Suppose A and B are independent, unrelated parties. The party, A sells something to B. A earns revenues from it and a profit of AED 400,000.0. As per the corporate tax law of UAE, A needs to pay tax on it. The tax liability would be AED 2250.0
Now, suppose C is the subsidiary of A. A has sold the same thing to C. Considering that A would earn profits from the transaction, on which it must pay corporate tax, A sells it to C at reduced prices. The reduced-price leads to a profit of only AED 380,000.0. Now, A must pay a tax of 9% on it, due to which the tax liability is AED 450.0.
Thus, since C is a related party, A sells it to them at a discount to reduce their tax liability. Internationally, transfer pricing rules require entities to conduct international transactions with related parties at arm’s length price.