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Transfer pricing is a practice that sets prices for transactions within a business or between subsidiaries under common ownership, and it applies to both domestic and cross-border exchanges.

When these companies buy, sell, or license things to each other, they have to decide on a price. That price, called the transfer price, has a big impact on how profits (and taxes) are spread across countries. If the price is too high or too low, it could shift profits to lower-tax jurisdictions, which is exactly what tax authorities want to avoid.

That’s why most countries, including the UAE, now have rules in place to ensure these prices follow the “arm’s length” standard, which means the pricing should be similar to what unrelated businesses would use.

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SCENARIO (A Short Transfer Pricing Story)

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SCENARIO (A Short Transfer Pricing Story)

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ABC Global has two subsidiaries:

YY Materials (in a high-tax country)

XX Electronics (in a low-tax country)

- YY makes materials, and XX uses them to build electronics. YY usually sells materials for €100, but since XX is its “company sibling,” it sells them for €70 instead.

- What happens?

YY earns less profit

XX earns more profit

- ABC’s total profit doesn’t change, it just moves from YY → XX

- Because XX is in a low-tax country, ABC pays less tax overall

- This smart shifting of profit through internal pricing is called transfer pricing.

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https://www.macfarlanes.com/what-we-think/102eli5/how-to-avoid-common-pitfalls-in-transfer-pricing-102jmmm/

1. Follow the arm’s length principle

2. Keep strong documentation

3. Perform accurate functional analysis

4. Use reliable comparability analysis

5. Monitor implementation continuously

6. Work with transfer pricing specialists

7. Use advance pricing agreements (APAs)

8. Strengthen internal controls and training

9. Identify HMRC “High-Risk Areas” early

10. Ensure accurate year-end adjustments

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How to avoid common pitfalls in transfer pricing - Macfarlanes

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HMRC recently issued guidelines on how to avoid common pitfalls and follow what HMRC considers to be best practice in transfer pricing compliance. The guidelines contain a detailed description of HMRC’s perception on the role of “UK risk leads” and “transfer pricing specialists”. The compliance guidelines also highlight HMRC’s view of common indicators of high-risk approaches to transfer pricing policies.

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How Big Companies Cut Tax in Ireland

The Double Irish was a tax strategy used by big multinational companies (like Apple, Google, and Facebook) to pay much less tax by moving profits to countries with very low or zero tax.

The Idea:

1. Company A (Irish company)

Sells products or ads and earns a lot of money in Europe.

But it pays huge fees/royalties to another company in the same group.

2. Company B (Also Irish, but taxed in a tax haven)

This company owns the intellectual property (IP), like software, algorithms, trademarks.

It is legally an Irish company, but it is managed from a tax haven, so it pays almost no tax.

The Goal

Move profits out of Europe → to a company that legally pays almost no tax.

Imagine:

Apple Ireland sells €10 billion worth of iPhones.

Apple Ireland must pay €9.8 billion in royalties to another Apple company based in Bermuda (but registered in Ireland).

Result:

Taxable profit in Ireland = only €200 million → very little tax.

Profit in Bermuda = €9.8 billion → tax = almost zero.

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1. Prevents profit shifting: Some companies might be tempted to move profits to countries with lower tax rates by tweaking internal prices. Transfer pricing rules are meant to stop that.

2. For fair tax collection: If a business makes money in the UAE, the UAE should get its fair share of tax revenue. Fair pricing ensures that it happens.

3. Promotes transparency: Clear and consistent internal pricing makes it easier for both businesses and tax authorities to stay on the same page.

4. Supports fair competition: When everyone plays by the same rules, businesses compete fairly, and no one gets an unfair tax advantage.

5. Aligns with international tax standards: Following global standards (like those from the OECD) helps businesses avoid being taxed twice on the same income and keeps them out of international tax trouble.

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1. Interconnected manual processes, from data extraction and manipulation, through to calculation and reporting prone to human error

2. Lack of control over intangibles and royalty payments

3. Persons using different version of data sets

4.Specific knowledge is held by a sole individual in the organisation

5. Confusion at the time of the allocation of profits between different subsidiaries, especially when dealing with complex transactions involving multiple countries

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Transfer Pricing & financing transactions explained

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Recent developments in transfer pricing in the UK