On this day in 1947, India achieved independence, marking a pivotal moment in its history. This event granted India the liberty to develop, flourish, and celebrate its cultural heritage. In the realm of auditing, independence is not only crucial but must also be apparent. Similarly, in taxation, independence holds significant importance, particularly when dealing with related parties.
The concept of the Arms-length Principle (ALP) is incorporated into many domestic tax laws as a specific anti-avoidance measure. ALP stipulates that transactions between related parties should mirror those agreed upon by independent entities. This principle considers not only the price but also terms such as credit period, delivery, post-sales service, functions performed, assets employed, and risks assumed. Related parties include individuals up to the fourth degree of relation, entities with at least 50 percent ownership or control, companies controlled by the same individual or entity, and individuals associated with trusts or foundations.
Proper documentation is essential. According to the OECD’s three-tier documentation approach, large corporations with a standalone turnover exceeding Dh200 million or a group turnover of Dh3.15 billion must maintain a local file and a master file. Exemptions apply for UAE-headquartered groups with no international presence. The highest tier, country-by-country reporting (CBCR), is mandatory for groups with consolidated revenues of Dh3.15 billion or more. For entities not meeting these criteria, maintaining documents supporting ALP compliance is essential.
Non-compliance with ALP can result in adjustments to taxable income and consequent tax liabilities. Therefore, assessing preparedness is crucial to avoid last-minute issues. Beyond compliance, this should be viewed as a matter of corporate governance, enhancing confidence and reducing litigation.
