Imagine you have a big family business, let's say it's making fancy sports shoes. But this isn't just a local business; your family has different parts of the business in different countries:
Your cousin in Country A designs the shoes.
Your uncle in Country B makes the actual shoes (the factory).
Your aunt in Country C sells the shoes to customers.
Now, when your uncle's factory (Country B) sells the shoes he made to your aunt's selling shop (Country C), they have to decide on a price. Let's say it costs your uncle $20 to make a pair of shoes. He could sell them to your aunt for:
$21: This would mean the factory in Country B makes very little profit, and the selling shop in Country C makes a huge profit.
$100: This would mean the factory in Country B makes a huge profit, and the selling shop in Country C makes very little profit.
Why does this matter? Because each country (A, B, and C) has its own tax rules. If the profit all piles up in a country with very low taxes, the family business pays less tax overall to the whole world.
The OECD (Organisation for Economic Co-operation and Development) is like a referee for this game. They say, "Hold on! That's not fair to the countries where the real work is happening."
The OECD Transfer Pricing Guidelines are their rulebook. This rulebook basically says:
"When different parts of the same family business (like your cousin, uncle, and aunt's businesses) trade with each other across different countries, the price they charge each other for goods or services must be the same price they would charge if they were totally separate businesses dealing with each other."
This is called the "Arm's Length Principle."
Think of "Arm's Length": If your uncle's factory was selling shoes to a completely separate, unrelated shoe shop down the street, what price would they agree on? That's the "arm's length" price. It's like reaching out your arm to shake hands – you're connected, but you're not getting too close or influencing the price unfairly.
Why does the UAE follow these guidelines?
The UAE has recently introduced Corporate Tax, and it wants to be seen as a fair and responsible country in the global business world.
Fair Play: By following the OECD's "Arm's Length Principle," the UAE ensures that if a big international company has a part of its business in the UAE, the UAE gets a fair share of the tax on the profit that's actually made in the UAE.
No Hiding Profits: It stops companies from making all their money in the UAE but pretending the profit was made somewhere else with lower taxes.
Good Global Citizen: Most major countries follow these rules. By adopting them, the UAE shows it's playing by the same rules as everyone else, which makes international businesses feel more confident about investing and operating here.
So, in simple terms, the OECD TP Guidelines are like the global rulebook for how parts of the same big company charge each other for stuff when they're in different countries, to make sure everyone pays their fair share of tax. And the UAE is now using this rulebook to make its new tax system fair and align with international standards.
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