Currency Depreciation & Transfer Pricing — Legal Justification for Intercompany Price Adjustments

Currency Depreciation & Transfer Pricing — Legal Justification for Intercompany Price Adjustments

Let’s address a question that’s both practical and increasingly relevant in global tax compliance:

Can currency depreciation alone justify changes in intercompany pricing between related parties?

1. Economic Substance First:
   Currency fluctuations are a real economic event — and under any robust transfer pricing policy, economic substance cannot be ignored. A significant and persistent depreciation of one currency (say INR) against another (say AED) does alter cost structures and profitability.

Hence, adjusting intercompany prices is not just a business decision — it can also be a tax risk mitigation strategy, provided it is grounded in substance.

2. UAE CT Law & TP Rules:
   As per Federal Decree-Law No. 47 of 2022, Articles 34 to 39 cover Transfer Pricing and mandate that all related party transactions must be conducted at Arm’s Length.

The law recognizes that arm’s length pricing is dynamic, and may evolve due to external factors — including FX volatility.

But here’s the key: Any price revision must be defensible. You can’t just change the price and move on.

3. FTA’s Expected Position:
   It is reasonable to expect the UAE Federal Tax Authority (FTA) to scrutinize price changes under the following lenses:

• Was the depreciation temporary or persistent?
• Did it materially affect the profitability of the tested party?
• Is there supporting documentation explaining the price adjustment?
• Are the comparables used for benchmarking adjusted for FX changes?
  FTA will not accept superficial justifications. The onus of proof lies with the taxpayer.

4. What Should Businesses Do?
   Here’s a practical framework:
   A. Document the impact of FX movements on your operating margins
   B. Revisit your comparables — ensure they reflect the revised economic reality
   C. If price changes are warranted — contemporaneously document the rationale
   D. Maintain a robust local file & master file (as required under UAE TP guidelines)

5. Final Word:

Yes — currency depreciation can justify intercompany price revisions.
But like all things in tax law, intent must meet documentation.
Economic rationale ≠ Compliance unless backed by structured justification.

I welcome thoughts from fellow professionals — How do you approach currency-driven pricing adjustments in your intercompany models?