Table of Contents
Why Documentation Has Become the Centre of Transfer Pricing Enforcement
Since the introduction of UAE Corporate Tax, transfer pricing documentation has shifted from being a technical formality to a primary enforcement tool for the FTA. While the arm’s length principle determines how related-party transactions should be priced, the Master File and Local File determine whether those prices can be defended under audit.
In practice, most transfer pricing disputes do not arise because a group selected an incorrect method. They arise because the taxpayer cannot demonstrate, with contemporaneous evidence, how pricing decisions were reached.
Legal Basis: Where Master File and Local File Requirements Come From
The requirement to prepare transfer pricing documentation is anchored in:
- Article 55 of Federal Decree-Law No. 47 of 2022 (Corporate Tax Law)
- FTA Transfer Pricing Guide (23 October 2023)
The UAE has expressly aligned its documentation framework with Chapter V of the OECD Transfer Pricing Guidelines, adopting the globally recognised three-tiered approach:
- Transfer Pricing Disclosure Form
- Master File
- Local File
Who Must Prepare a Master File and Local File in the UAE
Mandatory Thresholds
A UAE taxpayer is required to prepare both a Master File and a Local File if either of the following thresholds is met:
- UAE revenue exceeds AED 200 million in the relevant tax period, or
- The taxpayer is part of a multinational enterprise (MNE) group with consolidated group revenue exceeding AED 3.15 billion (EUR 750 million), approximately USD 810-825 million.
These thresholds are objective and mechanical. There is no discretion based on industry, tax rate, or Free Zone status.
Importantly, Free Zone Persons are not excluded. A Qualifying Free Zone Person that meets the thresholds must prepare Master File and Local File documentation in the same manner as a mainland entity.
Below the Thresholds: A Common Misconception
Taxpayers below the thresholds are not legally exempt from the arm’s length principle. The thresholds only determine whether formal Master File and Local File preparation is mandatory. They do not reduce:
- Transfer pricing compliance obligations
- Audit exposure
- The FTA’s power to adjust
In practice, many UAE groups below the thresholds still prepare defensive documentation (often simplified Local Files) to mitigate audit risk particularly where related-party transactions are material or complex.
The Master File: Group-Wide Transfer Pricing Blueprint
Purpose of the Master File
The Master File provides the FTA with a high-level, group-wide understanding of how value is created across the multinational group. Its objective is to explain:
- Where profits are generated
- How functions, assets, and risks are allocated
- How transfer pricing policies are designed globally
From an audit perspective, the Master File sets the context. If inconsistencies exist between the Master File and Local File, credibility is immediately undermined.
Key Content of the Master File
A compliant Master File typically includes:
- Organisational structure and legal ownership
- Description of the group’s business lines and value chain
- Details of group intangibles and IP ownership
- Intercompany financing arrangements
- Consolidated financial information
- Group-wide transfer pricing policies
In practice, UAE taxpayers often rely on an existing global Master File. However, it is critical that this document:
- Is up to date
- Reflects actual operating reality
- Is consistent with UAE-specific facts
Generic or outdated Master Files are a frequent source of audit exposure.
The Local File: UAE-Specific Audit Defence Document
Purpose of the Local File
The Local File is the most critical document from an FTA audit perspective. While the Master File explains the group, the Local File explains the UAE entity, what it does, how it earns profits, and why its related-party pricing is arm’s length.
This is the document the FTA will rely on to:
- Assess functional profiles
- Review benchmarking studies
- Challenge pricing outcomes
Key Content of the Local File
A robust UAE Local File includes:
- Detailed description of the UAE entity’s business
- Functional analysis (functions, assets, risks)
- Description of each controlled transaction
- Selection and justification of the transfer pricing method
- Benchmarking studies and comparability analysis
- Financial analysis linking benchmarks to actual results
From a practical standpoint, the Local File must be transaction-specific and contemporaneous. Recycled benchmarking studies or regional analyses that do not reflect UAE conditions materially increase audit risk.
Timing, Submission, and Record-Keeping Requirements
Preparation vs Submission
A common misunderstanding in the market is that Master File and Local File are “filed” documents. They are not.
- Documentation must be prepared contemporaneously
- It is not submitted automatically
- It must be provided to the FTA within 30 days of request
This 30-day window is strict. Groups that wait until a request is issued to start preparing documentation often fail to meet the deadline, triggering penalties and weakening their audit position.
Record Retention
Transfer pricing documentation must be retained for at least seven years, consistent with UAE record-keeping requirements under the Corporate Tax regime.
FTA Audit Perspective: How These Files Are Actually Used
From an enforcement standpoint, the FTA uses Master File and Local File documentation to:
- Test consistency between group policy and local outcomes
- Identify misalignment between profit and substance
- Prioritise high-risk taxpayers for deeper review
Common red flags include:
- UAE entities characterised as “low risk” but earning high margins
- Loss-making UAE entities performing core functions
- Significant outbound payments without robust benefit analysis
- Inconsistencies between VAT, ESR, and transfer pricing positions
In practice, documentation quality often determines how far an audit escalates.
Penalties and Risk Exposure
Failure to comply with documentation requirements can result in:
- Administrative penalties for non-provision or late provision
- Additional penalties for incorrect or misleading disclosures
- Transfer pricing adjustments increasing taxable income at 9%
For Free Zone entities, documentation failures may also:
- Undermine Qualifying Free Zone Person status
- Trigger reassessment of income eligibility for the 0% tax rate
The financial impact is therefore often significantly broader than the tax adjustment itself.
Documentation Is the First Line of Defence
In the UAE’s Corporate Tax environment, Master File and Local File documentation are no longer optional technical artefacts. They are the primary tools through which the FTA assesses risk, credibility, and compliance.
Groups that treat documentation as a retrospective exercise will struggle under audit. Those that integrate it into governance, financial reporting, and intercompany decision-making will be far better positioned to manage risk and operate with certainty.
In practice, transfer pricing documentation is not about satisfying regulators, it is about protecting the integrity of the group’s tax position before it is challenged.
