In May 2018 the UAE joined the Base Erosion and Profit Sharing (“BEPS”) framework. By joining the framework, it committed to implement four minimum standards:
- Action 5: Countering Harmful Tax Practises
- Action 6: Preventing Tax Treaty Abuse
- Action 13: Country-by-Country Reporting and Transfer Pricing Documentation
- Action 14: Improving Dispute Resolution Mechanisms
In practice, the UAE has committed to 1) assist preventing unfair and harmful tax practises by putting in place mechanisms to allow for cross-border exchange of information; 2) review and implement a framework to prevent abuse of double tax treaties; 3) implement a transfer pricing documentation and reporting framework; and 4) review and improve its available dispute resolution mechanisms.
Joining the BEPS framework will be transformative for businesses operating in the UAE – it will likely lead to additional compliance and reporting obligations and an increased focus on tax transparency. Businesses that operate across several jurisdictions should review their operating structures carefully to ensure compliance with the new framework.
Issues to consider now
It is not uncommon for Multinational Companies (“MNCs”) to finance new projects by loaning funds to their subsidiaries in different jurisdictions. As interest is a tax-deductible expense in most jurisdictions, in the past businesses have shifted debt to high tax jurisdictions while recognising higher profits in low tax jurisdictions. Any financing arrangements in a post-BEPS implementation environment will need to have a clearly documented economic justification. Where arrangements cannot be shown to have an economic basis to them, tax authorities in respective jurisdictions may determine that the arrangements are done for profit shifting purposes and bring back the profits into the tax net of the higher tax jurisdiction. The existing financing arrangements should be reviewed carefully to ensure their economic validity under the BEPS framework.
Transfer pricing arrangements and documentation
All intra-group transactions will need to be carried out under arms-length principles and accounted for at market value. Any arrangements that would artificially shift revenue and profits to low tax jurisdictions will fall foul of the BEPS framework. While the UAE does not currently have a domestic transfer pricing framework, we expect it will adopt one in the short to medium term future. MNCs should consider thorough transfer pricing audits to evaluate the existing state of the arrangements and documentation.
Internal risk management and reporting processes
Complying with the BEPS framework will likely put a strain on the existing compliance and reporting teams as well as processes. The existing controls and processes should be reviewed in light of the BEPS framework to ensure that they are fit-for-purpose. Knowledge gaps and weak controls should be identified and rectified as quickly as possible to prepare the business for additional reporting requirements.
We recommend that businesses start reviewing their arrangements and processes now to ensure they are ahead of the BEPS framework implementation, rather than having to catch-up once the new rules are in full force.
GTS team will be happy to meet with you to discuss your requirements.
050 653 1520