Tuesday, 02 January 2024 12:17 GMT

Pillar 2 Implementation In UAE: One Step At A Time


(MENAFN- Khaleej Times) With the introduction of VAT in 2018, followed by Economic Substance Regulations in 2019, anti-money laundering compliances in 2020, and corporate tax in 2022, the UAE has consistently demonstrated its commitment to becoming a compliant and transparent economy.

Given this foundation, the adoption of the global minimum tax under Pillar 2 comes as no surprise. It aligns seamlessly with the UAE's deliberate strategy of making incremental yet impactful moves to meet international standards.

This time, however, the timing of the UAE's decision plays a pivotal role. Curious to know why?

The UAE, being a member of OECD and being a signatory to the Inclusive Framework (IF) on BEPS, embraced the Pillar Two framework by implementing Domestic Minimum Top-Up Tax, a key tool designed to curb the challenge of tax avoidance or profit shifting done by the Multinational Enterprises (MNEs) and to ensure that MNEs pay a minimum 15 percent tax on profits earned within the jurisdiction.

Investors chase the efficiency of capital employed by them in terms of predictability and consistency in the policies offered by a jurisdiction and this step by the UAE signifies its commitment to aligning with global tax standards while preserving its taxing rights. UAE aims to counter profit-shifting practices and ensure transparency by taxing the MNEs profits at a globally accepted minimum tax rate.

In simple words, MNEs with a global revenue of more than Dh3.15 billion and a global presence, will now be subject to a 15 per cent minimum tax rate ie. in addition to UAE's nine per cent corporate tax introduced recently, the MNEs operating in UAE are liable to a top-up tax rate of 6 per cent on their profits in compliance with global anti-base erosion (GloBE) rules.

The top-up tax rate is determined as the difference between Effective Tax Rate (ETR) and the Global Minimum Tax (GMT) rate of 15 percent. By implementing qualified domestic minimum top-up tax (QDMTT) , UAE has reserved its right to collect additional taxes on MNEs since if not for UAE, the taxing rights would have been shifted to some other jurisdiction depending on the mechanism adopted by the respective jurisdiction. For instance, a non-UAE headquartered entity reserves its rights to tax profits in the jurisdiction where parent entity is located if it implements the income inclusion rule.

Prateek Tosniwal, Partner, MICS International.

Further, to ease the compliance burden, the Pillar Two framework introduces Safe Harbour rules, offering transitional and permanent reliefs for certain qualifying MNEs. These safe harbour provisions provides a breather for MNEs, ensuring streamlined compliance while maintaining adherence to global tax standards.

The QDMTT is expected to have an insightful impact on MNEs operating in the UAE. The treatment of QFZPs under QDMTT remains a critical point of interest, with nuances likely to emerge in the detailed legislation. Small and medium enterprises (SMEs), however, remain unaffected unless they belong to an MNE group exceeding the threshold.

While the framework challenges MNEs with higher compliance demands and increased tax liabilities, it also offers clarity and stability in an increasingly complex global tax landscape. The full impact of QDMTT will unfold as the fine print of the legislation is revealed, but one thing is clear: the UAE continues to balance compliance with competitiveness in a rapidly evolving global economy.

The writer is Partner, MICS International.

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