New tax in UAE? What you need to know about Global minimum tax

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The UAE’s Ministry of Finance (MoF) is seeking corporate feedback on the implementation of a global minimum tax in the country. The consultation is open to all stakeholders, but the MoF is “particularly keen” to hear from the “global community” of multinational groups operating in the UAE, along with their advisors, service providers and investors.

According to the ministry, submissions will help inform it on aspects such as domestic implementation issues, including interactions with the UAE’s Corporate Tax (CT) system; ways to minimise compliance costs, while exploring the policy options for potential implementation of the income inclusion rule (IIR), undertaxed profits rule (UTPR) and a domestic minimum top-up tax (DMTT).

Relevant stakeholders must submit their responses by April 10 via the ministry’s website.

Khaleej Times referred to a guidance paper released by the ministry and spoke to two experts to understand the tax and its possible implementation in the UAE.

Here is all you need to know:

What is global minimum tax?

According to the MoF’s guidance paper, the global minimum tax (GMT) targets multinational enterprises (MNEs) with annual consolidated revenue of or above €750 million (nearly Dh3 billion). “Broadly, it ensures that these MNEs pay a minimum tax of 15 per cent in respect of the excess profits derived from every jurisdiction they operate through two interlocking rules, the IIR and UTPR, which are together referred to as the global anti-base erosion rules or GloBE Rules.”

Farah Mourad, senior market analyst at Equiti Group, said it serves as a universal benchmark agreed upon by countries to set a baseline for corporate taxation. It aims to ensure that MNEs contribute their fair share and maintain a level playing field. “Think of it as an international pact among nations to prevent significant disparities within the business landscape. It's akin to establishing a minimum wage for taxes, guaranteeing that regardless of a company's location, it plays a role in the societies it profits from.”

Has the UAE formulated a policy to implement the tax?

As it stands now, the MoF has launched a digital public consultation on implementing the tax in the UAE. However, the document is only for the “purpose of obtaining input from the relevant stakeholders” and does not reflect the final view of the UAE. “The information stated in this document should not be used or relied upon to make individual or business decisions, as it does not represent the final policy position of the UAE,” the document states.

The UAE will announce further details on its implementation of the tax “in due course”.

What does the consultation questionnaire cover?

GMR implementation in the UAE, the design of a potential UAE domestic minimum top-up tax and administration matters.

Substance-based incentives

Is the UAE a signatory of the tax deal?

Farah Mourad: Yes. The UAE signed up for the GMT agreement in November 2023 and has taken significant steps towards aligning with global tax reforms by amending its Corporate Income Tax Law in November 2023. Yet the implementation of specific measures, such as the OECD's Pillar Two rules, have been delayed until 2025.

Which companies in the UAE will come under the GMT gambit?

George Khoury, global head of education and research at CFI, said the tax isn't industry-specific; therefore, any large multinational enterprise meeting the criteria, regardless of industry, will be subject to the GMT in the UAE.

Has the tax been implemented anywhere else in the world?

Farah Mourad: Yes. The implementation of a minimum tax for companies is already underway in some countries, particularly those that have historically operated as tax havens. For instance, countries like Ireland, Luxembourg, Switzerland, and Barbados are taking steps to adhere to the minimum tax rates. Switzerland, although known for its leniency towards multinational corporations in the past, is now making significant moves to address tax avoidance. Swiss voters will decide in June whether to adopt a constitutional amendment introducing a minimum corporate tax rate of 15 per cent. If approved, this amendment would come into effect in 2024, potentially altering Switzerland's tax landscape significantly. Furthermore, on a global scale, more than 40 countries are progressing towards implementing the minimum tax, marking a significant shift in international tax policies.

What do terms such as income inclusion rule (IIR), undertaxed profits rule (UTPR) and a domestic minimum top-up tax (DMT) mean?

George Koury: The IIR, UTPR, and DMTT are key components of the global tax reform under the OECD/G-20 inclusive framework on base erosion and profit shifting (BEPS).

IIR is designed to ensure that the profits of MNEs are subject to at least a minimum tax rate globally. It requires the parent entity of a multinational group to pay a top-up tax if the profits of its foreign subsidiaries are taxed below a certain minimum rate, which is currently set at 15 per cent. This rule is the primary mechanism to enforce the global minimum tax rate on MNEs and is similar to the U.S. GILTI (Global Intangible Low-Taxed Income) rules.

UTPR acts as a secondary mechanism and a backstop to the IIR. It allows countries to deny tax deductions or require equivalent adjustments for domestic companies that make payments to related entities in low-tax jurisdictions. This rule ensures that if the IIR does not fully address the low taxation of profits, the UTPR can be applied to ‘top-up’ the tax to the agreed minimum rate.

DMTT is a provision that allows a country to implement its own minimum tax rules that align with the global minimum tax principles. The DMTT takes precedence over the IIR and UTPR, ensuring that any additional tax revenue generated by the top-up tax is collected domestically rather than flowing overseas. This means that if a multinational's profits are generated in a country with a DMTT, the top-up tax will be paid to that country's government first before any IIR or UTPR liabilities are considered.