Transfer pricing is significant for determining the fair prices of goods, and services, and the exchange of intellectual property between two parties. Moreover, firms who work in cross-border transactions with affiliates must adhere to transfer pricing laws. This can include maintaining detailed documents, conducting transactions, and submitting them to FTA upon request.
Four Transfer Pricing Methods
The Transactional Profit-Split Way
This is a simple technique that includes the involvement of two parties who work closely together. It provides a fair share to each party by analyzing their organization’s contribution and potential profitability.
This method works on the phenomenon of establishing a price for a product that is new to the market. If you’re a seller in a foreign country, you can set up a benchmark price for the product by adding up the standard cost and profit. This way other sellers who will be selling the same type of product will already know the setting price.
This a go-to method for checking if the transactions between companies are at arm’s length or not. Moreover, it analyzes if the transactions are fair by comparing the both of the company’s net margin. If the margins between the two companies are similar then you can consider the transaction to be equitable.
When you resale the product to an unrelated party with a profit margin, determine the transfer price. It can be done by checking the resale price instead of its original price. Usually, the calculation of price works on looking into the profit margins of competitors of the same sector.
Wrapping it Up
Many businesses in UAE use transfer pricing for lowering the total tax burden on the parent company. All these guidelines help ensure a fair pricing for exchange of goods and services between parties with close relationships. Therefore, choose wisely in deciding which transfer pricing methodology is best for conducting your cross-border transactions.
