More often than taxpayers expect. A benchmarking study is not accepted simply because it exists — the Federal Tax Authority can, and does, question individual comparables on independence, functional similarity, data reliability and the geographic tier used. Because the UAE Corporate Tax regime places the burden of proof on the Taxable Person, a comparable that cannot be defended line by line is effectively a weak point in the whole transfer pricing position.
A study can look complete and still be vulnerable, because the FTA does not review the interquartile range as a single number — it reviews the comparables that produced it. A study built on six candidates, three of which turn out to be loosely comparable on closer inspection, does not simply lose those three; it loses the reliability of the range itself. This article sets out the grounds on which the FTA can challenge a comparable, how the FTA Transfer Pricing Guide (CTGTP1) frames the comparability analysis, and what a Taxable Person can do at the search stage to make the final set defensible.
What makes a company or transaction comparable in the first place?
Article 34(5) of the Corporate Tax Law requires that the most appropriate transfer pricing method be selected having regard to the contractual terms, the characteristics of the property or services, the economic circumstances of the parties, the business strategies employed, and the functions performed, assets employed and risks assumed.
These same factors define comparability: a candidate is only a reliable comparable to the extent that none of these differences would materially affect the price or margin being tested, or that a reasonably accurate adjustment can remove the effect of any difference that does exist. The FTA Transfer Pricing Guide also makes a point that is easy to overlook at the search stage: economic conduct between the parties prevails over the written contract, so a comparable's public filings and business description carry more weight than a label on a database screen.
How those factors should drive the search itself is covered in selecting reliable comparables.
Why does related-party dependence disqualify a candidate?
A comparable is meant to represent how independent parties price a transaction. If a large share of a candidate's own revenue comes from its related parties, its reported margin may itself reflect internal group pricing rather than market forces — which defeats the purpose of using it as a benchmark.
Commercial databases commonly apply an independence indicator based on ownership and revenue concentration. A defensible UAE study should apply and document a comparable independence screen of this kind, rather than relying on the database's default flag without checking it against the candidate's actual filings.
Why do loss-making comparables draw extra scrutiny?
The Transfer Pricing Guide is specific on this point: a loss-making uncontrolled transaction or company should trigger further investigation before it is accepted into, or excluded from, the comparable set. The Guide identifies two circumstances in which a loss-making comparable should be excluded — where the loss does not reflect normal business conditions, and where the loss reflects a level of risk that is not comparable to the risk actually assumed by the Taxable Person in its Controlled Transaction.
This cuts both ways: a loss-making candidate cannot be dropped simply because it is inconvenient, but it also cannot be kept without asking why it lost money and whether that reason applies equally to the tested party.
Why does the geographic tier of the comparable set matter?
The FTA's expected sequence for sourcing comparables starts with the local UAE market, moves to the regional Middle East market where local data is insufficient, and only then extends to other regions. This mirrors OECD practice, but it is a common point of challenge in UAE studies, because standalone GCC financial data is often thin and many practitioners move to regional or global databases relatively quickly.
A study that jumps straight to a global comparable set without first demonstrating that local and regional data was tested and found inadequate is an easier target than one that documents the search sequence and the reason each tier was insufficient.
What happens once the FTA challenges a comparable?
Article 34(8) gives the FTA the power to adjust Taxable Income to the arm's length result that best reflects the facts and circumstances where the reported result does not fall within an appropriate range. Article 34(9) requires that adjustment to be based on information the Taxable Person could reasonably have made available.
In practice, this means that if the FTA rejects one or more comparables and the remaining set no longer supports the tested party's position, the FTA is not required to accept the Taxable Person's original range — it can substitute its own comparable set or adjustment, informed by whatever documentation was or should have been available. A search log that only shows the accepted comparables, without a record of what was screened out and why, leaves the Taxable Person with little to argue from at that point.
What are the common rejection grounds, and how can they be pre-empted?
| Ground | Why the FTA can reject it | How to pre-empt it |
|---|---|---|
| Related-party dependence | The candidate's margin may reflect group pricing, not a market outcome | Apply and document an independence screen; check filings, not only the database flag |
| Functional dissimilarity | Industry codes catch false matches that do not share the tested party's FAR profile | Qualitative review of each business description before accepting the candidate |
| Unexplained or non-comparable losses | Losses may reflect abnormal conditions or a different risk profile | Investigate the reason for the loss and record why the candidate is kept or dropped |
| Wrong geographic tier | Global sets skip the local-then-regional sequence the FTA expects | Document that UAE and regional data were tested and why they were insufficient |
| Undocumented methodology | The FTA cannot reconstruct the range or the rejected candidates | Keep a dated search log, filters in order, and a specific reason for each rejection |
What does the FTA expect a search process to look like?
The Transfer Pricing Guide's comparability chapter, read together with general OECD practice, points to a search process that a UAE Taxable Person can reasonably follow: define quantitative screens first (industry classification, size, geography, data availability, positive equity where relevant), then apply a qualitative review of each shortlisted candidate's actual business description to eliminate false matches the quantitative filters cannot catch, and finally compute the profit level indicator on a single-year or multi-year basis, with multi-year averaging generally accepted where it smooths ordinary business-cycle volatility rather than masking a comparability problem.
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Record the database used and the exact search date.
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Record every quantitative and qualitative filter applied, in the order applied.
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Record the full candidate list before screening, not only the final accepted set.
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Record a short, specific reason for each rejection — "not comparable" is not itself a reason.
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Record the profit level indicator calculation and whether single-year or multi-year data was used, and why.
A practical illustration
Emirates Precision Supplies LLC benchmarks its UAE distribution margin against a set of nine candidates identified in a commercial database. On review, three candidates are removed: one derives more than half its revenue from a disclosed related party and fails the independence screen; one is a specialist reseller of a materially different product category identified only on reading its business description, not from the database's industry code; and one reports a loss explained in its own filings by a one-off litigation settlement unrelated to its ordinary trading risk.
The remaining six candidates produce an interquartile range that still supports the company's reported margin. Because the rejection of each candidate is documented with a specific, evidenced reason, the study withstands review even though a third of the original set was ultimately excluded.
Frequently asked questions
Can the FTA reject a comparable just because it disagrees with the choice?
The FTA's power under Article 34(8) is to adjust to the result that best reflects the facts and circumstances, which means any rejection should be reasoned rather than arbitrary — but the practical burden remains on the Taxable Person to show why a challenged comparable is reliable.
Are global comparables acceptable if local data is not available?
Yes, in principle, but the FTA's guidance points to a local-then-regional-then-global search sequence, so the study should show that local and regional data were tested first and found insufficient.
Does one weak comparable invalidate the whole study?
Not necessarily. Removing a small number of comparables and recalculating the range is normal; the risk arises when the remaining set is too small or too dissimilar to produce a reliable range.
How often does the comparable set need to be refreshed?
A full benchmarking refresh is generally expected periodically — commonly every three years where operating conditions are unchanged — with financial data updated annually in between, and an earlier refresh where a material change in functions, markets or business model occurs.
Is a database's independence flag enough on its own?
It is a reasonable starting point, but it should be checked against the candidate's own disclosures where the transaction or amounts involved are significant, since database flags can be based on incomplete ownership data.
Primary sources and further reading
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Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses — Article 34
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OECD Transfer Pricing Guidelines — Chapter III
How SBC Tax Consulting can help
SBC's transfer pricing team stress-tests comparable sets for independence, functional match, loss treatment and geographic sequencing before the FTA does. Contact SBC if a study needs a documented search log or a refresh ahead of review.
This publication is for general information only and does not constitute professional advice. Please consult your SBC advisor before acting on any matter covered here.