Interplay Between Permanent Establishment and Transfer Pricing

1)    Introduction

As multinational enterprises (MNEs) expand their global footprint, the issues related to the inherent risk of permanent establishment (PE) and the consequent allocation of profits to such PEs outside the country of tax residence become ever more relevant.

2)    PE under the UAE Tax Landscape

• Fixed place
• Agency
• Construction
• Service

3)    Corporate tax (CT) consequences of PE in the UAE

• Maintenance of books of accounts and other documents
• Mandatory CT registration
• Taxation of profits attributable to the PE
• Filing of CT return

4)    How is profit attribution done?

• No guidance on profit attribution as per the UAE CT Law.
• Application of Article 7 of the OECD Model Tax convention
• Separate entity approach is followed for profit allocation.
• Adherence to Arm’s Length Principle for profit allocation.

5)    Interplay between PE and TP

• The overarching principles for profit allocation to a PE are based on the OECD TP guidelines.
• A two-step approach involving functional and comparability analysis as prescribed under the OECD TP guidelines must be followed.

6)    Attribution principles

• Functional and factual analysis
• Attribution of assets
• Attribution of risks
• Attribution of free capital
• Recognition of dealings
• Selection of TP method
• Determination of ALP

7)    How can Crowe help?

• Evaluating the risk of PE establishment and advising on the consequential tax compliances.
• Assisting in the appropriate allocation of profits and maintenance of robust documentation – where applicable.
• Advising on measures to mitigate the risk of PE and tax exposure in connection thereof.