Beyond borders: Unpacking the impact of corporate tax on multinationals in the UAE

The UAE has entered a new era with the implementation of a Corporate Tax (CT) regime from June 1, 2023. This pivotal shift holds profound implications for multinational enterprises (MNEs) operating within the UAE, reshaping their strategies and compliance frameworks in a globally interconnected business landscape.

Defining multinational enterprises:

A multinational enterprise (MNE) is an entity that conducts business in more than one jurisdiction, whether it operates as a single taxpayer entity or as part of a larger group. This encapsulates the essence of businesses transcending national boundaries, engaging in cross-border activities that define the intricate web of the contemporary global economy.

Scope of UAE CT:

Entities effectively controlled or managed in the UAE, operating through a permanent establishment in the country, or earning income sourced from the UAE will now fall within the ambit of the UAE Corporate Tax. This broadens the tax net and necessitates a meticulous examination of an entity’s operations to determine its tax obligations.

Transfer pricing regulations:

With the introduction of corporate tax, transactions with related parties in the UAE will be subject to regulation under the UAE transfer pricing (TP) provisions. MNEs, operating as interconnected entities, will navigate these regulations to ensure compliance and fair valuation of transactions within the group.

Tax exemptions:

Despite the challenges, there are aspects that provide relief for MNEs. Dividends and gains on the sale of shares will remain tax-exempt, offering a degree of incentive for businesses operating within the UAE.

Pillar two global minimum tax and UAE CT:

The introduction of base erosion profit shifting (BEPS) pillar two global minimum tax is set to establish a global minimum tax regime applying to both public and privately held multinational groups, with consolidated annual revenue over €750 million. Expected to be implemented in FY24, this will significantly impact organisations in the Middle East with a global presence. Given that the BEPS minimum tax rate is set at 15 per cent, the impact could be substantial for businesses in the region, where headline Corporate Tax rates are below this threshold i.e zero per cent or nine per cent. This may result in additional taxes, commonly referred to as ‘top-up tax.’

Both corporate tax and BEPS will substantially increase the compliance and reporting burden on the tax function. A robust tax accounting process will be critical to facilitate this, ensuring accurate and reliable data is shared internally or externally for decision-making purposes.

Key challenges:

Determining PoEM, PE, and Nexus:

The determination of place of effective management (PoEM), permanent establishment (PE), and nexus in the UAE poses challenges due to limited guidance and divergent views, potentially leading to disputes and litigation.

Double taxation and treaty benefits:

MNEs operating in the UAE may face potential double tax issues and will need to carefully navigate tax treaties to optimize benefits in their country of residence and/or the UAE.

Attribution of profits:

The attribution of profits to the permanent establishment in the UAE becomes a critical consideration, requiring meticulous analysis and adherence to evolving international standards.

Compliance costs and administrative burden:

The introduction of corporate tax brings with it additional compliance costs and administrative burdens, compelling MNEs to reassess their operational and financial structures.

Scrutiny by tax authorities:

With the goal of mitigating tax evasion, MNEs can expect rigorous scrutiny from competent tax authorities, underscoring the importance of robust internal controls and transparent financial reporting.

In conclusion:

The introduction of corporate tax in the UAE marks a paradigm shift for multinational enterprises. While challenges abound, the UAE’s progressive approach to taxation and its openness to global initiatives like Pillar 2 position it as a dynamic player in the evolving landscape of international taxation. MNEs navigating these changes will need to adopt a proactive and adaptive strategy to ensure compliance and seize new opportunities in this transformative era.

The writer is partner - MI Capital Services

• Business