The Federal Tax Authority has issued Corporate Tax Public Clarification CTP011, addressing a question many taxpayers with related party dealings have been quietly asking: what happens when a transaction wasn’t priced at arm’s length, and the fix lowers taxable income rather than raising it?
The short answer: you can make the adjustment yourself. But you cannot make it quietly.
The Core Rule
Under Article 34(1) of the UAE Corporate Tax Law, all transactions and arrangements between related parties must meet the arm’s length standard. In practice, financial statements do not always reflect that standard perfectly. When they fall short, a taxable person must correct the position in the Tax Return through a transfer pricing adjustment.
That adjustment can go either way:
- An upward adjustment increases taxable income.
- A downward adjustment decreases taxable income.
CTP011 focuses squarely on the second type, and for good reason. Reducing your own tax base is exactly the kind of move the FTA wants to see done properly, with evidence, not assumptions.
No Prior Approval Needed, But Full Documentation Required
Because UAE Corporate Tax operates on a self assessment basis, taxpayers do not need the FTA’s blessing before making a transfer pricing adjustment. That flexibility comes with a trade off: any adjustment made can be tested later in a Tax Audit.
For downward adjustments specifically, the FTA expects taxpayers to maintain and be ready to produce:
- A clear rationale for why the original price recorded in the financial statements did not reflect the arm’s length standard, and how the adjusted figure corrects that.
- An arm’s length analysis, including a benchmarking study, showing the adjustment is consistent with the transfer pricing methods actually applied.
- A reconciliation between the values booked in the financial statements and the arm’s length values declared in the Tax Return.
- Evidence of a symmetrical corresponding adjustment made by the related party on the other side of the transaction.
Skip any one of these, and a downward adjustment becomes very difficult to defend under scrutiny.
Disclosure: The Detail Most Businesses Will Miss
Ordinarily, related party transactions only need to be disclosed in the Tax Return once they cross the applicable thresholds. CTP011 removes that threshold entirely for downward adjustments.
If a downward adjustment is made, it must be disclosed, regardless of the value or nature of the transaction. A small, seemingly immaterial adjustment is treated the same as a large one for disclosure purposes.
A Simple Illustration
Consider a company that sells goods to a related party above the arm’s length price. To correct this, it makes a downward adjustment in the Tax Return, bringing its taxable income back in line with the arm’s length result.
Under CTP011, that adjustment must be disclosed in the Tax Return, no matter how small the transaction value. Compare this to an upward adjustment in a similar scenario, where disclosure is only triggered if the related party transactions exceed the prescribed thresholds. The asymmetry is deliberate.
What This Means in Practice
For businesses with related party dealings, the message from CTP011 is consistent with how the FTA has approached transfer pricing more broadly: self assessment is trusted, but only when backed by contemporaneous, defensible documentation.
Before filing a Tax Return that includes a downward transfer pricing adjustment, businesses should be able to answer three questions with evidence, not assertions:
- Can we show why the original price was not arm’s length?
- Does our benchmarking support the adjusted figure?
- Has the related party made the matching adjustment on their side?
If any of these cannot be answered clearly, the adjustment is not ready to be filed.
A Final Note
It’s worth remembering that this clarification applies only to adjustments made under Article 34(1). It does not extend to corresponding adjustments under Articles 34(10) and 34(11), which follow a separate process involving the FTA or a foreign competent authority. Businesses should not conflate the two when planning their compliance approach.
This article is intended for general informational purposes and does not constitute tax advice. Businesses should assess their specific facts and circumstances, ideally with the support of a qualified tax advisor, before making transfer pricing adjustments in their Corporate Tax Return.
