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Market prices, profit margins and input VAT: Does FTA Decision No. 13 of 2026 import transfer pricing into VAT due diligence?

FTA Decision No. 13 of 2026, effective from 1 October 2026, requires taxable persons to verify not only the identity and commercial capacity of their suppliers but also the economic circumstances of each taxable supply before deducting input VAT.

One provision deserves particular attention. Under Article 4(3)(a), the recipient must “verify that the prices or the profit margin are not commercially unjustifiable or significantly different from market conditions without a clear reason”. At first sight, this resembles a transfer pricing requirement. The reference to market conditions, prices and profit margins suggests that taxpayers may need to assess whether their transactions produce results consistent with those observed between independent parties.

Yet the Decision applies not only to related-party transactions but also to ordinary purchases from independent suppliers. It does not prescribe valuation methods, acceptable profit margins or permissible deviations from market conditions.

This raises several questions:

  1. Are taxpayers now required to conduct transfer pricing analyses for VAT purposes?
  2. Is comparing the purchase price with the market sufficient, or must the commercial reasons for any deviation also be established?
  3. Whose profit margin must be assessed?
  4. And does the provision apply equally to prices above and below market?

These questions should be considered against the legal purpose of Decision No. 13. As discussed in our earlier articles,[1] the verification requirements form part of the mechanism for determining whether a taxable person should have been aware of Tax Evasion in a supply chain. Article 4(3)(a) must therefore be interpreted as a measure directed at identifying suspicious transactions, rather than an independent requirement that every taxable supply be concluded at market value.

Market pricing as a VAT verification requirement

  1. Article 4(3)(a) contains two important elements:
    1. commercial justification, and
    2. consistency with market conditions.

The provision does not prohibit prices or margins that differ from those ordinarily observed in the market. Instead, it requires verification that such differences have a clear commercial explanation.

  1. The distinction matters. A transaction may be concluded below the prevailing market price for entirely legitimate reasons, including liquidation of inventory, reduced demand, bulk purchasing arrangements, short delivery periods or the supplier’s strategic decision to enter a new market. Equally, a price above market may reflect extended credit, additional warranties, unusual delivery obligations, product scarcity or commercial risks assumed by the supplier. The mere existence of a price difference therefore does not establish that the transaction is commercially unjustifiable. Nor does an economically disadvantageous transaction necessarily indicate Tax Evasion.
  2. There is, however, a drafting ambiguity. Article 4(3)(a) refers to prices or margins that are “commercially unjustifiable or significantly different from market conditions without a clear reason”. It is not entirely clear whether commercial unjustifiability and significant deviation constitute two independent tests or whether the absence of a clear commercial explanation is intended to qualify both.
  3. In our view, the provision should be read as a whole. Its purpose is to identify circumstances that may indicate Tax Evasion, not to prescribe commercially optimal outcomes. Accordingly, the existence of a genuine and adequately supported commercial explanation should be relevant to the assessment under either formulation.

Does the provision import transfer pricing principles?

  1. The similarity with transfer pricing is apparent, but the legal distinction is fundamental. Article 34 of Corporate Tax Law requires transactions and arrangements between Related Parties to satisfy the arm’s-length standard. It prescribes methods for determining that result, including the comparable uncontrolled price, resale price, cost-plus, transactional net margin and profit split methods. Article 4(3)(a) of Decision No. 13 contains no equivalent reference to the arm’s-length standard or prescribed methods. Its application is not limited to Related Parties, and its objective is not to determine the appropriate allocation of taxable profits.
  2. Consequently, Article 34 of the Corporate Tax Law cannot, in our view, be treated as automatically applicable to VAT verification under Decision No. 13. Nevertheless, transfer pricing methodologies may provide useful analytical tools. For example, a comparison with prices charged for comparable goods may be appropriate where reliable market data is available. In other cases, the resale price method or a simplified margin analysis may help determine whether the economic results of the transaction are unusual. Such methods should, however, be used as evidence of commercial reasonableness rather than as mandatory valuation techniques.
  3. There is also an existing market-value concept within the VAT legislation itself. Article 25 of the VAT Executive Regulation defines market value by reference to the consideration generally obtainable in comparable circumstances between unconnected persons, with additional rules where directly comparable supplies are unavailable. This definition may provide a useful starting point when identifying comparable market prices. However, Decision No. 13 refers to “market conditions”, not expressly to the statutory definition of “market value”. It also requires consideration of profit margins, which extends beyond a simple valuation of the supply.
  4. Nor should Article 4(3)(a) be confused with Article 36 of the VAT Law. Article 36 already provides for market-value substitution in certain related-party transactions where the consideration is below market value and the recipient cannot recover the VAT in full. Article 36 is a rule determining the taxable value of a supply. Article 4(3)(a) is a verification requirement directed at identifying potentially suspicious circumstances. They operate for different purposes and under different conditions.
  5. Accordingly, even where a transaction does not require a market-value adjustment under Article 36, its pricing may still require explanation under Decision No. 13. The practical result is an overlap between VAT due diligence and transfer pricing analysis, but not a merger of the two regimes.

Is comparison with market prices sufficient?

  1. A further question is whether a taxpayer satisfies Article 4(3)(a) merely by checking the agreed price against available market data. We consider that two stages should be distinguished:
    1. the taxpayer must have a reasonable basis for assessing whether the price or margin is materially inconsistent with prevailing market conditions;
    2. where a significant deviation is identified, the taxpayer should establish and document the reasons for that deviation.

A simple comparison may be sufficient where the price falls within the range ordinarily observed for comparable transactions and there are no other unusual circumstances.

  1. Where the difference is material, however, identifying the deviation without investigating its cause would be difficult to reconcile with the requirement to verify that a clear commercial reason exists. Equally, the analysis should not be reduced to identifying a single market price. Prices may vary considerably depending on the timing of the transaction, volume, product quality, delivery terms, credit period, warranty obligations, geographic market and risks assumed by the parties. A commodity supplied for immediate delivery, for example, should not necessarily be compared directly with an otherwise identical commodity supplied under a long-term contract with deferred payment.
  2. A transaction may therefore fall outside an initially identified benchmark without being commercially unjustifiable. The important question is whether the comparison properly reflects the commercial circumstances of the transaction and, where a material difference remains, whether that difference can be reasonably explained.

Whose profit margin must be verified?

  1. This may be the most difficult aspect of Article 4(3)(a). The provision refers to “the profit margin” without identifying the person whose margin is relevant. At least three interpretations are possible.
    • The first is that the taxpayer must assess the margin earned by its supplier. This appears consistent with the purpose of identifying suppliers whose pricing may be commercially unsustainable.
    • The second is that the taxpayer must assess its own margin arising from the purchase and subsequent resale. An unusually high resale margin may indicate that the acquisition price was substantially below market, while an unusually low or negative margin may indicate an excessive purchase price.
    • The third is that the provision permits consideration of whichever margin is relevant to understanding the economic circumstances of the transaction, including the margin retained by an intermediary.
  2. In our view, the third interpretation is more consistent with the wording and purpose of the Decision. A purchaser ordinarily knows its own costs, selling prices and expected profitability. It does not necessarily know the supplier’s purchase cost, operating expenses or profitability. Requiring the purchaser to establish the actual profit margin of every independent supplier would effectively oblige it to investigate commercially confidential information that it may have no contractual or practical right to obtain.
  3. The Decision does not expressly impose such a requirement. This distinction becomes particularly important where the supplier is an intermediary. Article 4(3)(d) separately requires a clear and justifiable commercial explanation for the intermediary’s involvement in the supply. In such cases, the intermediary’s functions and remuneration may be relevant to determining whether its participation is commercially justified. However, this does not necessarily mean that the purchaser must independently reconstruct the intermediary’s financial statements or determine its precise net profit margin.
  4. A reasonable approach would be to assess the information available to the purchaser and, where circumstances indicate a material concern, request an explanation sufficient to understand the transaction’s economics. For related-party transactions, existing transfer pricing documentation may provide this explanation. For transactions between independent parties, however, the requirement should not be interpreted as granting the purchaser unrestricted access to its supplier’s internal financial information.

The difference is between verifying whether there is a credible economic explanation and proving the supplier’s actual profitability. Decision No. 13 expressly requires the former. It does not clearly prescribe the latter.

Who must justify an unusual price: the supplier or the purchaser?

  1. Closely related is the question of who should provide the explanation for a price that appears significantly below market. From the purchaser’s perspective, paying less is ordinarily commercially advantageous. The purchaser may have every legitimate reason to select the lowest-priced offer. The supplier, however, may have reasons for accepting a lower margin or even a loss on a particular transaction. Those reasons may not be apparent to the purchaser.
  2. It would therefore be artificial to require the purchaser to justify the supplier’s commercial decision solely by reference to the purchaser’s own economic interests. Nevertheless, Article 4(3)(a) imposes the verification obligation on the recipient seeking to deduct input VAT.
  3. The purchaser cannot, therefore, simply respond that a low price was attractive and that the supplier’s reasons are irrelevant. Where the price is sufficiently unusual to raise concerns, the purchaser should seek to understand why it is commercially possible. This may involve:
    • obtaining an explanation from the supplier,
    • reviewing the circumstances of the sale,
    • examining relevant market data, or
    • considering information already available from the parties’ commercial relationship.

The purchaser is not necessarily required to verify every component of the supplier’s cost structure. But an explanation should be sufficiently credible and consistent with the available evidence to address the apparent anomaly.

  1. For example, a supplier’s assertion that it is selling below market to liquidate obsolete inventory may be entirely plausible. Its credibility would be stronger if supported by information concerning the age of the inventory, its marketability or the supplier’s decision to discontinue the product. Conversely, a newly incorporated intermediary repeatedly offering high-value goods at prices materially below prevailing market levels, without identifiable commercial capabilities or a credible source of supply, may present a substantially different risk.

In the latter case, the problem is not merely the low price. It is the combination of the price, the supplier’s circumstances and the absence of a satisfactory explanation. This illustrates why the verification exercise should not be confined to a mechanical price comparison.

Does the requirement apply to prices above market as well as below market?

  1. A particularly important interpretative question is whether Article 4(3)(a) is concerned primarily with prices below market or applies equally to excessive prices. From a supply-chain VAT fraud perspective, unusually low prices may be the more obvious warning sign. A supplier offering goods substantially below prevailing prices may be relying on an economic advantage that cannot be explained by its legitimate business operations. In some circumstances, that advantage may arise from VAT that has been charged but will not be remitted to the tax authority.
  2. This concern is familiar from European and UK practice concerning missing-trader and supply-chain VAT fraud. However, the wording of Article 4(3)(a) is not limited to underpricing. It refers generally to prices or margins that are significantly different from market conditions. There is therefore a textual basis for applying the provision to prices above market as well.
  3. An excessive purchase price may be commercially justified. It may also, in particular circumstances, indicate inflated invoicing, artificial intermediary arrangements or transactions structured to generate unjustified input VAT claims. Nevertheless, the two situations should not be treated as presenting identical risks:
    • a low price may be commercially beneficial to the purchaser while raising questions about the supplier’s ability to perform the transaction legitimately;
    • a high price may be commercially disadvantageous to the purchaser and may require explanation for that reason. Yet accepting an excessive price, even knowingly, does not in itself demonstrate participation in Tax Evasion.

In our view, Article 4(3)(a) should be interpreted as covering material deviations in either direction, but the significance of the deviation must be assessed by reference to the circumstances and the particular VAT risk involved. A price above or below market should not automatically be treated as suspicious merely because a comparable transaction could have been concluded on more favourable terms.

Kickbacks and concealed commercial arrangements: a separate issue?

  1. Unusual pricing may also raise questions about undisclosed commissions, rebates or kickbacks. However, the distinction between such arrangements and the specific purpose of Decision No. 13 should not be overlooked. Article 54(bis) of VAT Law addresses the recipient’s awareness (actual or constructive) of a connection between the relevant supply or supply chain and Tax Evasion. An undisclosed payment to an employee or other person involved in procurement may raise serious legal and commercial concerns. However, the existence of such a payment does not necessarily establish Tax Evasion within the supply chain.
  2. Accordingly, investigating corruption or improper procurement incentives should not, in our view, be treated as an independent objective of Article 4(3)(a). The position may be different where a concealed payment affects the consideration for the supply, is used to disguise the real recipient of funds, supports artificial invoicing or forms part of an arrangement connected with Tax Evasion. In those circumstances, the payment may become relevant not only to the pricing requirement but also to Article 4(2), concerning payment arrangements, and Article 4(3)(d), concerning the role of intermediaries.
  3. The distinction is important. Decision No. 13 should not be interpreted as converting every commercially improper arrangement into VAT fraud. Its application remains linked to the statutory requirements of Article 54(bis).

Must taxpayers document market prices and margins for every transaction?

  1. Article 5(2) requires verification of each Taxable Supply received or accepted in accordance with Article 4. Article 5(3) requires the verification steps to be documented and supporting evidence retained. The language is mandatory. Moreover, the Decision does not provide a general exemption for supplies from established or low-risk suppliers. The limited exception under Article 6 concerns supplies below AED 10,000, excluding VAT, and does not apply where the aggregate value of supplies from the same supplier exceeds, or is expected to exceed, AED 100,000 over the relevant 12-month period. Does this mean that a taxpayer must prepare a separate market-pricing analysis for each transaction?
  2. In our view, not necessarily. The Decision requires verification of each supply but does not prescribe the form or extent of the pricing analysis or the documentation supporting it. A useful parallel can be drawn with the Corporate Tax transfer pricing rules. Under Article 34 of the Corporate Tax Law, the arm’s-length principle applies to transactions between Related Parties irrespective of whether the taxpayer meets the thresholds for maintaining a Master File and Local File. Where those thresholds are not met, Section 6.6.3 of the FTA Transfer Pricing Guide No. CTGTP1 expressly requires taxpayers to maintain “reasonable records supporting the arm’s-length nature” of their transactions. Thus, the absence of prescribed formal documentation does not remove the obligation to substantiate pricing, but allows taxpayers flexibility in selecting the appropriate evidence.
  3. We consider that a similar approach should apply to Article 4(3)(a) of Decision No. 13. Reasonableness is a broader concept than compliance with a particular documentation format. Where a pricing methodology and supporting records are sufficiently reliable to demonstrate compliance with the arm’s-length principle for Corporate Tax purposes, it is difficult to see why the same methodology and records should not ordinarily be regarded as reasonable evidence of commercial pricing for VAT purposes. Indeed, the VAT provision does not expressly require an arm’s-length result, but rather verification that prices or margins are commercially justifiable and that significant deviations from market conditions have a clear explanation.

Nevertheless, the different objectives of the two regimes must be recognised. Evidence supporting an arm’s-length result may satisfy the pricing element of VAT verification without necessarily addressing other circumstances relevant to supply-chain Tax Evasion.

  1. For businesses purchasing standardised goods, reasonable documentation may consist of a procurement policy supported by market quotations, periodically updated price ranges, recognised market indices or comparable historical transactions. For services or goods without readily observable market prices, the analysis may rely more heavily on the nature and scope of the supply, contractual terms, available quotations and the commercial rationale for the agreed consideration. Existing transfer pricing studies may also provide relevant support, particularly for related-party transactions. The extent of the analysis should reasonably reflect the nature of the transaction, the availability of comparable information and the significance of any pricing deviation.
  2. The distinction is therefore between the scope of verification, which Article 5 extends to each taxable supply, and the method and documentation of that verification, which the Decision does not prescribe in comparable detail. A common pricing methodology may be applied across multiple comparable transactions, provided that the taxpayer can demonstrate its application to the relevant supplies. There should be no need to prepare a separate benchmarking study or pricing memorandum for every invoice where existing records reasonably establish compliance with Article 4(3)(a). Where a transaction materially deviates from the established pricing parameters, however, the reasons for that deviation should be investigated and documented before the related input VAT is deducted.
  3. Accordingly, a proportionate approach based on reasonable records, consistent pricing methodologies and more detailed verification of exceptional transactions appears justified. Although Decision No. 13 does not expressly recognise such an approach as a safe harbour, it would be difficult to justify imposing more onerous pricing documentation requirements for VAT than those considered reasonable under the Corporate Tax transfer pricing framework without a clear statutory basis or a difference in the circumstances requiring further investigation. The relevant question should be whether the available records reasonably demonstrate compliance with Article 4(3)(a), rather than whether the taxpayer has prepared a particular type of pricing documentation.
  1. The final question is perhaps the most important. Suppose a taxable person purchases goods at a price materially below market and fails to obtain a convincing explanation from the supplier. Does this allow the FTA to deny input VAT recovery?
  2. In our view, not automatically. As explained in our earlier analysis, Decision No. 13 implements Article 54(bis)(3) of the VAT Law. The latter provides a mechanism under which a taxpayer may be treated as having been required to be aware that a supply was part of a supply chain related to Tax Evasion if it did not perform the prescribed verification. The underlying Tax Evasion remains a separate requirement. In other words, a failure to justify pricing may be relevant to establishing whether the taxpayer should have been aware of Tax Evasion. It does not itself establish that Tax Evasion occurred.
  3. Three matters must therefore remain conceptually separate:
    1. the FTA must establish that the relevant supply or supply chain was actually connected with Tax Evasion.
    2. it must consider the taxpayer’s awareness of that connection, including the statutory deeming mechanism under Article 54(bis)(3);
    3. the FTA must determine whether the statutory conditions for rejecting the deduction are satisfied.

Article 51 of the Tax Procedures Law places the burden of proving Tax Evasion on the FTA. Decision No. 13 does not, in our view, reverse that burden by treating unusual pricing as conclusive evidence of Tax Evasion.

  1. Conversely, an adequately explained price deviation does not necessarily protect the taxpayer where other circumstances demonstrate actual knowledge of Tax Evasion.
  2. This interpretation is also consistent with the distinction drawn in the European and UK experience. The UK tax authority’s guidance on the Kittel principle identifies commercially unusual transactions as possible indicators of the trader’s knowledge of VAT fraud. However, it also recognises that a purchaser cannot ordinarily be expected to know the precise margins earned by other traders throughout a supply chain.[2]
  3. In the UAE, the prescribed verification requirements are more extensive and their legal effect is more explicit. Nevertheless, the underlying distinction between evidence of suspicious circumstances and proof of Tax Evasion remains essential. In particular, an unexplained price difference should not become a substitute for establishing that the supply chain was connected with actual Tax Evasion.

Conclusions

  1. Article 4(3)(a) of Decision No. 13 introduces a significant new consideration into UAE VAT compliance: taxpayers must examine whether the prices and profit margins associated with their purchases are commercially justifiable. This requirement is not limited to related-party transactions and may therefore extend market-pricing analysis to businesses that have never been required to undertake formal transfer pricing studies.
  2. However, the provision should not be interpreted as introducing a general arm’s-length pricing obligation into VAT legislation. In our view, the appropriate interpretation is that:
    1. Transfer pricing methodologies may be used to support the commercial assessment, but they are not prescribed by Decision No. 13 and should not be treated as mandatory for every transaction.
    2. A comparison with market prices may be sufficient for ordinary transactions, while material deviations generally require additional investigation and a documented commercial explanation.
    3. The relevant profit margin should be assessed in light of the circumstances and information reasonably available to the purchaser. The provision should not be interpreted as an obligation to reconstruct the actual profitability of every independent supplier.
    4. Material deviations above and below market may both require explanation, although they may indicate different commercial circumstances and VAT risks.
    5. An unusual or unjustified price does not itself establish Tax Evasion and should not independently justify input VAT denial under Article 54(bis).
  3. The main difficulty is that Decision No. 13 does not define an acceptable pricing range, establish materiality thresholds or specify the extent of investigation expected where a supplier’s profitability is unknown. These omissions create uncertainty, particularly for businesses operating in volatile markets, dealing with independent intermediaries or purchasing goods and services for which reliable comparables are unavailable. Further FTA guidance would be welcome on the scope of the profit-margin test, the evidence required to justify deviations and the circumstances in which existing commercial pricing controls may satisfy Article 4(3)(a).
  4. Until such clarification is issued, businesses should avoid treating the provision as either a formal transfer pricing requirement or a purely documentary exercise. The essential question is not whether a better price could have been negotiated, but whether the agreed price makes commercial sense in the circumstances and whether any unusual features are sufficiently explained to address the risk of involvement in a supply chain connected with Tax Evasion. That distinction should guide both the implementation of Article 4(3)(a) and its interpretation in future VAT disputes.

Disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

The same reservation applies to the judicial issues addressed in this article. This study has not been commissioned, authorised, or endorsed by the Ministry of Justice, the Federal Supreme Court, or any other judicial authority in the UAE. It is not intended to convey, and should not be understood as conveying, any official position of those authorities. Nor does it purport to suggest that the interpretations, conclusions, or proposals set out in it are binding on the courts or must necessarily be adopted in judicial practice.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.

Footnotes

  1. See From “I Didn’t Know” to “You Should Have Known”: UAE Article 54(bis) and Supply-Chain VAT Risk, and The Checklist Has Arrived: FTA Decision No. 13 of 2026 and the New UAE VAT Due-Diligence Regime ↑
  2. HMRC VAT Fraud Manual, VATF53425 and VATF53435. ↑