UAE corporate tax: TNMM based on the NPIs to establish arm’s length price

UAE corporate tax: TNMM based on the NPIs to establish arm’s length price

UAE corporate tax: TNMM based on the NPIs to establish arm’s length price

The TNMM assesses the net profit in relation to a suitable base

By Mahar Afzal/Compliance Corner

Published: Sun 3 Dec 2023, 4:38 PM

Under the transactional profit methods, there are two approaches to establish the arm’s length price, with the transactional net margin method (TNMM) being one of them. The TNMM has been explained in detail in the guidelines issued by the Organisation for Economic Cooperation and Development (OECD) and given in the transfer pricing guideline (CTGTP1) issued by the Federal Tax Authority (FTA).

The TNMM assesses the net profit in relation to a suitable base such as costs, sales, or assets that a taxpayer gains from a controlled transaction. The net profit indicators (NPIs), which are the ratios of net profit to an appropriate base, of the controlled transaction need to be compared with those of the uncontrolled transaction. Ideally, the NPIs of the controlled transaction should align with those of the uncontrolled transaction. If there are disparities between the NPIs of the controlled and uncontrolled transactions, an adjustment to the controlled transaction price is necessary to establish an arm’s length price.

Adhering to the overarching principle of comparability, the NPIs of