Transfer Pricing challenges in MENA
RoyaltyRange
The Middle East and North Africa (MENA) region has seen significant developments in Transfer Pricing regulations in recent years, aligning with global trends to enhance transparency and prevent tax base erosion. These changes are largely driven by adopting international standards like the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan and efforts to protect local tax bases in response to evolving global tax dynamics.
In recent years, there has been a noticeable rise in Transfer Pricing audits and disputes across several countries in the MENA region. This surge has surprised many multinational enterprises (MNEs), particularly in countries where formal Transfer Pricing regulations have yet to be established.
The primary catalyst for Transfer Pricing reform in the MENA region has been the increasing integration into the global economy, alongside pressure from international organizations like the OECD and the G20. Many MENA countries, particularly those of the OECD’s Inclusive Framework, have committed to implementing BEPS measures, including Transfer Pricing regulations. This is evident in the growing number of countries in the region adopting the arm’s length principle and establishing detailed documentation requirements, in particular:
- United Arab Emirates (UAE): The UAE, a major hub for global business, has recently introduced its Federal Corporate Tax Law, which includes comprehensive Transfer Pricing rules. The new framework mandates companies to comply with the arm’s length principle and submit transfer pricing documentation, in line with OECD guidelines. The UAE’s introduction of corporate tax and Transfer Pricing rules marks a significant shift in its tax environment, which was previously tax-neutral.
- Saudi Arabia: Saudi Arabia has been a regional leader in adopting Transfer Pricing regulations. The General Authority of Zakat and Tax (GAZT), now part of the Zakat, Tax and Customs Authority (ZATCA), introduced Transfer Pricing guidelines in 2019, requiring businesses to maintain detailed documentation (master file and local file) and submit Country-by-Country (CbC) reports. The framework aligns with the OECD’s BEPS Action 13, and ZATCA has been actively auditing and enforcing compliance.
- Egypt: Egypt is also implementing the OECD’s BEPS initiatives and has updated its Transfer Pricing framework. The Egyptian Tax Authority (ETA) issued new Transfer Pricing guidelines in 2018, incorporating the arm’s length principle and documentation requirements. Egypt also requires MNEs to file CbC reports and has implemented measures to prevent profit shifting.
- Qatar: Qatar’s General Tax Authority (GTA) has included Transfer Pricing regulations in its Income Tax Law, which requires companies to adhere to the arm’s length principle for intercompany transactions. The law also mandates businesses to prepare and submit detailed Transfer Pricing documentation. Qatar’s Transfer Pricing regime is relatively new but is expected to follow the trend of increasing regulatory enforcement seen in other Gulf Cooperation Council (GCC) countries.
Implementing Transfer Pricing regulations in the MENA region presents several challenges for businesses. Many companies historically operating in tax-free environments are now navigating complex compliance landscapes with new Transfer Pricing documentation and reporting obligations. Additionally, companies must manage the risks of double taxation and potential disputes arising from tax audits, as MENA tax authorities ramp up enforcement efforts.
The requirement for comprehensive documentation – such as master files, local files, and CbC reports – has introduced administrative burdens, especially for MNEs. In some cases, the lack of clarity in local Transfer Pricing regulations or enforcement practices adds complexity, requiring businesses to work closely with tax professionals to ensure compliance.
Given the significance of establishing a proper Transfer Pricing policy for intangible assets, MNEs operating in the region must proactively address key issues related to intangible assets at the group level to manage their overall tax risk more effectively. Listed below are three important steps MNEs in the region should carefully consider regarding intangible assets:
- First, identify intangible assets within the group (developed/acquired, used, etc.), determine key parties involved in the intangible assets’ creation, and name the functions performed, assets utilized, and risks assumed on intangibles through a full DEMPE analysis.
- Second, analyze the scope and consistency of the contractual framework, examine the consistency of economic returns derived from the intangible assets, and study the accuracy of the allocation method used to split the economic returns from the intangible assets.
- Third, implement benchmarking studies to justify the level of economic returns to intangible asset owners, apply Transfer Pricing documentation supporting the Transfer Pricing policy related to the intangible assets, and initiate intra-group agreements aligned with the DEMPE analysis and the supporting economic analysis.
Transfer Pricing in the MENA region is expected to continue evolving, with more countries adopting and refining Transfer Pricing frameworks to align with global standards. As these regulations mature, businesses must adapt by improving their compliance strategies and ensuring accurate documentation of intercompany transactions. Additionally, the growing use of digital tools and technology to automate Transfer Pricing processes could help businesses meet these requirements efficiently.
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