Global Minimum Tax – The UAE Perspective

What is Global Minimum Tax (GMT)

To combat abusive tax practices adopted by some Multinational Enterprises (MNEs), the Organisation for Economic Co-operation and Development (OECD) has proposed a minimum effective Corporate Tax rate of 15% for MNCs with an annual global revenue of more than EURO 750 million. The proposal was accepted by over 136 countries in October 2021, with the intention that it would be effective from 2023. Given the scale of the changes that would be required to domestic corporate tax law, the target for implementation has since been delayed to 2024.

Why GMT is relevant to the UAE

The UAE implemented domestic Corporate Tax (CT) at a rate of 9% for financial years starting on or after 1 June 2023.It has also committed to the introduction of GMT but has deferred implementation to 2025.

Implementation of GMT in the UAE

The UAE Ministry of Finance (MoF) has initiated a public consultation to seek feedback on the implementation of GMT or Global Anti-Base Erosion Model (GloBE) Rules.

The purpose of the public consultation is to gather input from all stakeholders and the MoF is particularly keen to hear from MNE groups operating in the UAE regarding the various policy design options, including the interaction with the UAE's corporate tax and options to minimise compliance costs. The consultation is open until 10 April 2024.

Ingredients of the public consultation

The consultation paper is made up of two parts:
 

1. A consultation questionnaire:

• Covering GloBE implementation, the design of a potential UAE Domestic Minimum Top-up Tax (DMTT), administration matters; and
• Substance-based incentives.

2. A guidance paper to accompany the consultation questionnaire, offering details on the specific elements of the GloBE Rules.

Concepts covered in the public consultation

Broadly, the UAE MoF is considering the implementation of two key interlocking rules:
 

• Income Inclusion Rule (‘IIR’): Under the IIR, a Top-up tax is paid at the level of the Ultimate Parent Entity, in proportion to its ownership interests in entities that have low taxed income; and
• Under Taxed Payment Rule (‘UTPR’): UTPR acts as a backstop to the IIR. It requires an adjustment (for example, the denial of a deduction) that increases the tax at the level of the subsidiary. The adjustment is an amount sufficient to result in the group entities paying their share of the Top-up tax remaining after the IIR.

In addition to the IIR and UTPR, the MoF is also considering implementing Domestic Minimum Top-up Tax (‘DMTT’). DMTT would apply to the local entity of an in-scope MNE and would produce outcomes that are consistent with the GloBE Rules. It eliminates any Top-up tax liability under the GloBE rules when it is treated as a Qualified DMTT Safe Harbour (after assessment by a peer review process). When it is not treated as a Qualified DMTT Safe Harbour, the domestic minimum tax is credited against any Pillar 2 Top-up Tax liability.

The MoF’s proposal on implementation of GMT in the UAE
 

• GloBE Rules apply to all UAE entities of MNE Groups including establishments operating in the free zones. However, in order for the free zones to remain attractive for business, the MoF has recognised the importance of introducing additional tax incentives into the UAE CT regime, in line with the GloBE Rules.
• QDMTT will not apply to domestic groups or MNE Groups that are not in-scope of the GloBE Rules (i.e., small MNEs and purely domestic groups).
• QDMTT would provide for Substance-Based Income Exclusion to minimize the liability exposure. However, it must not be broader than that permitted under GloBE Rules.
• The EURO threshold should be adopted instead of an equivalent UAE Dirham threshold.
• Use of International Financial Reporting Standard (in alignment with the requirement under the UAE CT regime) to be used to compute income or loss.

The MoF’s proposal to administer GMT in the UAE

A GloBE Information Return would be filed with the Federal Tax Authority (FTA) no more than 18 months after the first fiscal year that an MNE Group comes within the scope of the GloBE Rules for the UAE. Filing for subsequent years will be due 15 months after the end of the fiscal year.

Consideration is being given to the implementation of two separate returns i.e. the GloBE Information Return and an additional return for the QDMTT (potentially linking or combining with the UAE CT return).

Liabilities under the GloBE Rules that are due in the UAE would be paid annually.   This may align with the payment date under the UAE CT law, or follow timelines set by the GloBE Rules.

Questions in the consultation paper

The public consultation paper raises some interesting questions:
 

• Would you prefer a 15% CT rate over the IIR?
• Would you prefer to pay Top-up Tax in the UAE or in another jurisdiction under the IIR or UTPR or QDMTT?
• Do you have any views on the amendments or additions to the existing administrative provisions of the UAE CT Law to deal with the record keeping requirements for the QDMTT and GloBE Rules?
• Do you have views on whether the penalties for non-compliance in relation to the GloBE Rules and the QDMTT should be aligned to those in the UAE Tax Procedures Law?

Impact of GMT on businesses operating in the UAE

UAE Head-quartered MNEs will be subject to GloBE Rules and pay the Top-up Tax liability if they breach the threshold of EUR 750 million. UAE MNEs will need to compute the Top-up tax taking into account the tax liability paid by their subsidiaries worldwide.

Non-UAE Headquartered MNEs that are within the scope of the GloBE Rules and have entities in the UAE (including entities in free zones) may have to comply with the GMT to satisfy the Top-up Tax liability for the Ultimate Parent in its home jurisdiction. For this, the MoF is considering implementing a DMTT/Qualified DMTT in addition to IIR and UTPR. However, to keep the market attractive for business, the MoF is also considering introducing a tax incentive package.

What should businesses be doing now and how can BDO help?

MNE groups that are likely to be affected should make sure they fully understand the proposals for the GMT and the implications for their business, both in the UAE and globally.

BDO is well placed to provide all the support you need, with a strong UAE tax practice and a global tax network covering over 160 countries. We can assist with:
 

• Assessing the implications of Pillar 2 and the Global Minimum Tax for your business, globally and locally; and
• Developing a cohesive and efficient global tax strategy.