Gulf Instability Tests Multinationals’ Transfer Pricing Policies

The current conflict in the Middle East is having an economic ripple effect throughout the region affecting multinationals. This series examines the impact the conflict is having on corporate tax practice and tax administration there.

The conflict in the Middle East, particularly in and around the Arabian Gulf—referring to Saudi Arabia, Qatar, the United Arab Emirates, Oman, Kuwait and Bahrain—has caused operational disruption with direct and indirect consequences for global supply chains.

While the conflict is geographically concentrated, its economic consequences are globally felt.

The Gulf region plays a critical role in energy, commodities, logistics, trading and financial service value chains. Disruptions affecting regional operations, ports, transit corridors or insurance availability can, therefore, cascade across multinational groups far beyond the immediate area of conflict.

For multinational enterprises, these developments raise a series of transfer pricing considerations. Supply chain shocks force businesses to adjust how they perform transactions, how they manage risks, and how economic outcomes arise, often more quickly than existing contractual frameworks or pricing policies anticipate.

Tax Authority Focus

Three areas are likely to attract attention from tax authorities:

• Contractual allocation of risk
• Treatment of extraordinary losses and costs
• Continued reliability of benchmarking analyses

Contractual risk allocation under stress. Transfer pricing outcomes typically follow the allocation of risks in intercompany contracts, provided those allocations reflect how the arrangements operate. In most cases, contracts are drafted with an implicit assumption about the scale and duration of potential disruption.

When disruption falls broadly within those assumptions, contractual outcomes are unlikely to raise material transfer pricing concerns, but prolonged geopolitical instability can push conditions well beyond what parties contemplated.

Prolonged instability has caused third party contracts to be suspended, renegotiated or otherwise rebalanced to reflect new commercial realities. For multinational enterprises, these developments are relevant not because they displace contractual form, but because they provide evidence of how independent parties respond when underlying assumptions change.

Tax authorities can scrutinize situations where related party arrangements remain unchanged while comparable third party relationships are being materially renegotiated or where contractual mechanisms don’t respond to sustained disruptions in a way that explains resulting economic outcomes (such as the distribution of profits or losses across the group).

Extraordinary cost and losses. The current conflict in the Gulf has triggered a range of incremental costs across global supply chains, including higher freight and insurance premiums, congestion and demurrage charges, production interruptions, and payment delays.

From a transfer pricing perspective, extraordinary costs or losses don’t automatically justify reallocating them within a multinational group without reference to existing risk allocation and actual conduct.

The fact that losses arise in entities exposed to certain risks doesn’t conclusively establish that the outcome is arm’s length. The critical consideration is whether the entity bearing the losses controls the relevant risks as they materialize and has the financial and operational capacity to absorb losses of that scale and duration.

Questions may arise as to whether the risk assumption reflected in the transfer pricing framework remains economically coherent when losses persist, or when their consequences are mitigated through group support in a manner that wouldn’t be available to an independent party.

In practice, operational pressures often result in certain entities temporarily absorbing costs or losses for operational or commercial reasons or because pricing mechanisms don’t adjust at the same time. Short-term mismatches may be commercially explainable. If losses persist or are offset repeatedly through intra-group support mechanisms, tax authorities may question whether the allocation of risk within the transfer pricing framework makes economic sense.

The coherence between risk, financial capacity, functional risk management capability and return remains central to the analysis.

Pressure on benchmarking and comparability. Supply chain disruptions place significant pressure on traditional benchmarking analyses. The Gulf conflict has underscored situations where benchmark ranges and pricing outcomes derived from prior periods may no longer be a reliable reference for assessing arm’s length results.

This is particularly relevant where disruption disproportionately affects companies operating in or trading through the Gulf. Financial results for entities exposed to the region may diverge significantly from comparable companies operating in less affected markets.

While disruption doesn’t justify disregarding established transfer pricing methods or comparables, it may require companies to reassess how benchmarking evidence is interpreted.

Multinational enterprises may need to reconsider the relevance of historical ranges, the weight given to multi year averages, the treatment of loss making results, and the role of contemporaneous market evidence in supporting transfer pricing outcomes during periods of instability.

Read more:
Gulf Conflict Creates Tax and Liquidity Risks for Multinationals
Middle East Worker Mobility Is a Corporate Resilience Strategy

Questions for Multinationals

For multinational enterprises, crucial transfer pricing risks rarely arise from disruption itself, but from a misalignment of commercial reality and existing pricing frameworks.

As geopolitical tensions continue to affect supply chains, tax authorities are more likely to focus on how transfer pricing arrangements operate in practice. Scrutiny may center on:

• Whether contractual risk allocations remain credible under disrupted conditions
• How extraordinary costs and losses are distributed across the group
• Whether benchmarking analyses continue to reflect observable market conditions

In periods of sustained volatility, contemporaneous evidence becomes critical. Documentation of operational decisions, risk management actions, and third-party commercial responses can play a decisive role in demonstrating that transfer pricing outcomes remain consistent with the arm’s-length principle.

For many multinationals, the current environment therefore may require not only operational adjustments to supply chains, but also a reassessment of the transfer pricing frameworks that support them.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Ton van Doremalen is partner and head of tax, Middle East, with DLA Piper in Dubai.

Juan Pablo Osman Moreno is principal/knowledge lead, transfer pricing, with DLA Piper in London.

Raneem Alrakhaimi is a tax manager with DLA Piper in Riyadh.

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