In January 2022, the United Arab Emirates (UAE) announced it was introducing a corporate income tax (CIT) for financial years commencing on or after 1 June 2023. A headline rate of 9% will apply on taxable profits over USD100,000. The Ministry of Finance (MoF) was quick to highlight that, by introducing a competitive CIT regime, the UAE is demonstrating its commitment to good taxation practice, further cementing its place as a leading investment hub for global business.
The ministry also announced a higher rate for larger multinationals (MNEs) on their UAE profits but did not reveal what that might be. Last year, the Organisation for Economic Co- operation and Development (OECD) set a global minimum tax (GMT) rate of 15% for MNEs on worldwide profits, regardless of where they are headquartered. Judging by the UAE’s keenness to be seen to adhering to established global norms (perhaps also bearing in mind that the country has recently been ‘grey-listed’ by the Financial Action Task Force (FATF)), it is safe to assume that the rate won’t diverge significantly from the OECD’s agreed GMT. MNEs of course also need to meet the OECD’s transfer pricing (TP) rules and documentation requirements.
What does this mean for UAE businesses? Are foreign tax authorities’ attitudes to the UAE likely to change?
Notwithstanding the introduction of value-added tax (VAT) in 2018 and CIT, the UAE remains an attractive foreign direct investment (FDI) destination. VAT and CIT rates are low - particularly when compared to more mature tax jurisdictions. The Ministry of Finance has been at pains to stress that – at least ‘for now’ - there are no plans to tax salaries, dividends, interest or investment.
Announcing a higher rate for MNEs should protect UAE tax revenue. In addition, some form of domestic top-up tax system could be adopted for MNEs whose effective tax rate (ETR) falls below 15% - for example, free zone entities (FZEs) receiving tax incentives. Introducing CIT at 9% should protect intra-group income such as royalties, interest or management fees from source-based taxes (such as a withholding tax) outside the UAE. Where foreign tax is paid on UAE-taxable profits, a mechanism to claim tax relief should be made available.
According to the information released by the ministry, FZEs will continue to enjoy tax exemptions, provided they meet regulatory requirements and do not conduct business with the UAE ‘mainland’. However, since CIT applies to mainland entities, FZEs may be taxed on income received from mainland operations – meaning FZEs may need to keep separate books for mainland activities.
Group entities can choose to form a tax group. By doing so, one company can surrender losses to another, subject to meeting certain conditions. Groups file a single corporate tax return, reducing administrative burdens. More details on the criteria and election process will be released in due course.
Believing MNEs were shifting their overseas profits to a jurisdiction where they had minimum economic activity or substance, UAE was blacklisted by the European Union (EU) in 2017 as a non-co-operative jurisdiction. As a consequence, EU authorities were taking a more aggressive approach to tax audits of MNEs with entities or operations in the UAE. In response, UAE introduced the economic substance regulations in 2019, committing itself to universally accepted tax norms. Later that year, UAE was removed from the blacklist.
The CIT announcement by the UAE is nothing short of seismic. The UAE has a large double tax treaty network – more than 130 agreements are already in place. With CIT’s introduction, the mutual agreement process, used to resolve cross-border disputes, should also be improved and updated, further strengthening the UAE’s position in tax treaty negotiations. If the UAE were no longer considered a low-tax jurisdiction, MNEs could make a good case to their home authorities on the commercial rationale of doing business there.
TP rules are to apply to cross-border intra-group transactions (and potentially to domestic intra-group transactions as well). MNEs with entities subject to CIT in the UAE should use the time available to update their TP policies and documentation to align them with the OECD guidelines on the ‘arm’s length principle’. By adopting a robust TP policy across the entire group, MNEs will be able to mitigate overall tax risk at both headquarter and individual entity level while simultaneously promoting international tax transparency.
Whilst the law is yet to be released and June 2023 may seem some time away, but, in my experience, implementation of a new tax is rarely straightforward. Stakeholders – not just tax and finance functions - across all levels of MNEs should clearly understand the potential impact of these tax reforms on business modelling, people, technology, compliance and corporate governance.
By Raman Ohri, Head of Direct Tax, Keypoint, Bahrain
Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax
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