Insights

Corporate Tax and Transfer Pricing- An Inevitable option for UAE to restore Economy and to attract Foreign Investments after COVID 19

As revenue from the Crude Oil and Hydrocarbons has been deteriorating every passing day and expected to remain low, UAE and other GCC Governments are under immense pressure to reduce their reliant on one commodity and to introduced diverse revenue sources to fund their budgets. Current COVID 19 situation also made it inevitable for UAE government to diversify their main revenue source different from Crude Oil and into a steadier source of income.

Implementation of Corporate Tax and Transfer Pricing regulations are the viable possibility by which UAE Government can increase their revenue and uplifting the compliance environment with international best practices which may attract Foreign Investments.

Corporate Tax

The United Arab Emirates (UAE) is a constitutional federation of seven Emirates. The UAE does not have any Federal Income Tax System, each Emirates has enacted its own Income Tax Decree.

Under the Emirate-based tax decrees, Corporate Tax may be imposed on all companies (including branches and permanent establishments. Currently following entities are subjected to Corporate Tax in the UAE;

• Corporate Entities engaged in the production of oil and gas or extraction of other natural resources in the United Arab Emirates at the rate maximum up to 55% and
• Branches of Foreign Banks at the rate of 20%. (Emirates Specific)

To maintain the global competition and also align growth and sustainability, the UAE government can introduce lower corporate tax rate between 5 to 10 percent while replacing the current government fee system.

Introduction of Corporate Tax can bring following advantages for UAE Economy and Companies;

• Corporate Tax may bring to end the High government fee system and would enable the SMEs to launch and sustain their businesses with the least cost possible.
• It would provide a reasonable business practice to UAE SMEs because they will pay based on their earnings. Tax cost would be proportional to the size of the company.
• SMEs will create more jobs and income generations for a huge sector of society which will ultimately boost the UAE Economy.
• Paying corporate taxes can be more beneficial for business owners than paying individual income tax as business expenses are fully deductible.
• While introducing lower income tax rate 5%, UAE government could possibly generate tax revenue of AED 10-15 Billion yearly, which would constitute 1.5-2% of UAE GDP.

Transfer Pricing (TP) Regulation

Transfer Price (TP) is the internal price charged by the entities in multinational group for sale of goods, services, Intellectual Property Rights (IPR) etc. Transfer Price may impact the actual profit and loss as well as Corporate Tax of group companies. Generally multinational group use this pricing to transfer their profit from high tax jurisdiction to lower tax jurisdiction.

 The UAE has no transfer pricing regulation. Corporate Tax could be introduced with possible provisions requiring taxpayers with cross-border transactions to prepare transfer pricing documentation that is consistent with Action 13 of the Organization for Economic Co-operation and Development’s (OECD) base erosion and profit shifting initiative.

Introduction of Transfer Pricing Regulation can bring following advantages for UAE Economy;

• Transfer Price Regulation will bring the transparency in cross border transaction and provide best international tax practice and compliance environment.
• Enactment of TP Regulation will attract OECD countries and G20 Countries Companies to freely invest in the UAE without going through stringent audit requirements in their respective Jurisdictions.
• Transfer pricing documentation requirements will allow governments to target MNEs’ transfer pricing arrangements as a means of raising tax revenues.

Reason behind the possible introduction of Corporate Tax and Transfer pricing Regulations:-

Enactment of following Agreements and regulation including VAT/Excise, made an easy way to introduced Corporate Tax and Transfer Pricing Regulations in the UAE;

• Double Taxation Avoidance Agreements (DTAA):-The UAE has signed 117 double-taxation treaties as of now with most of them aimed to prevent double taxation of certain incomes. In absence of withholding Tax and Non Resident tax in UAE theses DTTs may not be immediately relevant for obtaining relief from UAE taxation; however, they may allow for relief from taxation in DTT partner countries.
• Base erosion and profit shifting (BEPS):- The United Arab Emirates joined the Organization for Economic Co-operation and Development (OECD) Inclusive Framework on BEPS on 16 May 2018. Through joining the Inclusive Framework, the United Arab Emirates has committed to implement, in the immediate to short term, the following four BEPS minimum standards Actions (5,6,11,13 &14)
• Economic Substance Regulations (ESR): – On 30 April 2019 and amended in 2020, UAE has introduced Economic Substance Regulations (ESR) for the certain licensee that derive income from one or more of the ‘relevant activities’ listed under the ESR, during a financial period commencing on or after 1 January 2019:
• Country By Country Reporting (CBCR): – On 30 April 2019 and amended in 2020, UAE has introduced country-by-country reporting requirement (either filing or notification) for ultimate parent entities that are tax resident in the United Arab Emirates and that are part of a multinational group with consolidated revenues equal to or exceeding AED 3.15 billion in the preceding financial year.