UAE businesses need to address unique tax issues

We continue our last week’s ‘Tax Conversations’ on corporate tax and transfer pricing. Just like all tax domains, corporate tax and transfer pricing is a vast field for study and specialisation. Since the announcement of corporate tax, terms like BEPS, OECD, Pillar 1, Pillar 2 etc. have become the buzzwords amongst the business and finance fraternity.

As with any new tax regime, it is likely to have a fear of the unknown. UAE businesses need to steer away from such fears and smartly handle tax compliance.

BEPS

As per OECD, Base erosion and profit shifting (BEPS) refers to tax planning strategies, used by multinational enterprises, to artificially shift profits to jurisdictions with no/low tax rates & economic activity. OCED estimates that BEPS results in an annual loss of about 4-10 per cent of global corporate tax revenue aggregating to $100-240 billion.

In year 2015, a detailed 15 action points were determined to counter BEPS and improve transparency. About 99 countries/jurisdictions are signatories to the implement measures to prevent BEPS. BEPS action plan has enjoyed a significant level international cooperation and information sharing.

Pillar 1 and Pillar 2

As a part of the BEPS action plan, a two-pillar solution to address the tax challenges arising from the digitalisation of the economy was proposed and has now been adopted by about 135 countries. The expression ‘pillars’ sounds very technical and complex. ‘Two pillar solution’ could be read as ‘two elements’ or ’two pronged’ solution for ease of understanding.

The first element i.e. Pillar 1 provides the principles for determining the allocation of taxing rights amongst different jurisdictions i.e. nexus and profit allocation on account of digitalisation of the economy.

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

Pillar 1 and Pillar 2 would be applicable to MNEs of relatively high turnover of at least 750 million euros. We will discuss the BEPS action plan separately in our future tax conversations.