There Is No UAE Comparable. Now What?

The practical problem with benchmarking a UAE transaction is not methodological. It is that private company financial data in the UAE is thin, and a search restricted to domestic comparables often returns too few observations to be useful. The guide does not pretend otherwise; it sets out an order of preference and expects the widening to be reasoned.

Domestic first, then regional or global

The guide's position is stated directly. As far as possible, taxable persons should use domestic comparables in their comparability analysis, as these generally have a higher degree of comparability in terms of their market and economic circumstances compared to foreign comparables. Where insufficient data is available at the domestic level, taxable persons can consider regional or global comparables.

Two ways to build the set

The guide describes two broad approaches to identifying potentially comparable uncontrolled transactions, and they suit different fact patterns.

The additive approach starts with a list of independent parties believed to carry out potentially comparable transactions. Information is then collected on the transactions those parties conduct, to confirm whether they are acceptable comparables against predetermined criteria. In practice it may include both internal and external comparables.

The deductive approach starts with a wide set of companies operating in the same sector as the tested party, performing similar broad functions and not presenting obviously different economic characteristics. That list is then refined using selection criteria and publicly available information from databases, websites and similar sources.

The guide asks for a methodical, consistent approach that maintains a constant relationship between the steps — from the preliminary analysis of the controlled transaction, through the comparability analysis and the selection of method, to identifying comparables and reaching a conclusion. In other words the search criteria have to follow from the functional analysis rather than being chosen to produce a convenient answer.

The result is a range, not a number

Article 34(7) of the Corporate Tax Law recognises that applying the selected method, or a combination of methods, to comparable data may produce a range of financial results or indicators that are all relatively equally reliable. The guide adds the reason: transfer pricing is not an exact science, so it is generally difficult to arrive at a single figure that is the most reliable.

Where the range contains a sizeable number of observations, the guide says statistical tools that take account of central tendency — the interquartile range or other percentiles — are useful to narrow it and improve reliability, and that they prevent the impact of outliers and exceptional circumstances.

The guide's worked example benchmarks using three-year weighted average margins for each comparable company, which is worth noting in its own right: single-year data is more exposed to a one-off, and multi-year averaging is what the example demonstrates.

Adjustments, and the obligation to justify them

Widening a search geographically increases the differences between the comparables and the tested party, which is where comparability adjustments come in. The guide identifies adjustments for differing accounting practices between the controlled and uncontrolled transactions, segmentation of financial data to eliminate the material impact of non-comparable transactions, and adjustments for differences in capital, functions, assets and risks.

It singles out working capital. Working capital cycles and the related costs tend to have significant implications for profitability in certain industries, so adjustments for differing levels of accounts receivable, accounts payable and inventory may be undertaken where relevant.

The FTA can ask to see the database

One procedural point catches taxpayers who commissioned a study rather than performing one. Where a taxable person has used a private database to support its transfer prices, the FTA may request access to that database in order to better understand the conclusions reached. Adequate documentation should be maintained to demonstrate the results of the comparability analysis.

That has a practical consequence when a study is outsourced: the search strategy, the screens applied, the rejections and the reasons for them need to be retrievable, not just the final report. A conclusion without a reproducible search behind it is difficult to stand behind on request.

Where the entity is in a free zone, the stakes are higher than an adjustment. Compliance with the arm's length principle is a condition of Qualifying Free Zone Person status, so a benchmarking file that cannot be supported puts the rate at risk.

What to check

1. Run and record the domestic search first, even where you expect it to fail — the permission to widen depends on the domestic set being insufficient.
2. Exhaust internal comparables before commissioning an external search.
3. Derive the search criteria from the functional analysis, and keep the linkage visible through to the final set.
4. Use multi-year data where a single year would be distorted; the guide's example uses three-year weighted averages.
5. Apply the interquartile range where the set is large enough, rather than testing against a single point.
6. Justify every comparability adjustment in writing, particularly working capital adjustments.
7. Keep the search strategy, screens and rejection reasons retrievable, because the FTA may ask for access to the database itself.

The FTA Transfer Pricing Guide (CTGTP1) is guidance rather than legislation; the underlying obligation is in Articles 34 and 55 of the Corporate Tax Law. Confirm the position for your own facts before relying on it.