7. Special Considerations for Specific Cases
7.6. Permanent Establishment
Where valuation techniques are utilised in a Transfer Pricing analysis involving the transfer of intangibles or rights in intangibles, it is necessary to apply such techniques in line with international valuation standards and in a manner that is consistent with the Arm’s Length Principle and the principles of this Guide.
Depending on the facts and circumstances of the individual case, there may be a situation where an agreeable range of values cannot be arrived at for the transfer of assets or going concerns, for example, because of differences in the buyer and seller’s positions. This may be an indication that a termination payment is required or the possibility that the transaction should be disregarded.
It is not the intention of this Guide to set out a comprehensive summary of the valuation techniques used by valuation professionals or to endorse or reject one or more sets of valuation standards applied by valuation or accounting professionals or to describe in detail or specifically endorse one or more specific valuation techniques or methods as being especially suitable for use in a Transfer Pricing analysis.
Nonetheless, it is important to recognise that the value estimates based on valuation techniques can be volatile and rely on various assumptions. Due to the importance of the underlying assumptions and valuation parameters, Taxable Persons using valuation techniques should be explicit in the valuation parameters and assumptions and should substantiate the valuation techniques (including the reasonableness of such assumptions) when creating the valuation model. These concerns, amongst others, are important in evaluating the reliability of the particular application of a valuation technique.
7.5.3.3. Remuneration of post-restructuring Controlled Transactions
The Arm’s Length Principle and this Guide do not apply differently to post-restructuring Controlled Transactions as opposed to transactions that were structured as such from the beginning. The Arm’s Length Principle must be applied not only to the post- restructuring Controlled Transactions, but also to additional Controlled Transactions that comprise the Business Restructuring.
7.6. Permanent Establishment
Taxable Persons may carry on business activity through a number of different options including PEs. The principles outlined in this Guide apply to Taxable Persons who carry on business activity through a PE. Therefore, transactions between Related Parties or Connected Persons where one of the parties is a PE would need to be conducted in line with the Arm’s Length Principle.
7.6.2. The separate entity approach
In certain situations, a Non-Resident Person may perform activities which result in the creation of a PE in the UAE. Similarly, a Resident Person may conduct activities in another jurisdiction through a PE.
The FTA expects Taxable Persons to attribute the appropriate amount of profits and associated costs to PEs in accordance with the Arm’s Length Principle. The Arm’s Length Principle requires treating a PE as if it is a separate entity that operates independently from other parts of the Group and the parent to whom the PE belongs (i.e. a head office).
The separate entity approach is a hypothetical construct that distinguishes the functions, assets and risks of the PE from its parent entity and in doing so identifies the profits that the PE would have earned at arm’s length in its dealings with other parts of the Group.
References to attributing “profits” should also be understood as applying equally to attributing losses. Additionally, profits may be attributed to a PE even though the enterprise as a whole has never made profits, and vice versa, the application of the separate entity approach may result in nil profits being attributed to the PE despite the fact that the head office may have made profits. In order to accurately attribute the profit between the PE and its parent, a two-step analysis is required:
Step one:
The first step involves conducting a Functional Analysis to identify the activities performed by the PE on one side, and the head office on the other side, treating each as separate to the other. This analysis should also take into account the assets used and the risks assumed by the PE. The Functional Analysis should lead to:
• attributing to the PE the rights and obligations arising from the dealings between the Head Office and separate persons;
• the identification of significant people functions relevant to the assets, and the attribution of economic ownership of assets to the PE. The “significant people functions” considers the key value creating functions performed by the people contracted by the PE. Part of the analysis should allocate risks, assets and rewards to the function and take into account the significant people function role as key decision makers with the ability to assume risks;
• the identification of other functions of the PE;
• the recognition and determination of the nature of those dealings between the PE and other parts of the same enterprise (i.e. the head office); and
• the attribution of capital based on the assets and risks attributed to the PE.
Step two:
Determine the compensation of any transactions between the head office and the PE through:
• the determination of comparability between the dealings and uncontrolled transactions, established by applying this guide’s comparability factors directly (characteristics of property or services, economic circumstances, and business strategies) or by analogy (Functional Analysis and contractual terms) in light of the particular factual circumstances of the PE; and
• selecting and applying by analogy to the guidance in this guide the most appropriate method to the circumstances of the case to arrive at an arm’s length compensation for the dealings between the PE and the rest of the enterprise, taking into account the functions performed and the assets and risks attributed to the PE.
The FTA expects Taxable Persons will follow the above approach when attributing profits to PEs and that contemporaneous documentation supporting the application of the approach will be maintained and provided to the FTA upon request. This is expected to form part of the Transfer Pricing documentation prepared for each period.
In situations where an issue is not addressed within this guide, Taxable Persons are encouraged to refer to the 2010 report32 and the 2018 report33 on the attribution of profits to PEs issued by the OECD.
Example 23: Attribution of profits to PE
Company A is the parent company of an MNE Group headquartered in country X. It has a core business of procurement and sale of goods in country X.
Company A has a PE in the UAE that performs procurement activity on behalf of Company A from unrelated suppliers in the UAE. The PE habitually exercises an authority to conduct a Business or Business Activity in the UAE. The PE does not own title of the goods at any point of time nor has any entitlement to the amount charged by Company A from its customers.
32 Available at: https://www.oecd.org/ctp/transfer-pricing/45689524.pdf
33Available at: https://www.oecd.org/tax/transfer-pricing/additional-guidance-attribution-of-profits-to- permanent-establishments-BEPS-action-7.pdf
Company A pays a commission to the PE as a percentage of cost of purchases made on its behalf.
As mentioned earlier, to accurately attribute the profit between the PE and its head office, a two-step analysis is required:
Step One: The first step involves conducting a Functional Analysis to identify the activities performed by the PE on one side, and the head office on the other side, treating each as separate to the other. This analysis should also take into account the assets used and the risks assumed by the PE. The Functional Analysis shows that:
• A Co is performing the function of sale of goods to independent third-party customers in country X.
• The PE is performing procurement support.
Step two: Determining the compensation for the transactions and arrangements between A Co and its PE.
The attribution of profits should be done by applying the Arm’s Length Principle on the transactions and arrangements between A Co and its PE in the UAE.
The appropriate attribution should be at the arm’s length result that A Co would have had to pay if the transactions had been performed by an unrelated supplier performing similar functions in the UAE on behalf of A Co.