UAE introduces country-by-country reporting for companies
Move to strengthen international regulations in line with OECD countries, which will also change compliance landscape in the country
The UAE has introduced country-by-country (CbC) reporting for companies in order to strengthen its international regulations in line with OECD countries, which will also change the compliance landscape in the country.
Companies will have to submit their complete financial reports to the UAE Ministry of Finance by December 31, 2019. It is applicable to groups that have subsidiaries in at least two tax jurisdictions. The threshold for consolidated revenues is Dh3.15 billion.
Prior to the UAE, around 80 countries have already implemented CbC reporting standards as part of a framework agreed upon by the OECD and G20 countries, among others, to implement BEPS action 13 (known as country-by-country reporting) in order to tackle the shortcomings of the international tax system.
This action prescribes that countries implement legislation requiring multinational enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business certain relevant tax related information and exchange this information with other countries.
Thomas Vanhee, partner at Aurifer Middle East Tax Consultancy and affiliate professor of tax law, said the regulation impacts both foreign multinationals with a presence in the UAE and local multinationals headquartered in the country.
He pointed out that the first immediate impact is the disclosure of financial information and the sharing of this information by the UAE with other countries with which it has agreements to share tax information.
The medium-term impact is that the operations of businesses will come under greater scrutiny. The information is a tool to ascertain whether revenues are reported in the right jurisdiction. If a very high turnover is reported by a legal entity with no assets and one staff, the value creation may not actually happen in that legal entity but rather in another one.
If businesses fail to file to comply with their obligations under the CbC reporting, they could face a penalty of up to Dh2.25 million.
With the introduction of CbC reporting, the UAE complies with international tax standards and reinforces its attractiveness for investments, he said, adding that the introduction of the reporting will allow the UAE to be removed from domestic, European and other blacklists.
"If the multinational is headquartered in the UAE, the UAE entity will have to make the disclosures. If the multinational is headquartered abroad, then the local UAE entity will have to inform the Ministry of Finance that its parent entity is filing the CbC report. If the parent entity is not filing a CbC report, then the UAE company might still have to file the CbC report," Vanhee said.
Small and medium businesses are out of scope of this law as it is targeted at large multinationals, which may be using tax optimisation techniques to shift profits between countries. The law was passed in Cabinet Resolution No.32 issued on April 30, 2019.
Country-by-country reporting is one of the minimum standards to be adopted on signing the inclusive framework of the OECD. It is considered to be one of the most challenging components of Base Erosion and Profit Shifting (BEPS). In the world of taxation, CbC reporting shines light on perceived 'dark corners' of the international tax arena.
Anurag Chaturvedi, managing partner at Chartered House, said CbC reporting will require MNEs to identify tax residence of each affiliated entity, provide information pertaining to its revenues, profit, declared capital, accrued profits, number of employees and assets - both cash and non-cash.
"With regulations fast approaching and the UAE taking all efforts towards it to maintain highest international standards of taxation, I think multinational companies without comprehensive tax technology in place for CbC reporting could face a number of issues in the long run, including a high risk of error and inconsistencies, difficulty capturing, recreating, and demonstrating the audit trail, etc," Chaturvedi said.
He said generally, the countries that implement the BEPS minimum standard, they are very similar to the standards imposed by OECD countries. "Taking that into consideration, CBC reporting is going to impact every group of companies that has subsidiaries in at least two tax jurisdiction and having the global revenue as per the threshold or exceeding the threshold," he added.
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