When a related-party transaction is not priced at arm's length in the accounts, the Corporate Tax Law expects the correction to be made in the return. The FTA's public clarification CTP011 deals with the more sensitive half of that correction — the downward adjustment, where a taxpayer reduces its own taxable income to reach the arm's length result. The message is balanced: you may make the adjustment yourself, but you must disclose it in full and be able to prove it.
The starting point: arm's length, or adjust in the return
Article 34(1) of the Corporate Tax Law requires every transaction and arrangement between Related Parties to meet the arm's length standard, and your financial statements should already reflect that. In practice they often do not — intercompany pricing is set for commercial or historical reasons, not for tax. Where the accounts fall short, the law requires an appropriate transfer-pricing adjustment in the return. That adjustment runs in one of two directions: upward, which increases taxable income, or downward, which decreases it.
You do not need the FTA's permission
Corporate Tax operates on self-assessment, and CTP011 confirms the consequence. A taxpayer must assess for itself whether an adjustment is needed, and does not require prior approval from the FTA to make one, in either direction, in the return. That is a helpful confirmation. It does not put the figure beyond reach: any adjustment entered in the return can be tested in a tax audit.
The catch: downward adjustments are disclosed in full
Here the clarification draws a deliberate line. General related-party transactions are disclosed in the return only where they exceed the applicable thresholds. Downward adjustments are treated differently. Every transaction or arrangement for which a downward adjustment is made must be disclosed — irrespective of its value or nature. There is no de minimis. If you reduce taxable income on a related-party dealing, the FTA expects to see it, however small.
The logic is straightforward. An upward adjustment increases the tax base; a downward adjustment shrinks it. The regime is content to let you self-assess the reduction, but not to let it pass unseen.
What you must be able to show
CTP011 sets out the evidence a taxpayer should hold whenever it makes a downward adjustment. Treat it as a file to be assembled before filing, not reconstructed after a query:
- A rationale for the adjustment — why the original pricing recorded in the financial statements did not reflect arm's length, and how the revised outcome does.
- An arm's length analysis, including a benchmarking study, evidencing that the adjustment is consistent with the transfer-pricing methods and regulations that apply.
- A reconciliation between the values recorded in the financial statements and the arm's length values disclosed in the return.
- Evidence of symmetrical corresponding adjustments by the relevant related parties to the same transactions and arrangements — that the other side of the dealing has been treated consistently.
The last point is the one groups most often miss. A downward adjustment that leaves the counterparty's position unchanged is asymmetric on its face, and asymmetry is what invites scrutiny.
What the clarification does not cover
CTP011 is confined to adjustments a taxpayer makes to comply with Article 34(1). It does not deal with the corresponding-adjustment mechanisms elsewhere in the Article: Article 34(10), under which the FTA makes a matching adjustment to a related party's income once an arm's length adjustment is made, and Article 34(11), under which a taxpayer can apply to the FTA for a corresponding adjustment after a foreign competent authority has adjusted the other side. Those are separate processes, with their own requirements — this clarification should not be read as covering them.
Before you file
For groups preparing the return, the practical implications are narrow but firm:
- Identify every related-party transaction where the booked price sits above arm's length and a downward adjustment is warranted.
- Disclose each one in the return without applying a threshold filter — the thresholds do not apply to downward adjustments.
- Assemble the rationale, benchmarking, and financial-statement-to-return reconciliation as a contemporaneous file.
- Confirm that the counterparty has made, or will make, the symmetrical adjustment — and document it.
Done well, a downward adjustment is simply the arm's length principle working as intended. Done casually — reduced income, thin evidence, no matching entry on the other side — it is one of the clearer flags a return can carry.
This article is general information on the FTA's CTP011 clarification and is not tax advice. We would be glad to review your related-party positions before filing.