Transfer Pricing Adjustment UAE: Downward Rules Explained

A transfer pricing adjustment may be required when a UAE taxable person’s related party transactions are not recorded at arm’s length in the financial statements. In Public Clarification CTP011, the UAE Federal Tax Authority explains that downward adjustments can be made in the Corporate Tax Return without prior FTA approval, provided they are properly assessed, disclosed, reconciled, and supported with appropriate transfer pricing documentation.

This clarification is particularly relevant for UAE businesses that have recognised more taxable income than an arm’s length outcome would support. While the FTA confirms that a downward adjustment is possible, it also makes clear that taxpayers must be able to justify the adjustment if reviewed.

What is a transfer pricing adjustment?

A transfer pricing adjustment is an adjustment made in the Corporate Tax Return to align related party transactions with the arm’s length principle.

Under Article 34(1) of the UAE Corporate Tax Law, transactions and arrangements between related parties must meet the arm’s length standard. This means the pricing should reflect what independent parties would have agreed in comparable circumstances.

A transfer pricing adjustment may be:

• An upward adjustment, which increases taxable income.
• A downward adjustment, which decreases taxable income.
• A correction to the tax position where the financial statements do not reflect arm’s length values.

For example, if a UAE company sells goods to a related party at a price higher than the arm’s length price, the financial statements may show more income than the arm’s length result supports. In that case, a downward adjustment may be needed in the Tax Return to reduce taxable income to the correct arm’s length amount.

The arm’s length principle is also consistent with the wider international approach to transfer pricing. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations | OECD describe the arm’s length principle as the international consensus for valuing cross-border transactions between associated enterprises, while the UAE’s transfer pricing framework applies this principle within the UAE Corporate Tax regime.

When is a downward transfer pricing adjustment relevant?

A downward transfer pricing adjustment is relevant where the amount recorded in the financial statements results in taxable income that is higher than the arm’s length outcome.

This can happen where:

• A UAE taxable person has sold goods or services to a related party at a price above the arm’s length price.
• A related party arrangement has been recorded on terms that do not reflect market conditions.
• The financial statement value does not match the result supported by the transfer pricing analysis.

The FTA’s Public Clarification CTP011 confirms that taxpayers must self-assess whether a transfer pricing adjustment is required.

The UAE Corporate Tax system operates on a self-assessment basis, so prior approval from the FTA is not required before making the adjustment in the Tax Return. However, this does not reduce the need for supporting evidence. Any adjustment may still be reviewed in a tax audit.

In practice, this means a downward adjustment should be treated as a technical tax position, not simply as a return entry. The calculation must be consistent with the relevant transaction, the applicable transfer pricing methodology, and the supporting evidence.

Disclosure rules for a downward transfer pricing adjustment

One of the most important points in CTP011 is the disclosure requirement.

The FTA clarifies that where a taxable person makes a downward adjustment in the Tax Return, the related party transaction or arrangement must be disclosed regardless of its value or nature. This is different from the usual threshold-based approach for certain related party disclosures.

Scenario	Adjustment type	Disclosure treatment
Goods sold to a related party below the arm’s length price	Upward adjustment	Disclosure required only if the applicable thresholds are exceeded
Goods sold to a related party above the arm’s length price	Downward adjustment	Disclosure required regardless of value or nature
Related party transaction recorded at arm’s length	No adjustment	Standard disclosure rules should be considered

This is a practical point for finance and tax teams. Even if the transaction is relatively small, a downward adjustment must still be disclosed if it is included in the Corporate Tax Return.

For businesses preparing their UAE Corporate Tax filings, this should be reviewed alongside the transfer pricing disclosure form. WellTax has published practical guidance on 7 Practical Tips for Filing the Transfer Pricing Disclosure Form, which may help businesses prepare the supporting information more effectively.

Documentation required before filing

CTP011 places significant emphasis on documentation. Where a downward adjustment is made, the taxpayer should maintain sufficient evidence to support the position taken in the Tax Return.

The documentation should include:

• The rationale for making the downward adjustment.
• An explanation of why the original pricing did not reflect the arm’s length principle.
• An arm’s length analysis, including a benchmarking study where appropriate.
• A reconciliation between the financial statement values and the values disclosed in the Tax Return.
• Evidence of symmetrical corresponding adjustments by the relevant related parties.

This documentation should be prepared before filing, not only after an FTA query arises. The taxpayer should be able to show how the adjustment was calculated, why it was necessary, and how the revised position aligns with the arm’s length standard.

A clear reconciliation is especially important. It should connect the accounting records to the tax return position in a way that can be followed by management, advisers, and, if required, the FTA.

Practical risks for UAE businesses

Downward adjustments are likely to attract careful attention because they reduce taxable income. CTP011 does not prevent taxpayers from making them, but it does highlight the need for a well-supported position.

Common risk areas include:

• Adjustments made late in the filing process without sufficient analysis.
• Benchmarking that does not match the actual transaction.
• Missing reconciliation between the accounts and the Tax Return.
• Related party positions that do not support the UAE taxpayer’s adjustment.
• Incomplete disclosure of the transaction or arrangement.

The related party position is particularly important. CTP011 refers to symmetrical corresponding adjustments by relevant related parties. In practical terms, this means the UAE taxpayer should consider whether the related party has reflected a consistent position for the same transaction or arrangement.

A one-sided adjustment may create questions, especially where the group has not documented how the overall arm’s length result was achieved.

For businesses operating across borders, our guide to UK & UAE Transfer Pricing Rules: Key Guidelines and Global Considerations for Companies Growing Internationally explains broader transfer pricing considerations where group pricing policies affect more than one jurisdiction.

Steps to take before making a transfer pricing adjustment

Before making a downward transfer pricing adjustment, businesses should follow a structured review process. This helps reduce filing risk and improves the quality of the tax position.

A practical process would include:

1. Identify the related party transaction or arrangement.
2. Confirm the amount recorded in the financial statements.
3. Assess whether the recorded amount reflects the arm’s length principle.
4. Prepare or update the transfer pricing analysis.
5. Complete a benchmarking study where required.
6. Calculate the revised arm’s length value.
7. Reconcile the accounting value to the Tax Return value.
8. Check whether the relevant related party has made a symmetrical corresponding adjustment.
9. Complete the required disclosure in the Corporate Tax Return.
10. Retain supporting documentation in case of an FTA review.

This approach helps ensure that the adjustment is not only technically correct, but also properly evidenced.

As an FTA registered tax agent in the UAE, we can support businesses with UAE Corporate Tax compliance, transfer pricing analysis, Tax Return filing, and communications with the Federal Tax Authority where required.

Transfer pricing adjustments can involve several overlapping issues, including accounting records, Corporate Tax filing, benchmarking, related party disclosures, and group tax positions.

WellTax supports UAE businesses with transfer pricing and Corporate Tax matters, including the review of related party transactions, preparation of transfer pricing support, and assessment of whether tax return adjustments are required. For internationally active groups, we can also assist where UAE transfer pricing interacts with UK or wider cross-border tax considerations.

This is especially useful where a business needs to understand not only whether a downward adjustment is technically available, but also whether the supporting file is strong enough to defend the position if reviewed.

Final thoughts

CTP011 gives UAE taxpayers helpful clarity on downward transfer pricing adjustments. It confirms that prior FTA approval is not required, but it also makes clear that taxpayers must self-assess, disclose, and document the adjustment properly.

The key message is simple: a downward adjustment should be made only where it is supported by a clear arm’s length analysis, a reliable reconciliation, and appropriate related party evidence.

For UAE businesses, the safest approach is to identify any potential adjustment early, prepare the supporting documentation before filing, and ensure the Corporate Tax Return disclosure is complete.

Written by Keziah Nicole Dela Cruz, CPA, Senior Accountant & FTA Tax Agent, WellTax.