Transfer Pricing By law on Approved & Arm’s Length Results

General Authority of Zakat and Tax under Board Resolution NO [6-1- 19] 

In the realm of international business, transfer pricing is a critical consideration for multinational enterprises, ensuring that transactions between related entities are conducted at fair market value. The General Authority of Zakat and Tax (GAZT) has outlined several approved methods for determining arm’s length results in its Transfer Pricing Bylaws, issued under Board Resolution No. [6-1-19]. Here’s a closer look at the approved methods for establishing transfer pricing, as detailed in Article 7 of the Bylaws: 

1. Comparable Uncontrolled Price (CUP) Method 

The CUP method involves comparing the price charged in a controlled transaction (i.e., between related entities) with the price charged in a comparable uncontrolled transaction (i.e., between independent entities). This method is ideal for situations where there is a direct comparison between transactions, ensuring that the price reflects the market conditions in which independent entities operate. 

2. Resale Price Method 

Under the Resale Price Method, the focus is on the resale margin. This method compares the margin earned from reselling property acquired in a controlled transaction with the margin earned from reselling similar property in uncontrolled transactions. It is particularly useful for determining arm’s length prices for distributors who resell products purchased from related entities. 

3. Cost Plus Method 

The Cost Plus Method involves comparing the mark-up on costs incurred in a controlled transaction with the mark-up on similar costs in uncontrolled transactions. This method is frequently used for providing services or selling goods where the costs incurred are relatively straightforward to determine, ensuring that the mark-up reflects market conditions. 

4. Transactional Net Margin Method (TNMM) 

The TNMM compares the net profit margin relative to an appropriate base (e.g., costs, sales, or assets) achieved in a controlled transaction with the margin achieved in comparable uncontrolled transactions. This method is useful when direct comparisons of prices or margins are not feasible, allowing for a broader assessment of profitability. 

5. Transactional Profit Split Method 

This method allocates a portion of the common profit (or loss) derived from a controlled transaction to each related entity, based on what an independent party would expect to earn from a comparable transaction. If arm’s length remuneration for certain functions can be determined using one of the other approved methods, the residual profit split method can then be applied to allocate remaining profits. 

Flexibility and Guidance 

The Bylaws emphasize that the methods listed are not in a specific order of preference. Instead, the choice of method should be guided by the specific facts and circumstances of each transaction. The Authority may provide further guidance on selecting the appropriate transfer pricing method through detailed guidelines. 

Conclusion 

The approved methods outlined in Article 7 of the Transfer Pricing Bylaws provide a robust framework for ensuring that intercompany transactions are priced fairly and in accordance with market conditions. Understanding and applying these methods correctly is essential for compliance and for maintaining transparent and equitable financial practices within multinational enterprises.