United Arab Emirates: Cloud Computing And Transfer Pricing

Last Updated: 30 January 2018
Article by STA Law Firm
Most Read Contributor in United Arab Emirates, September 2019

In these times life without Netflix or Google Drive is hard to imagine, right? Accessing your all-time favorite movies from wherever you are to whenever you need without the hassle of carrying a bunch of discs and tapes wherever you go. Be it your slumber parties or a coffee shop where your client is late for a meeting; direct access to your devices and the cloud has never been so easy. But do you ever wonder how? Its Video-sharing cloud services, like Netflix that stream data across the Internet to a player application on the viewing equipment rather than sending the purchaser a DVD or physical discs. Even the services (such as Gmail and AppStore) which you use every minute of the day is a fantastic example of how much cloud computing has contributed to the technology industry over the past few years. Data routing, transmission and sharing at its best.

Cloud computing is what allows a company to practice using a network of remote servers hosted on the internet to operates and process data, share materials, and storage space to store rather than to store on a local server or a personal computer. A cloud computing system keeps its crucial data on Internet servers rather than distributing copies of data files to a particular client's devices; it is the delivery of on-demand computing materials over the internet.

Today everyone is talking about cloud computing as it has brought numerous advantages for the businesses, whether, large or small. The services provided by a cloud is easily accessible from anywhere on the globe and from any device, complete access to your resources, is no cost for infrastructure, having minimum management cost and the same time saving a lot of time and effort

Companies worldwide have adapted themselves by rapidly moving forward and have started operating their business from the cloud because of the temporary changes in the business sector brought about by the digital industry.

The most common actions today, like listening to the music, playing video games, using the social networks, storing photos and documents are, in most of the cases, done using the Cloud computing.

Transfer Pricing Challenges in The Cloud

Although service providers create cloud-computing systems to serve and benefit everyday business or research needs, it provides a time of unpredictability for international tax laws to follow this track of virtual cloud which makes it an obstacle to the companies and the tax administration.

The primary issue that arises out of this situation is the transfer pricing. Transfer pricing is the pricing for which, goods and services are sold and bought by related companies internationally within an enterprise. The price imposed by one group to a related entity for services provided.

For example, if a subsidiary company in Australia sells goods or services to a parent company in the USA, the cost of those goods paid by the parent company to the subsidiary company is the transfer price.

Every business that transacts internationally (or; virtually) with related entities, the transfer pricing rules and the principles of arm's length and permanent establishment are of great significance in such transactions.

For income tax regulation, multinational corporations must keep in account the transfer pricing rules and allocate their global profits among the various countries in which they function. The ideal allocation would permit each state to tax an appropriate portion of the taxpayer's total gain while avoiding taxation of the same income by more than one state.

The transfer pricing rules affect profits and losses among related entities of an enterprise that is in separate jurisdictions; thus, every business that transacts internationally with associated entities of industry must take into account the transfer pricing rules.

However, the governments worldwide are losing substantial tax revenue as companies allocate the profits to an establishment in a low-tax or a zero-tax jurisdiction.

Tax Manipulation

A straightforward illustration of transfer pricing and artificially allocating profits is as follows:

  • USco, a fictional U.S. based Bottle Company, manufactures bottle in the U.S. at the cost of 10 cents per pen.
  • USco's Canadian subsidiary, Subco, sells the bottle to Canadian customers for $1 (or 100 cents) per bottle and spends 10 cents per bottle in marketing and distribution costs.
  • The enterprise's total profit on the sale of each bottle is 80 cents (income of 100 cents, subtracting the value of 20 cents).
  • Transfer price is the price charged by USco to Subco and is likely to be somewhere between 20 cents (which will leave all of the profit in Canada) and 80 cents (which will allocate all the earnings in the US).

In this instance, the US tax rate is higher than the Canadian tax rate. Therefore, the multinational is likely to allocate the lowest possible transfer price to the sale of bottles from USco to Subco.

Such a way of artificially shifting profits had become the most significant concern of many governments, giving rise to the 'BEPS' (base erosion and profit sharing) project.

Organization for Economic Co-operation and Development (OECD)

In most jurisdictions, transfer pricing and solutions to such concerns of tax erosion, as stated above, are regulated by the OECD transfer pricing guidelines.

The Organization for Economic Co-operation and Development is an intergovernmental economic organization with thirty-five (35) member countries to spur economic progress and global trade and commerce. And it was in 2013 that at the request of the G20, the OECD launched an action plan to implement the BEPS project.

The transfer pricing law applies an arms-length model to reduce to the smallest possible inter-company price manipulation, which requires the transactions between related taxpayers to be constant with the results that would have been if independent, unrelated entities had engaged in a similar operation under similar circumstances. It ensures that business transactions where the buyer and seller are different legal entities but from the same enterprise, act independently and with no interest in the other's benefit.

In 2015, the OECD issued guidance and discussed new chapters to reduce the risk of transfers of intangible assets. An intangible asset for transfer pricing purposes is defined as 'something which is not a (physical) or financial asset, that can be owned or controlled for use in commercial activities and includes compensation of the use or transfer, had it occurred in a transaction between independent parties in comparable circumstances.'

The Challenge Today

However, there are several problems today in transfer pricing rules about the business of cloud computing. The first critical issue regarding the tax treatment of Cloud computing services is the characterization of the income deriving from services since it is not always possible to characterize the functions of cloud computing as the transfer of intangible assets. By moving to the cloud business, there is no longer a transfer of a physical or an electronic copy of the transaction like in intangible assets.

Another issue is the mobility of the cloud business which gives rise to complex challenges connected to the identification of the place where the business activity is sufficient. Leading to a shift in the taxation of the services from one jurisdiction to another and potential issues for the concerned governments since it gives rise to a problem of no taxation or double taxation.

Accordingly, the OECD needs to address issues on old tax guidelines that no longer match the current practice of doing business across jurisdictions. Considering that there are many obstacles and disputes that the taxpayer and the tax administrators are encountering owing to the updated technologies, such as cloud computing.

There are no updated guidelines of the transfer pricing rule that can apply to the technology of cloud computing, exposing the tax administrator to a problem of, non-payment of tax and stripping of charge by the companies seeing that. Corporations can quickly move their cloud service provider to a low or zero tax jurisdiction or even allocate the profits to a firm located in a low-tax or zero tax jurisdiction.

And as for the taxpayers, having no specific guidelines exposes them to a problem of double taxation and rise of a dispute with tax administrators as to the confusion on how to apply the transfer pricing rules to the business of cloud computing which leads to a different range of conclusions.

The virtual and borderless nature of cloud computing, together with the unpredictability created by the traditional transfer pricing rules has given rise to significant and complex issues.

And considering the importance and rapid growth of the Cloud computing business today and shortly, a novel solution as to depart from these disputes is required soon.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions