The UAE’s ambition to align with the OECD/G20 Inclusive Framework’s (IF) Statement – aimed at combatting tax avoidance and profit shifting – could be followed by the introduction of a more detailed corporate tax regime in the Emirates.
The UAE’s Ministry of Finance issued a statement in July confirming its support towards the OECD’s BEPS project and the implementation of the two-pillar solution as agreed by the G20. Pillar one will affect MNEs with a global turnover of over €20bn ($23.6bn), while pillar two will set up a 15% global minimum tax rate on MNEs that meet the €750m threshold.
While IF countries can adopt different thresholds, the UAE will likely adopt the bare minimum thresholds suggested by the OECD, according to Rushabh Vora, senior manager of global transfer pricing (TP) and international tax at Crowe UAE.
“Considering the substantially high threshold, these rules may not impact most entities operating in the UAE. Only a few UK multinationals operating in the UAE may get impacted in the event of such a significant threshold,” said Vora.
The OECD’s two-pillar solution is expected to hardly impact most multinational enterprises (MNEs), but expanding the corporate tax regime in the UAE based on the scope of the OECD’s solution will likely change the UAE’s ability to attract more FDI in the longer-term.
“There are many positive aspects here for businesses operating in the UAE. By way of example, an improved mutual agreement procedure (MAP) process for managing tax audits will assist all MNEs dealing with their domestic tax authorities who often challenge UAE transactions,” added Shiv Mahalingham, TP and BEPS expert at the Cragus Group Limited.
For example, the MAP process under the double tax treaty (DTA) signed between the UAE and the UK in 2016 ensures any risk of double taxation is mitigated. Tax certainty could be improved beyond MNEs simply obtaining tax credits in the UAE for taxes paid in the UK.
However, the UAE’s alignment with the OECD’s digital tax agenda may spell challenges for the country to attract larger businesses to invest in the GCC region.
Mixed results to more corporate tax in the UAE
Taxpayers could yet witness the introduction of a corporate tax regime in the UAE following its support in reaching a global consensus on the OECD solution, according to Vora, which could have repercussions on the Emirates’ ability to attract larger businesses to the region.
“In last few decades, UAE has adopted corporate tax regime only for oil and gas companies and branches of foreign banks and it has not yet levied corporate tax on others, thereby continuing its primary identity as tax-free jurisdiction,” said Vora.
Fully developed TP regulations have not yet been implemented by the UAE either, but cross-party transactions are still required to comply with the Economic Substance Regulation (ESR). While this regulation does not require corporate documentation to justify the application of the arm’s length principle, the required TP documents can still demonstrate substance in the Emirates.
The UAE’s implementation of the country-by-country reporting (CbCR) regulation in 2019 led the European Commission to remove the Emirates from the EU’s blacklist of non-cooperative jurisdictions, according to Vora. Tax experts expect even more TP changes that align the UAE with the wider international tax framework to stay competitive.
“Once corporate tax will be announced, the introduction of TP regulation will more likely be a consequential event to fence its fair share of revenue,” said Vora.
“In case corporate tax regime is adopted by UAE, it would not only alter its traditional image of being tax haven but also may impact the perception of MNEs on deciding to invest in UAE,” added Vora. “Considering this fact, UAE government may need to be mindful while balancing tax regime as well as continue to attract foreign investments.”
Despite the global pressure to adopt the OECD’s digital tax rules under an enhanced corporate tax regime, Saeed Rashid Al Yateem, Assistant Under-Secretary of the Resource and Budget Sector at the Ministry of Finance, emphasised the UAE’s appetite for foreign investment and ensured the Emirates would remain an attractive hub for businesses.
"This approach has created a business-friendly environment that affirms the UAE’s global position as a stable and attractive place to facilitate global investment," said Yateem.
In an effort to stay stable and attractive ahead of the digital tax changes, the UAE Ministry of the Economy also announced in June 2021 that the Commercial Companies Law will enable 100% foreign ownership of onshore companies for foreign investors and entrepreneurs – a plan aimed at “boosting the country’s competitive edge”, according to the Minister of the Economy Abdulla bin Touq Al Marri.
Progress has been made by the UAE in reaching a consensus with members of the IF to combat profit shifting and aggressive tax avoidance across the globe. More regulations have been implemented and the Emirates’ recent statement released by the Ministry of Finance following the July G20 meeting shows its ambition to align with OECD guidelines. However, adopting the global tax framework will yet remain a challenge for the attractive business hub, particularly when it comes to introducing a headline corporate tax rate.
