One Side Adjusted. What Happens to the Other?

A transfer pricing adjustment is only half a transaction. If one company's income goes up because a price was too low, the counterparty's deduction was correspondingly too high. Whether that second entry is ever made is what decides if the group has paid the right amount of tax overall or been taxed twice on the same profit. The Corporate Tax Law answers that question twice, and the two answers are not the same.

How an adjustment arises in the first place

Article 34(7) recognises that applying the selected method may produce an arm's length range of financial results rather than a single figure. Article 34(8) then provides that where the result of the transaction does not fall within that range, the Authority shall adjust the taxable income to achieve the arm's length result that best reflects the facts and circumstances.

Article 34(9) attaches a constraint that is easy to overlook and useful to know. Where the Authority makes an adjustment under Clause 8, it shall rely on information that can or will be made available to the taxable person. An adjustment cannot rest on material the taxpayer is never allowed to see.

Domestic: the corresponding adjustment is mandatory

Article 34(10) is the provision that matters for two UAE parties. Where the Authority or a taxable person adjusts the taxable income for a transaction or arrangement to meet the arm's length standard, the Authority shall make a corresponding adjustment to the taxable income of the Related Party that is party to that transaction.

Two features of that sentence do real work. It is expressed as shall, not may. And it is triggered by an adjustment made by the Authority or by the taxable person — a self-adjustment brings the counterparty adjustment with it.

Cross-border: it becomes an application

Article 34(11) covers the other case. Where a foreign competent authority makes an adjustment to a transaction or arrangement involving a taxable person to meet the arm's length standard, that taxable person can make an application to the Authority to make a corresponding adjustment to its taxable income.

The contrast with Clause 10 is the point of this article. Domestically, the Authority shall adjust. Cross-border, the taxable person can apply. There is no automatic relief when it is a foreign tax authority that moved first, and the guide confirms the FTA will review the foreign adjustment rather than simply give effect to it.

The guide adds that a taxable person can request the corresponding adjustment under the applicable provisions of the relevant Double Taxation Agreement. Article 34(11) itself does not condition the application on a treaty, so the guide is describing the ordinary route rather than restating a statutory limit — a distinction worth holding onto where no treaty covers the counterparty's jurisdiction.

The guide's worked figures

Example 25 in the guide runs the arithmetic. Company A, a UAE resident, sells finished goods to Related Party Company X under a policy of cost plus 6%. The FTA assesses the arm's length mark-up for similar transactions under similar conditions at 8% on cost, and adjusts Company A accordingly.

On operating cost of AED 5,000,000, revenue from Company X moves from AED 5,300,000 to AED 5,400,000, and Company A's profit moves from AED 300,000 to AED 400,000.

Company A and Company X then approached the FTA and requested a corresponding adjustment to limit the impact of double taxation on the same income. The FTA reviewed the position and agreed. In Company X, revenue from third parties stays at AED 6,500,000, the cost of finished goods from Company A rises from AED 5,300,000 to AED 5,400,000, and profit falls from AED 1,200,000 to AED 1,100,000.

Adjusting yourself: one direction is free, the other is not

The transfer pricing disclosure form runs on self-assessment, and the guide places the burden of proof on the taxable person. It recommends monitoring controlled transactions throughout the tax period so that real-time adjustments can be made before the return is submitted, which is the cheapest place to fix a pricing drift.

After the return is filed the position changes, and it is asymmetric.

The practical consequence is that the year-end true-up many groups run as a routine journal is only routine in one direction. A downward true-up after filing is a process with the FTA, not an entry, and it needs to be planned for rather than discovered.

The guide also notes that the taxable person has the option to seek clarification on a point of law from the FTA, which is a different instrument from an adjustment and worth distinguishing in a file.

Where a free zone entity is on either side of the adjusted transaction, the exposure is not confined to the computation. Compliance with the arm's length principle is a condition of Qualifying Free Zone Person status, so an adjustment reaches the rate rather than only the number.

What to check

1. Identify which clause your counterparty falls under: 34(10) for a UAE Related Party, 34(11) where a foreign authority adjusted first.
2. For domestic transactions, expect the corresponding adjustment as of right — the Authority shall make it.
3. For foreign adjustments, plan an application to the FTA and expect it to review the foreign adjustment rather than accept it.
4. Check whether the counterparty enjoys a different rate or relief, because a matched adjustment is not neutral where the two sides are taxed differently.
5. Monitor controlled transactions during the period so corrections happen before filing, not after.
6. Treat a post-filing downward true-up as an FTA process, not a journal entry.
7. Record why your chosen method was appropriate under the Clause 5 factors, since the FTA's examination starts from your method.
8. Where an adjustment is proposed, ask for the information relied on — Article 34(9) requires it to be information that can or will be made available to you.

The FTA Transfer Pricing Guide (CTGTP1) is guidance rather than legislation; the operative provisions are in Article 34 of the Corporate Tax Law. Confirm the position for your own facts before relying on it.