GCC corporate taxes: Tax compliance transformation

Tax treaties aid non-residents in mitigating double taxation and reducing withholding tax exposure

Corporate tax is an important direct tax levied on the taxable profits of business entities. Around the world, corporate tax rates have been dropping, from highs of over 50 per cent to around the 20 per cent range, as economies compete to attract inward foreign investment. The GCC, however, is an exception that bucks the trend. Here, these taxes are instead being introduced for the first time, rationalised as a switch towards tax compliant country-status in the global economy. This, in turn, is being driven by the pressure exerted from the Organisation for Economic Cooperation and Development (OECD) and G20 countries on tax havens and low tax jurisdictions to implement more transparency and stricter compliances. Regulations such as economic substance regulations, country by country reporting, and transfer pricing regulations, among others, have been adopted by many GCC countries recently.

Four out of the six GCC countries have corporate tax regimes and the other two, the UAE and Bahrain, are in serious discussions to introduce one in 2023. This is in the aftermath of talks between the finance ministers of G7 countries and the recent OECD’s Pillar Two model rules for the domestic implementation of 15 per cent global tax unveiled on December 20, 2021. The new Pillar Two model rules will help countries legislate the Global Anti-Base Erosion (GloBE) rules domestically in 2022, to come into effect from 2023.

The headline corporate tax rates in the GCC range from a low of 10 per cent in Qatar, through 15 per cent in Kuwait and Oman, to a high of 20 per cent in Saudi Arabia.

In this context, it is important to note that the GCC countries have a growing double taxation treaty (DTT) network to eliminate double taxation — the UAE has treaties with 112 countries, Kuwait 82 countries, Qatar 60, Saudi Arabia 51 countries, Oman 31, and Bahrain with 44 countries. The tax treaty network is expected to expand rapidly with many treaties in various stages of discussion, negotiation, and finalisation.

Tax treaties play an important role in mitigating corporate tax for non-residents, forming permanent establishments in other countries, or reducing their withholding tax exposure in the four GCC countries. The GCC countries have introduced and are actively using technology for corporate tax compliances whereby contracts, tax returns and declarations are being filed online into portals. This allows tax authorities to cross verify information easily and initiate tax audits where there are discrepancies versus acceptable standards. Taxpayers must be extra vigilant in compliances as many jurisdictions do not allow tax returns to be revised.

The region’s tax reforms in the post-pandemic period are unfolding and evolving fast. With diversification into the non-oil sector gaining even more traction, the opening up of economies and the rationalisation of taxes, taxpayers must build robust tax and transfer pricing policies and documentation in advance to address the ever-changing landscape.

— International Tax for MENA region, MBG Corporate Services