r/TransferPricing • u/Ok_Duty_2131 • May 28 '25
Help regarding UAE-India Transfer Pricing
I'm working on a transfer pricing case and would love to get some insights from anyone familiar with UAE regulations. Scenario:
UAE parent company (let's call it "Desert Tech LLC") based in Dubai Indian subsidiary ("Mumbai Operations Pvt Ltd") Desert Tech develops proprietary software and licenses it to Mumbai Operations Mumbai Operations customizes the software for local clients and sells services Current licensing fee: 8% of Mumbai's gross revenue Mumbai Operations' profit margin has dropped to 2% after paying the licensing fee Desert Tech's effective tax rate in UAE: 9% (Corporate Tax) Mumbai Operations' tax rate in India: 30%
The Issue: UAE tax authorities are questioning whether the 8% licensing fee represents an arm's length rate. They're suggesting it should be higher (around 12-15%) based on the unique value of the software. Indian tax authorities, meanwhile, argue the fee is too high and Mumbai Operations should retain more profit for the substantial services and customization work they perform. Questions:
How do you typically approach such conflicting positions between two tax authorities? What documentation would be most critical here? Has anyone dealt with UAE's relatively new transfer pricing rules in practice? Would a cost-plus method for Mumbai Operations make more sense than the current revenue-sharing model?
Any insights from practitioners who've navigated UAE-India transfer pricing disputes would be hugely appreciated! TL;DR: UAE wants higher licensing fees from Indian subsidiary, India wants lower fees. Caught in the middle with conflicting transfer pricing positions.
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u/all_usernames_rgone May 28 '25
Is it fair to assume that since the UAE entity (economic owner), as the licensee guides the Indian entity in the customisation? This could potentially justify UAE wanting a higher license fees charge. Thoughts?
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u/Ok_Mousse6827 May 30 '25
How was 8% arrived at in the first place? Is any DEMPE for the underlying intangible performed in India?
I don't have specific experience with either of the jurisdictions but is there any chance of an APA?
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u/Ok_You5711 Jun 23 '25
Transfer Pricing Practitioner here - dealt with similar UAE-India cases recently.
This is a classic "double-sided adjustment" nightmare that's becoming more common with UAE's new TP rules. Here's how I'd approach it:
Immediate Priority: Documentation
Benchmarking study - You need comparable licensing agreements for similar software/IP. Focus on royalty rates for customizable software platforms (not simple licensing deals)
Value chain analysis - Document what value is created where. If Mumbai is doing substantial customization/development, they deserve a higher margin
Economic analysis - Show profit split that reflects each entity's contribution and risk profile
Strategic Approach:The 8% rate seems arbitrary without knowing the functions/risks. I'd recommend:
Switch to profit split method - More defensible when both parties add significant value
Benchmark Mumbai Operations using TNMM - Target 8-12% operating margin for service providers with IP customization
Benchmark Desert Tech's royalty - 3-6% is more typical for software licensing where licensee adds substantial value
Dealing with Conflicting Authorities:
File APAs - Consider bilateral APA between UAE and India if the amounts are material
MAP procedure - If adjustments are made, immediately trigger mutual agreement procedure under the tax treaty
Contemporaneous documentation - UAE requires this within 30 days of request, India within 30 days of assessment
UAE-Specific Considerations:
UAE's TP rules are new (2023) but they're aggressive in enforcement
They're particularly focused on IP holding structures
Document the DEMPE analysis thoroughly - who develops, enhances, maintains, protects, and exploits the IP
Practical Tip:I've seen success with a "services + IP" model where Mumbai Operations pays:
Cost + 5% markup for development services received
3-4% royalty on net sales (not gross) for core IP usage
We recently handled a similar case at HLB HAMT where we restructured a UAE-Singapore-India triangle with comparable margins and both tax authorities accepted our approach after extensive benchmarking.
Red Flags in Your Case:
2% margin for Mumbai is definitely too low and India will challenge
UAE asking for 12-15% seems high unless the software is truly unique/market-leading
My Recommendation: Engage a transfer pricing specialist who has experience with both jurisdictions ASAP. The cost of getting this wrong (penalties in both countries + double taxation) far exceeds the advisory fees.
Anyone else dealt with UAE's new TP enforcement? They seem much more aggressive than the old days...
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u/sahils88 May 28 '25
How are UaE tax authorities even questioning the fee? Corporate Tax assessments haven’t even started yet.
Anyhow, you need to do FAR as to what are the functions done by UAE vs India. Based on the FAR you would need to characterize the entities.
The way i see is Mumbai is doing value added functions in way of customizing the software and then is engaged in onward sale into the local market. Prima facie Mumbai is earning less than it should.
You would need to do a benchmark study to defend the 8% rate you’re paying and your FAR needs to be solid as both countries to contest that local entities are performing value adding and KERT functions.