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BEPS and the Middle East: Change is coming

The Australian tax world has had a brisk start to 2020

The OECD's base erosion and profit shifting (BEPS) project is well underway with proposals (at least in draft form) and consultations on all specific action points.

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Adil Rao

While it is already dominating the tax agenda for most of the multinational businesses and tax authorities across the world, BEPS is also becoming an increasingly important risk management issue for businesses operating in the Middle East region. There has already been growing recognition that taxation plays a central role in promoting sustainable development, and the recent volatility in oil prices has further highlighted the need for having a lesser reliance on oil and an increased diversification of revenues. As such, Middle Eastern countries are now increasingly focusing on mobilising their domestic resources and developing tax capacities. As the region continues to evolve as a key growth market for both inbound and outbound businesses, it is also evolving with respect to its general tax administration, including the formation and application of tax regimes that are consistent with international standards and best practices.

The OECD began work on its BEPS project to address concerns that existing principles of national and international taxation were failing to keep pace with the global nature of modern trading and business models, in particular, a perception that existing rules give businesses too much opportunity for arbitraging tax rates and regimes. This is likely to have rather more significant implications for the businesses operating in developing countries due to their heavier reliance on corporate income tax (as compared with the developed world) – a trend which is now gaining momentum in the Middle East region as well.

In view of the above, it is important for the businesses operating in this highly diverse and challenging region to fully prepare themselves for the potential changes in the international tax landscape that will inevitably arise – both globally and within this region – as a result of BEPS action points.

Some of the key BEPS priority areas that might have more significant implications for Middle Eastern businesses may include limiting base erosion via interest deductions and other financial payments (Action 4 of the BEPS Action Plan), preventing tax treaty abuse (Action 6), artificial avoidance of permanent establishment status (Action 7), the transfer pricing related areas – prevention of artificial profit shifting through inter-company payments involving intangibles, risk and capital, and other high risk transactions (Action 8, 9 and 10 respectively) and transfer pricing documentation and country-by-country reporting (Action 13).

It is not clear at this stage how the tax authorities in the region would adopt and apply the new OECD guidelines and while views vary, one clear and consistent message is that the matters on the BEPS agenda are set to significantly shape the means by which governments collect tax and by which companies align their tax affairs and business models in the decade ahead. Given the OECD's pace of work, change is inevitable and will be swift – preparedness is essential to adapt.

Adil Rao (adirao@deloitte.com)

Deloitte

Tel: +971 4506 4901

Website: www.deloitte.com/middleeast

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