Base erosion and profit shifting (BEPS)
The United Arab Emirates joined the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on BEPS on 16 May 2018. Through joining the Inclusive Framework, the United Arab Emirates has committed to implement, in the immediate to short term, the following four BEPS minimum standards Actions:
- Action 5: Countering harmful tax practices.
- Action 6: Countering tax treaty abuse.
- Action 13: Transfer pricing documentation and country-by-country (CbC) reporting.
- Action 14: Improving dispute resolution mechanisms.
The BEPS minimum standards Actions are focused on (i) putting in place a mechanism to facilitate an automatic exchange of information with relevant jurisdictions to combat harmful tax practices, (ii) implementing certain anti-double tax treaty abuse measures, (iii) implementing a three-tier standardised approach with regard to transfer pricing documentation on related-party transactions and CbC reporting, and (iv) committing to improve dispute resolution mechanisms.
Recently, on 30 April 2019, the United Arab Emirates issued its country-by-country (CbC) reporting rules, which are in line with the guidance issued by the OECD on CbC reporting. The rules introduce a CbC reporting requirement (either filing or notification) for entities that are tax resident in the United Arab Emirates and that are part of a multinational group with consolidated revenues equal to or exceeding AED 3.15 billion in the preceding financial year. CbC reporting requirements are applicable to ‘financial reporting years’ starting on or after 1 January 2019 with the relevant CbC report to be submitted by 31 December 2020.
Failure to comply with the CbC reporting requirements is likely to expose the UAE taxpayers concerned to stringent and varying levels of administrative penalties in the United Arab Emirates.
The United Arab Emirates has also committed to implement the other (11) BEPS measures in the medium to long term.
On 27 June 2018, the United Arab Emirates signed the BEPS Multilateral Instrument (MLI). The key positions that the United Arab Emirates decided to adopt include:
- The United Arab Emirates has chosen to include additional wording in the preamble of its DTTs stating that the DTTs should not be used for treaty abuse (BEPS Action 6 minimum standard).
- The United Arab Emirates has chosen to include a Principal Purpose Test (PPT) with the ability to refer to a competent authority for final assessment of the availability of treaty benefits (BEPS Action 6 minimum standard).
- The United Arab Emirates has chosen to include addition wording in its DTTs to improve the dispute resolution process through Mutual Agreement Procedures (MAP) (BEPS Action 14 minimum standard).
- The United Arab Emirates has chosen to retain the existing permanent establishment (PE) definition in its DTTs, and has not elected to adopt the expanded PE definition.
- The United Arab Emirates has chosen to retain its existing position on the taxation of capital gains realised on real estate rich entities, and has not elected to adopt the proposed real estate rich provisions in its existing DTTs.
In respect of the remaining measures included under the United Arab Emirates' MLI position, the United Arab Emirates has opted to agree specific changes to its DTTs through bilateral negotiation.
For the provisions of the MLI to apply to the United Arab Emirates and its DTTs with other jurisdictions, a ratification and notification process must be completed by both the United Arab Emirates and the relevant DTT partner countries.
The United Arab Emirates has recently completed its domestic ratification procedures in order to implement the MLI with the modifications and ratifications in the UAE MLI to become effective from 1 September 2019.
Currently, 20 of the United Arab Emirates' treaty partners have completed their own ratification process. There are, however, a large number of countries that have either signed and/or ratified (but not yet in force) MLIs and, as such, as more treaty partners deposit their ratification instruments with the OECD, the position will continue to change.
Economic substance requirements
The United Arab Emirates introduced its economic substance requirements effective from 30 April 2019. The United Arab Emirates’ Cabinet issued the Cabinet of Ministers Resolution No. 31 of 2019 ('the Regulations'), requiring all in-scope UAE entities ('relevant entities') that carry on certain activities ('relevant activities') to have demonstrable economic substance in the United Arab Emirates from such date.
The Regulations apply to all UAE onshore and FTZ companies that carry on a relevant activity. It is yet to be confirmed whether the Regulations will also apply to sole proprietorships and branches; however, it is expected that entities incorporated under offshore (FTZ) companies that carry on a relevant activity will be within the scope of the Regulations.
The following are considered as relevant activities under the Regulations: banking, insurance, fund management, lease-finance, headquarters, shipping, holding company, intellectual property (IP), and distribution and service centres.
To satisfy the economic substance requirements in relation to a relevant activity, a relevant entity must:
- conduct the relevant 'core income generating activities' in the United Arab Emirates
- be 'directed and managed' in the United Arab Emirates, and
- with reference to the level of activities performed in the United Arab Emirates:
- have an adequate number of qualified full-time employees in the United Arab Emirates
- incur an adequate amount of operating expenditure in the United Arab Emirates, and
- have adequate physical assets in the United Arab Emirates.
The introduction of the Regulations in the United Arab Emirates brings it in line with other jurisdictions that have recently issued economic substance legislation and affirms the United Arab Emirates’ commitment to addressing concerns around the shifting of profits derived from certain business activities to 'no or nominal tax jurisdictions' without corresponding local economic activities. This should also be seen as the United Arab Emirates making positive progress towards meeting the EU’s requirements to be removed from the EU list of non-cooperative jurisdictions for tax purposes (the 'EU blacklist').
United States (US) Foreign Account Tax Compliance Act (FATCA)
The United States and the United Arab Emirates reached a Model 1B Intergovernmental Agreement (IGA) in substance as of 10 June 2014.
On 17 June 2015, the United Arab Emirates formally signed the Model 1B IGA, which came into force on 19 February 2016, with the US Internal Revenue Services (IRS) regarding the exchange of information related to US individuals and certain type of US-owned entities.
On 6 July 2015, the UAE government released guidance notes on the requirements of the IGA on the implementation of FATCA. The final guidelines expand upon the UAE-US Model 1 IGA, including the definitions, implementation of the due diligence procedures, and reporting obligations.
The exchange of information is done on a yearly basis, occurring in September of each year, between the United Arab Emirates and the US IRS. Filing of nil reports is required under the IGA.
Common Reporting Standard (CRS)
On 22 February 2017, the UAE government signed the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Financial Account Information, and the Convention on Mutual Administrative Assistance in Tax Matters (CMAATM) was signed on 21 April 2017, enabling the United Arab Emirates to fulfil their commitment to the CRS.