Page 7 - ICAI UAE TAX UPDATE_JUNE 2024

4 ARTICLES FROM MEMBERS

4.1 Attributing Profits to a UAE

Permanent Establishment

CA Ajit Jain

Permanent Establishment (PE) is a place of business the Branch is considered as a PE of the head office and
that through which an enterprise conducts its business characterised as a procurement support service entity.
wholly or partially. A PE may subsist where there is a
branch, management office, workshop or any other Step 2: Determining the arm’s length compensation.
fixed place of business. However, it is also possible to The next step is to determine the arm’s length attribution
have a dependent agent PE when that agent concludes to the PE, based on the functional analysis.
contracts on behalf of principal entity
In our procurement example, the UAE Branch should
The UAE Corporate Tax regulations (Article 14) require earn a commission aligned with what an independent
attributing profit to a PE as if it were a separate and agent would receive for similar procurement support
independent enterprise – authorized OECD approach. This activities. A transfer pricing method like the Transactional
approach ensures that PE to be taxed on what it would Net Margin Method (TNMM) can benchmark an arm’s
have earned if it dealt with the rest of the operations at length commission range, likely based on a Return on
an arm’s length. This article provides a practical two-step Total Costs profit level indicator.
guide, along with illustrative examples.
If the benchmarking analysis shows that independent
Step 1: Functional Analysis procurement support agents earn a 5-10% commission
on the value of goods purchased. The UAE PE’s
The first step is to conduct a thorough functional analysis remuneration should fall within this range, based on its
to identify the PE’s functions, assets, and risks, as a specific functions, assets, and risks.
separate and independent enterprise. This delineation is
important for accurately attributing profits. Key considerations for UAE taxpayers:

Example: A ForeignCo has a UAE Branch engaged in • Conduct a PE analysis to identify any unintended PEs
procurement activities for the head office. The major and assess profit attribution implications.
responsibility of the branch is to source for suppliers, • Ensure the PE’s books and financial statements reflect
discuss and agree on contracts and place orders. the attributed profits.
However, the PE does not take title to the goods or earn • Maintain robust TP documentation, including detailed
any sales revenue. PE functional analysis.
The functional analysis reveals that the branch performs Proper profit attribution ensures a PE is taxed on what it
support activities, while ForeignCo handles strategic would have earned as a separate entity. UAE taxpayers
procurement decisions and bears inventory risk. with PEs or potential PEs should invest in developing
ForeignCo also handles all sales activities and retains a sound profit attribution methodology to minimize tax
title to the goods. Based on the functional analysis, risks.
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