Navigating Year End Transfer Pricing Adjustments

With the fiscal year coming to a close for MNEs operating on a calendar year basis, it is essential to evaluate whether transfer prices need to be revisited before yearend closure. In the UAE, CT law has kicked in for years commencing after 1 June 2023 & this would be the first year of TP compliance for many UAE businesses with calendar year. All related party transaction should meet the arm’s length standard irrespective of any thresholds, making it vital to streamline TP policies & make necessary year end adjustments.

Companies carry out year end adjustments (True-up/True down adjustment) if faced with one of the below scenarios

• Actual results/margins deviate from targeted margin as per intercompany agreement/pricing policy
  Eg:where fixed return model is followed by a limited risk bearing entity (contract manufacturer/LRD/contract service provider) deviations can be due to differences between budgeted & actual costs & billings based on budgets; or variance in components of costs considered for billing & for TP purposes (operating costs).
• The actual margin earned is not at arm’s length when compared to comparable companies for that particular period, based on the comparability analysis carried out to arrive at the arm’s length range.

These adjustments are necessary to achieve arm’s length results in compliance with local regulation & reduce exposure of audit adjustments. Any adjustment done post book closure can only be considered in the tax return (ie suo moto adjustment) & may give rise to other implications (additional interest, secondary adjustment if applicable in that country).

While performing yearend adjustments one needs to consider:

1. Whether intercompany agreements contain applicable clauses relating to true-up/true-down adjustments
2. When adjustments are required as per scenario b) above, to what point of arm’s length range should the adjustment be made by UAE taxpayers– 25th/75th percentile or median of the dataset?
3. In a one sided-testing approach, whether the adjustments made would be acceptable & justifiable from the viewpoint of the counter party’s jurisdiction
4. Implications on duties paid (Customs) for imports when there is downward price adjustment-whether the same would be treated as sunk cost or refund can be claimed
5. Revenue figures reported in periodic other statutory filings (indirect tax filing) during the year-whether the same should be revised
6. Interplay with Pillar2

While year end adjustments may be inevitable in some cases, it is desirable that the adjustment quantum is minimal. This is possible through periodic (monthly, quarterly) monitoring & evaluation of profitability levels through the year. This is where operationaltransferpricing gains importance & technology tools can be leveraged for effective implementation of TP polices.