UAE Corporate Tax implementation

[Audio] UAE Corporate Tax implementation Purpose / Objective Why UAE launched Corporate Tax Now.

[Audio] Why Tax is collected. A jurisdiction or country law enforces the collection of revenue from the residents in that country in the form of tax. Tax revenue is defined as the revenues collected from taxes on income and profits, taxes levied on goods and services etc. The taxation plays an important role in developed and under developed countries. So, it becomes one of major source for a country/jurisdiction in providing public facilities, for country infrastructure development, for maintaining expenses against country security, such as Police, Army. Apart from this taking care for under privileged people. In this case, collected tax may convert into subsidies and grants provided to under privileged people to make them become effective part of society. Some types of taxes: Income Tax (corporate, Personal income) Value Added Tax ( VAT) Excise duty Customs Duty Capital Gain Tax.

[Audio] GLOBALIZATION AND ITS EFFECTS ON BUSINESS PROCESSES: Due to globalization, business boundaries are now limitless. Businesses are now tended to sell online beyond the geography to which it belongs. Sales order received in one country being delivered from a branch in other country. Transportation/ logistics are becoming very convenient. Anybody from a different part of country A can ask any shipping company located in different part of country B, which can arrange the delivery of item to country A. Therefore, the country which has the right to collect tax also need to make sure that how effectively it is achieving its objective. In many jurisdictions around the world faces issues that taxable persons not paying tax, avoiding or doing tax evasion in different ways. One way is, based erosion profit shifting, where taxable person is shifting their profits from taxable jurisdiction to non-taxable jurisdiction. This is where the BEPS framework comes into action headed by 141+ countries collaborated together to work an effective way to control these aspects. Given the nature of these challenges and the difficulty to put borders around the digitalized economy, the approach at this critical juncture is clear: a comprehensive consensus-based solution that deals with both the allocation of taxing rights and the remaining BEPS issues. This would secure and sustain the international income tax system and increase tax equity amongst traditional and digital businesses. To reinforce sustainability, the Inclusive Framework is also conducting economic analyses and impact assessments to ensure that any solution complements existing conventions securing the integrity of the global tax system..

[Audio] GLOBALIZATION AND ITS EFFECTS ON BUSINESS PROCESSES: Countries and jurisdictions have joined the Two-Pillar Solution to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. Pillar One – Re-allocation of taxing rights Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there or no. Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year. Pillar Two – Global anti-base erosion mechanism Pillar Two seeks to put a floor on competition over corporate income tax, ensuring that large multinational companies pay their fair share of tax everywhere..

[Audio] The BEPS framework come up with 15 actions plan as follows and how it effect UAE perspective of corporate tax ;.

[Audio] BEPS- Base Erosion Profit Shifting action plans in consideration: Address the tax challenges of the digital economy. Top world companies having e-commerce and social websites earning legitimate taxable income but shifting it to parent company located in tax heaven, having low or no tax rate applicable. This continuously challenges the effectiveness of existing profit allocation and nexus rules to distribute taxing rights on income generated from cross-border activities in a way that is acceptable to all countries, small and large, developed and developing (the so-called allocation of taxing right issue)..

[Audio] Neutralize the effects of hybrid mismatch arrangements. To neutralize the mismatch in tax implication across different jurisdiction where to avoid any possible dual effect or no effect. For example: in one country interest paid is tax deductible and is paid to related company in other country, where it is treated as dividend received free of tax. On the other hand a dividend is paid in one country and had not taxed thinking it will be taxed in the country where it is received to avoid double taxation. The receiving country jurisdiction may think it is already taxed from the country its paid. In above scenarios, technically speaking tax is paid nowhere. Such arrangements need to be aligned and neutralize, so tax should not escape also and should not double tax also..

[Audio] 3. Strengthen Controlled Foreign Company rules ( CFC rules) It is to address the issue where the parent company is located in one location and activity being done in different location being controlled by parent tax payers as foreign entity. Without such rules, CFCs provide opportunities for profit shifting to low-tax jurisdiction and long-term deferral of taxation including measures devised to eliminate the risk of double taxation. These recommendations are not minimum standards, but are designed to ensure that jurisdictions that choose to implement them will have rules that effectively prevent taxpayers from inappropriately shifting income into foreign subsidiaries..

[Audio] Limit base erosion via interest deductions and other financial payments. Multinational groups may achieve favorable tax results by adjusting the amount of debt in a group entity. BEPS risks in this area may arise in three basic scenarios: Groups placing higher levels of third party debt in high tax countries. Groups using intragroup loans to generate interest deductions in excess of the group's actual third party interest expense. Groups using third party or intragroup financing to fund the generation of tax exempt income. For example, a group company with taxable income may borrow intragroup or third part loan from a country where there is no tax on interest income (e.g UAE in current scenario) but getting tax saved by deducting same interest on borrowing in tax jurisdiction of other group company. The use of third party and related party interest is perhaps one of the most simple of the profit-shifting techniques available in international tax planning. The fluidity and fungibility of money makes it a relatively simple exercise to adjust the mix of debt and equity in a controlled entity. In particular, the deductibility of interest expense can give rise to double non-taxation in both inbound and outbound investment scenarios. The interest payments are deducted against the taxable profits of the operating companies while the interest income is taxed at comparatively low tax rates or not at all at the level of the recipient. This is despite the fact that in some situations the multinational group may have little or no external debt..

[Audio] This approach includes three elements: a fixed ratio rule based on a benchmark net interest/ EBITDA ratio; a group ratio rule which may allow an entity to deduct more interest expense depending on the relative net interest/EBITDA ratio of the worldwide group; and targeted rules to address specific risks. OECD and Inclusive Framework members have adopted interest limitations rules by providing an interest cap rule that restricts a taxpayer's deductible borrowing costs to generally 30 percent of the taxpayer's earnings before interest, tax, depreciation and amortization (EBITDA)..