The UAE’s corporate tax system uses the Transactional Net Margin Method (TNMM) to establish an arm’s length price for controlled transactions. This method, outlined by the Organisation for Economic Cooperation and Development (OECD) and the Federal Tax Authority (FTA), assesses net profit in relation to a relevant base like costs, sales, or assets. The Net Profit Indicators (NPIs), which are ratios of net profit to the chosen base, are crucial for comparing controlled and uncontrolled transactions. If differences are found, adjustments are needed to establish an arm’s length price.
It is important to apply the TNMM at the transactional level, and businesses are encouraged to conduct functional analysis to determine net profit margins based on functions performed, risks taken, and assets used. While the TNMM works for various transactions and is practical for analyzing a financial indicator for one business, it has drawbacks. Factors affecting NPIs might not impact prices or gross margins, and making corresponding adjustments can be challenging, especially when traditional methods are not feasible. To navigate these complexities, businesses are advised to be cautious, prioritize traditional methods, and use TNMM only when traditional methods face limitations.
Want to know more about updates to the UAE’s Corporate tax guidelines and regulations? Drop us an email (office@alphaprimedwc.ae) or give us a call (+97158 515 2374) at any time.
