

• Net tax expenses
• Excluded dividend distributions
• Excluded equity gains and losses
• Included revaluation method gains or losses
• Gains or losses from the disposal of assets and liabilities
• Asymmetric foreign currency gains or losses
• Illicit expenditure, fines and penalties
• Prior period errors and changes in accounting principles
• Accrued pension expenses
• Debt forgiveness
• Share-based compensation
• Election to spread capital gains over five tax periods
• Intra-group financing arrangements
• Election to consolidate transactions of CEs located in Kuwait
• Transfer pricing adjustments

Net Pillar 2 Income

• Pillar 2 Income of all Constituent Entities – Pillar 2 Losses of all Constituent Entities

An entity that qualifies as a designated CE may opt to apply a Pillar 2 Loss Election in the country. This election can be made instead of following the standard rules, provided it is submitted along with the group’s first Pillar 2 Information Return or the entity’s tax return in the country, whichever is earlier. If the election is made, a deferred tax asset is created for each year in which the entity incurs a Pillar 2 loss, calculated by multiplying the loss amount by the minimum tax rate

Calculation of ETR, Top-up Tax Liability

ETR for the jurisdiction for each tax period

(Total Adjusted Covered Taxes of all Constituent Entities in Kuwait / Net Pillar Two Income of all Constituent Entities in Kuwait)*100

Net Pillar 2 Income – Substance-Based Income Exclusion (Considering only positive amounts) where in

SBI = {Qualified Payroll Costs * % of salaries} + {Qualified Tangible Assets * % of asset value} subject to

• Qualified payroll costs for employees performing activities for the CE in Kuwait, with varying percentages set for each fiscal year starting at 9.6% for 2025, decreasing progressively to 5% from 2033 onwards
• Qualified tangible assets located in Kuwait, with percentages starting at 7.6% for 2025, decreasing progressively to 5% from 2033 onwards

Certain types of entities are required to calculate their ETR separately from the rest of the group in Kuwait. These include Joint Ventures (JK), Minority Owned Constituent Entities (MCCIs), Investment Entities, and Services Permanent Establishments (PEs).

If a group chooses not to claim exclusion in a given year, the excluded income for that year will be considered as nil. Additionally, if the excluded income exceeds the net Pillar Two Income for the period, the excess cannot be calculated forward to future years. Entities must maintain adequate supporting documentation to substantiate the claimed payroll and tangible asset costs, which must relate only to eligible employees and qualifying tangible assets.

Calculate Top-up Tax

• Top-up Tax Rate = 15% – ETR
• Top-up Tax = Taxable Income X Top-up Tax Rate

Determination of Additional Current Tax / Permanent Difference Tax Liability

Current Additional Tax = (Pillar 2 Income or Loss × Minimum Tax) – Modified Covered Taxes

The current additional tax is the amount arising from a recalculation of the effective tax rate or Pillar 2 income/loss for a prior period.

Permanent difference tax liability arises due to certain criteria being met, e.g. restatement of financial statements or non-GloBE permanent differences

Participating entities can elect zero top-up tax if both of the following thresholds are met during the period:

• Average total revenue is less than EUR 10 million (or local equivalent),
• Average Pillar Two Income prices is less than EUR1 million (or local equivalent).

The average income and revenue are calculated over the current annual unsecuring tax periods, excluding any items within the relevant period.

Top-up Tax + Additional Current Tax / Permanent Difference Tax Liability

Safe Harbour

Under Article 60, tax is considered zero for a multinational entity group using the simplified accounting method, provided one of three tests is met in a country i.e., the normal profits test, the minimum revenue test, or the effective tax rate test. These tests can be verified using simplified income, revenue, or tax calculations. Calculations must include relevant group entities and comply with specific thresholds and conditions outlined in related articles and regulations.

Transitional Safe harbor

• A transitional safe harbor is available for multinational groups that submit qualifying cross-border reports based on eligible financial statements. For tax periods beginning on or before December 31, 2026 (but not ending after June 30, 2028), the top-up tax may be considered zero if revenue and income thresholds are met or if the effective tax rate satisfies the minimum requirement. These reports must be based on reliable, standardized financial data.

International activity

• During the initial phase of international activity, a taxpayer’s tax rate is zero if specific conditions are met, including presence in no more than six jurisdictions and tangible assets not exceeding EUR 50 million outside the primary jurisdiction. The rule excludes assets held by investment entities, joint ventures, or subsidiaries thereof. Tangible assets must be physically located in the jurisdiction to be counted, and minority-owned associates are fully included. These provisions cease after five tax periods following the first application of Pillar 2 rules to the multinational group.

The Tax Administration may verify the data if a taxpayer applies a safe harbor and can raise an objection within 36 months of receiving the tax return, providing supporting facts. The designated C then has 6 months to respond. If the response fails to prove that these facts did not affect safe harbor conditions, the safe harbor won’t apply. However, if the entity successfully demonstrates no material impact, the safe harbor remains valid, and the effective tax rate will be treated as meeting the minimum threshold.

Transfer Pricing Requirements

Group entities operating in Kuwait are required to ensure that transactions with related parties, whether within or outside Kuwait, are conducted on an arm’s length basis.

• Related persons are defined as having common connection with each other or with another person, or if one person has significant or controlling over the other person or if two or more persons are under common control. The regulations prescribe 50% or more direct or indirect shareholding or control as a threshold for establishing the relationship between the persons.
• The control is defined as the ability of any person along or with persons related to him, directly or indirectly, to exercise the effective influence over the decisions or actions of their peers. The regulations prescribe the inclusive scenarios covering voting rights, appointment of board or managers, right to obtain capital or profits, influence over the management, providing loans or guarantees with certain thresholds.
• The Regulations also prescribe the factors such as contractual terms, characteristics, economic circumstances, economic activities, assets and risks, business strategies of the transaction to be taken into account for comparing with the uncontrolled transactions.
• The regulations also prescribe certain methods such as comparable arm’s length method, resale price method, total cost-plus profit margin method, the net profit margin method for the transactions, the method for apportioning transaction profit. The taxpayer must document the reasons and assumptions for choosing a method and can also use any other method if none of the above methods are applicable.
• The tax administration has right to adjust the transaction price based on methods prescribed in the regulations.

Each taxable entity is mitigated to maintain the following documentation to demonstrate compliance:

Local File and Macker File

• There exist the presence I and I post up to 5 days. Upon request from the Ministry of Finance (MoE) the files must be submitted within 30 days.

Transfer Pricing Disclosure Form

• This form should include additional information relating to the application and the transfer pricing metrics applied. If this is submitted soon with the tax return and carried by an approved audit firm.

It is anticipated that the MoE will release further guidance outlining the detailed content and format requirements for the disclosure form. The Regulations do not specify any minimum threshold for maintaining transfer pricing documentation. As a result, all taxable entities are required to comply with the documentation and disclosure requirements, regardless of the scale or value of their related party transactions.

Transfer Pricing Documentation Requirements

Other Key Areas

Registration

The Filing CEO/designated CE must apply for registration with the MoH within 120 days from the date of becomes subject to tax penalties for non-compliance are up to KWD 3,000 as per the DMTT Law. The DMTT registration requires submission of details on the MNEC Group, including ownership structure fiscal year financial data and creation from relevant entities regarding the designation of the appointed CE. The MoH will issue a registration certificate once accepted. For MNEC Group that were in-score of the DMTT on 1 January 2025, they are required to register by MD September 2019.

Deregistration

The designated CE must submit a request to the Tax Administration to deregister if any of the following categories: (a) the registrant has completely ceased its activity in the country; (b) the registrant has exited the multinational entity group and the designated entity has notified the Tax Authority; (c) the multinational group, which includes the registrant, has not met the revenue intended for five consecutive tax periods and the designated entity has informed the Tax Authority of the IC each period; or (d) any other case as determined by the Tax Authority.

Tax Return and Books

The designated CE must file a tax return within 15 months of the end of each tax period, even if no tax is due. A simplified return or additional Pillar 2 filing may be required by the Tax Authority. Amended returns are allowed within five years, provided the period hasn’t already been assessed, and must include reasons for the changes. Taxpayers must maintain all records necessary to prepare financial statements, determine taxable income, and comply with Pillar 10A, including key documents such as financial statements, journals, registers, and sample pricing files. Supporting documents like invoices and calculation methods must also be retained for at least 10 years from the end of the relevant tax period.

Computation and Payment Currency

Under the Executive Regulations, monetary references to the Euro must be converted using the Central Bank of Kuwait’s CBN average exchange rate for December of the previous calendar year. For tax calculation, if all local constituent entities use Kuwaiti Diner (KWD) as their functional currency, the tax must be computed in KWD. In cases where multiple functional currencies are used, the Designated Constituent Entity must elect to compute tax either in KWD or the UPE’s presentation currency, this election is binding for five tax periods. Taxes calculated in a foreign currency must be converted to KWD using the CBN’s average annual exchange rate for payment. Alternatively, amounts may be converted to the UPE’s presentation currency. In line with approved accounting standards, Where CBN arises are unavailable, the central bank rate of the UPE’s jurisdiction may be used with prior approval from the Tax Administration.

Administrative penalties and tax evasion:

Kuwait’s Executive Regulations impose a fix penalty for each 30-day delay in tax payment or fraction thereof, penalize unauthorised disclosure of taxpayer information with a KWD 5,000 fine, and outline procedures for investigating and settling tax evasion cases. Further, when the tax administration suspects a tax evasion crime, it may refer the case to the public prosecution with ministerial approval. However, a settlement may be reached if the taxpayer pays all due taxes and penalties, along with a fine equal to the evasion tax—divided in repeat cases.

• Kuwait’s Executive Regulations require the tax administration to consider the tax effects of any agreements or transactions primarily aimed at reducing, deferring, or avoiding tax only after assessing genuineness of commercial or economic purpose of such arrangements, the administration may examine the transactions executed, their underlying rationale, substances and form etc.

Key Takeaways for the Taxpayers

• Evaluate the applicability in terms of registration, compliance, reporting, payment obligations and disclosure requirements.
• Draw a roadmap for the group with all the requirements and action points including the timelines based on the evaluation while ensuring the consent of all the stake holders.
• Ensure Registration within the prescribed timelines while keeping the penalty implications in mind.
• Meet the transfer pricing requirements such as local file, Master file and CbcR reporting prescribed in the regulations.
• Ensure compliance with transitional safe harbour requirements in order to avail the relief.
• Track record keeping and file the tax returns within prescribed due dates.
• Ensure the accurate computation of DMIT and payment of DMIT liability within prescribed timelines.

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As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

India | UAE | USA | KSA | Dubai | Asia Pacific | Europe | Africa | North America

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

Contact us today to explore how we can partner with you to optimize your global transfer pricing approach.

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Bahrain Pillar 2 update

DMTT Advance Payment Manual released on 2 July 2025

Scope of DMTT advance payments

On 02 July 2025, the Kingdom of Bahrain, as a part of inclusive framework of OECD BEPS [agreed at minimum of 15% tax], introduced the Domestic Minimum Top-Up Tax (“DMTT”) advance payment manual providing a general overview of the procedures and guidance for Filling Constituent Entities on using the National Bureau for Revenue (“NBR”) online portal and related forms

MNE Group with annual revenue of the Group Euro 750 million for 2 of 4 preceding years

Bahrain located Constituent Entities of a MNE Group meeting the Revenue Test must appoint an Entity among them

Excluded Entities are not subject to DMTT but their revenue counts toward meeting the Revenue Test

Revenue Test

Filing Constituent Entity

Excluded Entities

If an entity elects an exclusion such as the “Transitional Safe Harbour” or “De Minimis”, or “Initial Phase of International Activity” during registration, it is not required to declare or settle advance payments However, if the entity’s circumstances change and it no longer qualifies for the selected exclusion, the entity must update its registration details. To remove the exclusion before making any payments At the time of filing the DMTT tax return, if the entity qualifies for an exclusion for the fiscal year, its DMTT liability is considered zero, and it may request a refund for any advance payments made for that year

• Making quarterly advance payments throughout the year
• filing the tax return at year-end along with any remaining balance
• payments are due after each three-month period, starting from the first day of the fiscal year. If the fiscal year cannot be evenly divided into three-month periods, the final period will be shorter and cover the remaining months
• Has 60 days after the end of each advance payment period to decline and pay the due amount
• Payments made after the deadline are subject to penalties under Article 28 of Decree-Law No. 11 of 2024

DMTT Advance Payment Process

Before starting the DMTT advance payment process, the FCE should read the instructions and select the ‘I Agree’ checkbox to proceed; all mandatory fields are marked with a red asterisk (✓). If the MNE Group is not required to make an advance payment, this obligation will not appear on the Filing Constituent Entity’s tax portal.

• Login to the NBR online portal using the User ID and password
• Go to the ‘DMTT’ tab on the left side of the screen and select DMTT returns from the options
• In the ‘Actions’ column next to ‘DMTT Advance Payments’, open the options menu (three dots)
• Choose the New Payment option from the menu to initiate the declaration process.

Advance payments can be made via Bahrain’s National Portal (Bahrain.bh) or Fawaieer, using the reference number generated upon submission of the payment form. To access the advance payment details, two pieces of information are required: the reference number of the advance payment form and the Filing Constituent Entity’s account number. When declaring an advance payment, the filing constituent entity must provide the following:

• The FCE must select the preferred method in the ‘Estimation Methodology’ (one of the two estimation methods prescribed by the NBR) field when submitting the first advance payment. This choice is final and applies to all advance payments for the fiscal year. (Article 70 of the Executive Regulation and Decree Law No. 11 of 2024.)
• Prior year method
• Current year method
• Once the Filing Constituent Entity selects the estimation methodology, it must enter the estimated tax in the ‘Quarterly Tax Liability (BHD)’ field. This amount must be fully paid using the reference number generated by the due date, to avoid penalties. Although partial payments are allowed, the full amount declared must be paid within the prescribed deadline.

After submission, a confirmation screen will display “Form submitted successfully” along with a reference number for payment.

Key Takeaways for the Taxpayer

Evaluate whether the group is in scope and draw a road map with requirements and timelines considering the view of all the stakeholders.

Assess the eligibility to avail relief under safe harbours or exclusions.

Ensure the implementation of plan for timely compliance of quarterly, yearly advance payments and filing of tax returns.

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As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

India | UAE | USA | KSA | Dubai | Asia Pacific | Europe | Africa | North America

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

Contact us today to explore how we can partner with you to optimize your global transfer pricing approach.

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

VSTN CONSULTANCY

Global Transfer Pricing Documentation – A strategic Investment for MNE

• ITF
  WINNER
  BEST NEW COMER OF THE YEAR
• ITF
  REGORNISED FIRM
  2025
• ITF
  HIGHLY REGARDED PRACTITIONER
  2025
• ITF
  WORLD TAX
  2025

What is Global Doc?

• Global doc is a structured set of documents, maintained entity-wise to justify the arm’s length nature of the intra-group transactions, ensuring compliance across jurisdictions.
• A professionally structured global documentation is suitable for internal analysis and external consumption by stakeholders.
• A well-prepared global transfer pricing document also supports mutual agreement procedures (MAPs) or advance pricing agreements (APAs)

Context & Considerations

• Do you operate in more than 2 countries?
• Are your intra-group transactions carried out at Arm’s length Price?
• Does your company maintain appropriate transfer pricing documentation in adherence with the respective local laws?
• Is your document prepared only with one sided understanding of the country laws?
• Does your document which is compliant as per your local country laws create challenges in the counter party jurisdiction?
• Is the information presented in various countries’ documentation in alignment with each other?
• Is your transfer pricing document consistent, defensible and reduces the risk of audit exposure, fines, and reputational damage?

Maintenance of Global documentation is the key to align your transfer pricing policies with the companies’ business strategies

Why Unified Global Doc Matters

• A. Avoids Double Taxation
• B. Reduces tax controversies and related penal consequences
• C. Maintains symmetry with Master File and CbCr
• D. Supports Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs)
• E. Local files aligned with company’s global strategy
• F. Ensures compliance with local tax regulations
• G. Navigate complexities in regulatory landscape
• H. Global cash flow management
• T. Tool for improving tax efficiency across jurisdictions
• I. Helps align pricing policies
• J. Proactive management and Planning
• R. Risk management
• I. Identify blind spots in global transfer pricing strategies
• C. Consistency in documentation amongst the group entities
• E. Evidence and Proof to substantiate the intra-group transfer pricing policy

Stay Protected & Stay Compliant

• Global doc isn’t just about compliance – Having a globally organized and centrally managed approach to transfer pricing documentation also helps to identify planning opportunities for your business.
• Global doc is an investment to mitigate transfer pricing litigation.
• The cost of non-compliance outweighs the cost of getting it right.

Looking out for a trusted partner in preparing your global doc?
Contact our transfer pricing specialists at www.vstnconsultancy.com

Why VSTN?

• Experience of preparing documentation for more than 17 countries across the globe
• Access to all major global databases like Moody’s Orbis- TP catalyst, Moody’s -EDFX , ktMINE, Thomson Reuters Onesource, Royaltyrange, Prowess
• Highly experienced professionals with culminative TP experience of 100+ years
• Awarded as the Best Newcomer in Asia Pacific – 2024 by International Tax Review (ITR)
• Recognized as one of the finest performing transfer pricing firms by ITR
• The core team has visibility of various countries TP norms as we work across multiple country TP regulations thereby enabling us to be able to provide TP advisory and solutions wholistically.

Countries covered by VSTN so far

• USA
• Canada
• Mexico
• UK
• Netherlands
• Italy
• Switzerland
• Zambia
• Denmark
• Belgium
• Turkey
• KSA
• UAE
• Singapore
• Philippines
• India
• Australia

LOCATION SERVED

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As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

India | UAE | USA | KSA | Dubai | Asia Pacific | Europe | Africa | North America

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

Contact us today to explore how we can partner with you to optimize your global transfer pricing approach.

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

UAE MAP GUIDANCE

Released on 25 June 2025

Background of MAP in UAE

On 25 June 2025, the United Arab Emirates officially issued the mutual agreement procedure (MAP) guidance through the Ministry of Finance

Mutual Agreement Procedure

• The mutual agreement procedure (MAP) is intended to relieve double taxation arising from transfer pricing cases and to resolve double tax treaty disputes and issues surrounding the interpretation/application of a double tax treaty (DTA), as well as to allow for a bilateral mechanism for the Ministry of Finance to engage with other tax authorities

Double Taxation Treaty

• A DTA is an international agreement signed by two countries for the avoidance of double taxation and the prevention of fiscal evasion of taxes on income and capital. DTA will also seek to prevent economic double taxation whereby, for example, the same income is taxed in two different states in the hands of two different taxpayers
• The relevant MAP clause in a DTA is typically based on Article 25 of the OECD Model Tax Convention (‘MTC’) on Income and Capital

UAE Competent Authority and Federal Tax Authority

• In the UAE, the Competent Authority is often defined as ‘the Minister of Finance or his authorised representative’. The UAE Competent Authority (‘UAE CA’) is independent from the Federal Tax Authority (‘FTA’). The role of the UAE CA, under the MAP provisions of the DTA, is to endeavor to eliminate double taxation and not to re-audit the taxpayer
• Dedicated members of the FTA (independent of the tax audit function) will work together with the UAE CA on MAP cases and will be part of the MAP process. The FTA will also be responsible for implementing any MAP agreement reached or assisting the UAE CA to obtain any relevant documents in respect of a MAP claim

Eligibility for MAP

• Withdrawal/reduction of the adjustment imposed
  A corresponding deduction by the foreign tax authority
• Provided in the Applicable DTA applies to the taxpayer (or)
  When there is a conflict between UAE’s general anti-abuse rule under the UAE Corporate Tax law and applicable DTA provisions
• Transfer pricing adjustments
• Anti-abuse Provisions
• Taxpayer
• Payment
• Demand to be tax resident in more than one state
• Adjustment of profits of Permanent Establishment (PE) / Branch
• For determination of tax residency under DTA provisions
• For an increased foreign tax credit
  Request the Competent Authority of the other contracting state to provide relief

The application of the general anti-abuse measure, under UAE Corporate Tax Law, is outside the scope of MAP as it relates to the interpretation of domestic law.

Key Highlights

• Self-initiated adjustments are allowed for MAP Claim
  Done in good faith and are supported by thorough transfer pricing documentation and economic analysis
• Parallel domestic legal remedies application is allowed for MAP Claim
  But cannot pursue simultaneously and to be kept in abeyance
• Multiyear resolution under MAP for recurring issues
  Facts should be same for all the years
• Targeted Resolution within 24 months from the acceptance of MAP claim
  Taxpayer needs to submit the required information within the stipulated time and extend cooperation
• Withdrawal option to the taxpayer at any time during MAP proceedings
  Needs to communicate the same through email
• Option to access the arbitration for unresolved issues under MAP
  If provided under relevant DTA
• Adjustment of penalties (levied by FTA) under MAP agreement
  MAP to be accepted by the taxpayer and should be in line with DTA provisions

It is important to note that certain above highlights are aligned to the OECD best practices and UAE MAP guidance has taken practical approach in MAP procedures. However, the taxpayers, while evaluating the MAP option and while the MAP proceedings are on going, needs to give special attention to the following:

1. Evaluate the outcome of MAP on pillar 2 computations
2. The nuances of practical implications for certain approaches like self initiated adjustments

Important Timelines During MAP Process

• MAP Claim must be filed within 3 years from the first notification of action resulting in the adjustment while considering the timelines specified in the respective DTA
• During the process of MAP, Information sought by the CAs should be submitted by the taxpayer within 1 month
• CA of UAE endeavours to complete the MAP Claim within an average period of 24 months from the date of acceptance of MAP Claim/ application
• The CA of UAE to communicate the acceptance or rejection of MAP Claim within 2 months
• If the taxpayer fails to provide the information sought by the CAs within 3 months, the MAP process may be discontinued

MAP Procedure

Application

• In cases of transfer pricing adjustment, the taxpayer needs to submit a MAP claim from the point it believes an adjustment is probable without even waiting for the formal notification of tax adjustment. The MAP claim is to be submitted to one of the competent authorities. It is better to submit the claim to both the competent authorities for the benefit of the taxpayer.

Information to be submitted

• the name, address and the taxpayer identification number of any related foreign taxpayer involved, details of foreign and local tax administration office and officers proposing/ making adjustment, fiscal years involved; transaction details and related party details. A summary of facts and analysis of the issue (transfer pricing documentation prepared in line with domestic market pricing regulations, details of any prior requests) will CAE of the contracting risky company relevant things or AAA complete the Documentary required should be the right or Arabic with bilingual translation option on request from CAE. UAE CAs may request additional information from the taxpayer which is to be submitted within stipulated timeframe.

Acceptance of claim

• MAP claim will be assessed by the UAE CAs to verify that it is complete, submitted within the time limit of the relevant DTA and whether the objection raised by the taxpayer is justified. The UAE CA will respond to the taxpayer on its decision as to whether or not MAP claim is accepted.

Negotiation process

• UAE CA will first assess whether unilateral relief can be granted. If not, they will initiate the bilateral negotiation process after informing the corresponding competent authority. This would involve preparation and exchange of position papers based on the information and facts provided by the taxpayer. Taxpayers will not be privy to communication and negotiations between the CAe of the countries involved except for making a presentation of Facts of the case to the CAe at the direction of CAe. As such, the UAE CA will seek to provide updates via telephone/sideo conference after each significant milestone. In case of failure of negotiation lack of agreement between the CAe, the MAP claim will be considered closed.

Outcome

• If an agreement has been reached between the CAe, the UAE CA will notify the taxpayer via e-mail within two months from the conclusion of such agreement, where such MAP claim has been filed with the UAE CA. The taxpayer should then seek to reply to the UAE CA confirming the corrective or rejection of the outcome within one month. In case of MAP claims, the taxpayer should confirm in writing the withdrawal of domestic legal remedies filed. Both the UAE CA and taxpayer should share the written acceptance of the taxpayer to the FTA for the implementation of the agreement under UAE. In case of rejection of the agreement by the taxpayer, the MAP claim will be considered closed, and the taxpayer is free to pursue the available domestic legal remedies in the UAE or the other jurisdiction where relevant.

MAP claims to the UAE CA should be submitted to: usemap@mof.gov.ae

Key Takeaways For The Taxpayer

• Timely application in accordance with the double tax treaty
• Maintenance of robust documentation with strong functional/value chain analysis and appropriate economic analysis to support the value chain analysis
• Timely interaction with domestic legal remedies while considering the MAP
• Cooperation and timely submission of accurate and complete information to the CAs as and when required

How VSTN Can Help

• Assessment and advice of double taxation incidents including timelines in light of the applicable double tax treaty
• Conduct a cost benefit analysis between MAP and domestic legal remedies and advice on the option that is beneficial to them
• Review available transfer pricing documentation and highlight the additional information to be submitted to the CAe to strengthen the case
• Preparation and submission of various information as per the UAE MAP guidance while coordinating with the CAe in other countries wherever application is being filed
• Thorough evaluation of value chain of the group and the UAE entity including updating of economic analysis wherever applicable
• Documenting all the above relevant information that supports the case. Presentation of the same before the authorities as and when called for
• Provide timely updates on each milestone of the MAP claim to the client while maintaining constant communication with the CAe
• Assist the client in timely interaction/application of domestic legal remedies while providing assistance in MAP claim
• Coordinate with the client and CAe for timely submission of accurate and complete information submission to the CAe within the stipulated timeframe

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As businesses expand across borders, navigating complex transfer pricing regulations becomes critical. At VSTN Consultancy, a global transfer pricing firm, we specialize in helping companies stay compliant and competitive across key markets including:

India | UAE | USA | KSA | Dubai | Asia Pacific | Europe | Africa | North America

Whether you’re preparing for benchmarking intercompany transactions, or developing robust TP documentation, our team is here to support your international strategy and Compliance.

Contact us today to explore how we can partner with you to optimize your global transfer pricing approach.

#TransferPricing #TransferPricingFirm#VSTNConsultancy #TaxCompliance #IndiaUAEUSA

#TPExperts#TransferPricingExperts#GlobalTransferPricingFirm

Domestic Transactions in TP – What is “Specified”

Intent Of Specified Domestic Transactions Provisions In Indian Transfer Pricing Regulations:

Transactions between related parties have always been suspected as a tool to shift profits and thereby reduce the overall tax liability of a company or a group operating from multiple locations having different tax laws. In order to mitigate tax arbitrages in transactions entered into between domestic companies, the concept of Specified Domestic Transactions was introduced in the Income-tax Act, I9GI by Finance Act, 2012.

Concept Of Tax Arbitrage

Tax arbitrage refers to the practice of profiting because of the difference in ways in which income and expenses are treated for the purpose of calculating taxes. The tax impact changes where one of the parties to such a transaction is either loss-making or is liable to pay taxes at a lower rate. In such cases, profits can be deliberately shifted to such an entity to reduce the overall tax burden of the group or company.

Definition Of Specified Domestic Transaction:

Following are the specified conditions that are required to classify transactions as a specified domestic transaction under section 92BA of the Income-tax Act, 1962 (‘the Act’):

• The transaction should not be an international transaction;
• Any transaction as referred in Sections 80A, 80IA(8), 80IA(10) of the Act;
• Any business transacted between the assessee and other person as referred to in section 80-IA(10) of the Act;
• Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of section 80-IA(8) and 80IA(10) of the Act are applicable;
• The aggregate of such transactions entered into by the taxpayer should exceed the threshold limit of INR 20 crores (from the assessment year 2016-17).

As per the provisions of the Act, once a transaction falls under Specified Domestic Transaction, all the compliance requirements relating to transfer pricing documentation, accountant’s report, etc. shall apply to it in the same manner as they apply for international transactions.

Transfer Pricing Scrutiny Assessment of Specified Domestic Transactions:

In the recent past, there has been increased focus of the tax authorities on Specified Domestic Transactions in India. The most common Specified Domestic Transactions challenged by the tax authorities include the following:

• Transfer of goods and services between the tax holiday unit/company and domestic tariff area unit/company;
• Cost allocation for common human resources between tax holiday unit and domestic tariff area unit;
• Sale or purchase of goods or services from head office to branches.

It is pertinent to note that the power of the AO/ the officer from NeAC to refer the Specified Domestic Transactions to the Transfer Pricing Officer comes into play when the reason to believe that there is a tax arbitrage in case of Assessee only when it is recorded in writing.

The following recent Ruling in case of KBS Creations Vs Deputy Commissioner of Incometax_Circle-24(1) [ITA No. 6477/MUM/2024 (A.Y-2021-22)] from Mumbai Income Tax Appellate Tribunal clearly brings out the intent of the Specified Domestic Transactions provisions in the context of the jurisdiction of AO/ TPO to conduct the scrutiny assessment:

Background Of The Assessee:

The Assessee [KBS Creations] is a firm, engaged in business of Gems and Jewellery, primarily manufacturing and export of diamond studded Jewellery. The assessee is having one of its units located in Santacruz Electronics Export Processing Zone-Special Economic Zone(SEEPZ – SEZ) Andheri (East), Mumbai. The assessee has another unit located outside of SEZ, which mainly supplied diamonds to manufacturing unit in SEZ. The assessee reported certain Specified Domestic Transaction (SDT) with its related party/associated enterprises in the Form 3CEB and maintained all the required documentation out of abundant caution.

The assessing officer (AO) made reference under section 92CA (1) was made to Transfer Pricing Officer (TPO) for computation of Arm Length Price as the Assessee reported the sale transaction in the 3CEB. TPO made an adjustment of Rs.11.62 crores to sales transaction, thereby reducing profit of undertaking to that extent for the purpose of computation of deduction under section 10AA. Consequently, the AO made addition /adjustment of Rs.11.62 crores in draft assessment order. The Assessee filed its detailed objections before the Dispute Resolution Panel (DRP), and the DRP has rejected most of the objections of the Assessee. Consequently, the Assessee filed its appeal before the ITAT.

NON-SEZ UNIT
Goods, SEZ Unit

3CEB Filing

TPO Referral

DRP

ITAT

Important Issue Under Consideration:

Amongst other issues, the Assessee mainly contended on the following issues:

1. AO has erred in making reference to TPO by invoking provisions of section 80IA(10) without determining and establishing existence of an arrangement between the concerned parties which results in more than ordinary profit and therefore, whole proceedings initiated under transfer pricing provisions is bad in law.
2. The assessee by refereeing sub-section (10) of section 80IA submitted that such section casts responsibilities upon the AO to demonstrate that business affairs of the assessee with the closely connected entity have been so arranged even raised to more than ordinary profit to the assessee, which is missing in the assessment and TP proceedings, and determine what is normal profit.

Findings of the Income Tax Appellate Tribunal

The ITAT opined that a careful reading of definition of SDT prescribed in section 92BA makes it clear that there must be a transaction, it is not an International Transaction within meaning of ‘International Transaction’ defined in section 92B, and it should be covered under one of the six transactions mentioned in the subsection and aggregate value of transactions in the previous year exceed a sum Rs. 20 Crore.

The ITAT has opined that the TPO has not considered the above contentional submissions of the Assessee from the beginning of the assessment proceedings and proceeded to determine the arm’s length nature of the transactions under consideration.

Relying on the Hon’ble Jurisdictional High Court in CIT Vs. Schmetz India Private Limited (2012) 26 taxmann.com 336 (Born), the ITAT has opined that the existence of arrangement between the deduction seeking unit and other AE is a pre-condition for invoking rigor of section 80IA(10). Higher profit per se cannot lead to the conclusion that there is arrangement between the parties. The concept of PLI cannot per se be applied to hold that assessee has earned higher profit. The TPO has no occasion to make any comparative data analysis unless condition of pre-arrangement is satisfied.

Other Rulings Relied Upon By The Assessee and Discussed By The ITAT:

• Rajasthan High Court P.CIT Vs. Vedansh Jewels Private Limited (2018) 87 taxmann.com 521 (Raj).
• Karnataka High Court in CIT Vs. H.P. Global Soft Ltd. 342 ITR 263 (Kar)
• Delhi Tribunal in Mankind Pharma Limited Vs. DCTI in ITA No. 2313/Del/2022
• DCTI Vs. Halliburton Technology Industries Pvt. Ltd. in ITA No. 277/Pun/2021

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