UAE businesses need to address unique tax issues – News

Terms such as BEPS, OECD, Pillar 1, Pillar 2 have become buzzwords in business and finance since the corporate tax announcement.

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We continue last week’s “Tax Conversation” on corporate tax and transfer pricing. Like all areas of taxation, corporate tax and transfer pricing is a vast area of ​​study and expertise. Terms such as BEPS, OECD, Pillar 1, Pillar 2 have become buzzwords in business and finance since the corporate tax announcement.

As with any new tax system, it can fear the unknown. UAE businesses need to steer clear of such concerns and handle tax compliance tactfully.

BEPS

According to the OECD, Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by multinational corporations to artificially shift profits to jurisdictions with no/low tax rates and economic activity. OCED estimates that BEPS results in a loss of approximately 4-10% of global corporate tax revenue annually, totaling $10-240 billion.

In 2015, detailed 15 action points were identified to address BEPS and increase transparency. Some 99 countries signed up to implement measures to prevent BEPS. The BEPS Action Plan has seen significant international collaboration and information sharing.

Pillar 1 and Pillar 2

As part of the BEPS Action Plan, a two-pillar solution to the tax challenges posed by the digitization of the economy was proposed and has been adopted by some 135 countries. The word “pillar” sounds very technical and complex. For ease of understanding, a “two-pillar solution” can be understood as a “two-element” or “two-pronged” solution.

The first element, Pillar 1, provides the principles for determining the distribution of taxing powers between different jurisdictions, i.e. relationships and profit distribution based on the digitization of the economy.

The second element, Pillar 2, proposes a global minimum tax, a system whereby multinational enterprises (MNEs) pay a minimum tax on their global profits.

Pillars 1 and 2 will apply to multinational companies with relatively high turnover (at least EUR 750 million). We will discuss the BEPS Action Plan separately in future tax conversations.

UAE Businesses and Controlled Foreign Companies (CFCs)

International transfer pricing is aimed at multinational enterprises (MNEs). It does not cover every transaction of UAE businesses just because it involves international transactions. However, UAE businesses also need to understand the Economic Substance Regulations (ESR). ESR is aligned with Action 3 of the 15 Action Plan.

BESP Action 3 covers the Controlled Foreign Company (CFC) rules. The CFC rules cover situations where a taxpayer transfers its income to a foreign company controlled by the taxpayer. This planning helps taxpayers shift their tax base from their country of residence to the CFC’s jurisdiction. Action 3 proposes that certain categories of CFC’s income be attributed to shareholders.

The ESR requires that UAE companies should demonstrate sufficient economic substance in the UAE, i.e. persons, assets, activities, etc., to justify the income earned in the UAE. Currently, the ESR covers 9 related activities. A UAE company wholly owned by one or more UAE residents is exempt from ESR under two conditions – (a) it does not belong to a multinational conglomerate; (b) it only conducts business in the UAE. Companies that are not solely doing business in the UAE may not be eligible for ESR exemption.

It is likely that ESR compliance will remain a mandatory requirement even after the implementation of corporate tax. UAE businesses will need to address unique tax issues to manage tax compliance. An understanding of tax nuances will help optimize tax impact and compliance.

Pankaj S. Jain is the Managing Director of AskPankaj Tax Advisors. For feedback and questions, you can write to info@AskPankaj.com. The views expressed are his own and do not reflect the policy of the newspaper.