What is a transfer pricing policy, and why is it important?

August 21, 2025
Uncategorized

Introduction

In today’s globalised economy, multinational businesses often engage in cross-border transactions between their subsidiaries, branches, or related entities. To regulate such dealings, companies are required to follow a Transfer Pricing Policy. If you’re wondering what a transfer pricing policy is and why it matters for businesses, this guide explains everything you need to know.

What is a transfer pricing policy?

A Transfer Pricing Policy is a set of guidelines that determines how goods, services, or intellectual property are priced when exchanged between related entities within the same corporate group.

The main goal is to ensure that these internal transactions reflect fair market value, preventing companies from shifting profits to low-tax jurisdictions and complying with international tax laws.

In short, the policy acts as a framework to:

  • Maintain transparency in intercompany transactions
  • Ensure compliance with tax regulations
  • Reduce risks of tax disputes and penalties

Why is a transfer pricing policy important?

Understanding why a Transfer Pricing Policy is important helps businesses avoid legal and financial risks. Here are the key reasons:

Tax compliance and legal requirements.
Authorities worldwide, including the UAE, require businesses to follow transfer pricing regulations. Without a clear policy, companies risk penalties, fines, and audits.

Prevents profit shifting.
A transfer pricing policy prevents artificial shifting of profits to tax-friendly jurisdictions, ensuring fair tax contribution where actual business activities occur.

Enhances transparency.
Documenting transfer pricing practices creates a transparent financial system, making it easier for auditors and regulators to review business operations.

Reduces tax disputes.
A well-documented policy minimises the risk of double taxation and disputes with tax authorities.

Reduces financial and operational risks.
Unexpected transfer pricing adjustments by the Federal Tax Authority (FTA) can cause significant financial strain and disrupt business operations. By establishing and maintaining a robust policy, companies can proactively minimise such risks. 

Documenting transfer pricing practices creates a transparent financial system… Regular reviews through internal audit services further strengthen compliance and highlight areas of improvement.

Transfer pricing policy in the UAE.
A taxable person that meets either of the following conditions shall maintain both a master file and a local file per Clause (2) of Article (55) of the Corporate Tax Law in the relevant Tax Period: 

  1. a) Where the Taxable Person, for any time during the relevant Tax Period, is a Constituent Company of a Multinational Enterprises Group as defined in the Cabinet Decision No. 44 of 2020 referred to above that has a total consolidated group Revenue of AED 3,150,000,000 (three billion one hundred and fifty million United Arab Emirates dirhams) or more in the relevant Tax Period. 
  2. b) Where the Taxable Person’s Revenue in the relevant Tax Period is AED 200,000,000 (two hundred million United Arab Emirates dirhams) or more.

For businesses crossing the AED 200M or AED 3.15B thresholds, proper documentation is mandatory. Independent reviews, such as external audit services, can ensure that your transfer pricing framework aligns with the UAE Corporate Tax law.

Best practices for implementing a transfer pricing policy.

To build a strong and compliant transfer pricing framework, companies should:

  • Conduct a functional analysis of intercompany transactions
  • Use appropriate transfer pricing methods (e.g., CUP, Cost Plus, TNMM)
  • Keep updated documentation and reports
  • Review policies regularly with professional tax advisors

Keeping updated documentation and reports is crucial, and periodic reviews through external audits ensure accuracy. Similarly, internal audit services help identify risks early, while VAT consultancy ensures alignment with UAE tax obligations.

Conclusion

So, what is a transfer pricing policy? It’s a structured approach that ensures fair pricing in related-party transactions, protects businesses from legal risks, and builds long-term financial stability. For UAE businesses, adopting a clear transfer pricing policy is no longer optional—it’s a legal necessity under corporate tax law. Get expert guidance for your transfer pricing policy in the UAE with MBB Auditing—your partner for success.