- The UAE Ministry of Finance has released a significant amount of details of the upcoming UAE Corporate Tax regime as part of the Public Consultation document. Whilst this is not the legislation itself, it shows considerable work has already been undertaken in benchmarking key principles of leading international / corporate tax practices, including but not limited to provisions such as a participation exemption, groupings and transfer pricing.
- The opportunity to submit comments / clarifications on the UAE Corporate Tax Public Consultation should not be wasted. The Ministry has invited businesses to give their comments (where possible with examples) on both the areas covered in the document and any other areas they consider relevant. The deadline for submission is 19 May 2022.
- All stakeholders should be kept informed of the developments, with the opportunity to discuss and align any submissions with the board/C Suite. Businesses should consider their submissions in their own name and/or as part of a industry or business advisory capacity.
The Global Tax Landscape
- The Greatest change region has seen on tax law
Particularly true of GCC, but also KSA; The rise of technological VAT; Corporate income tax and BEPS 2.0; Personal Income Tax Direction
- Revenue Authorities leapfrogging on technology
Companies increasingly need to deal with Revenue Authorities on good terms; Company systems may be leapfrogged by Revenue Authorities .
- Being strategic and not merely responsive
Period of high change may lead to responsiveness, rather than leadership; Balance needs to respond to Pillar 2 and other changes and long term strategic thinking
- Obtaining the right tax budget for the future
The Tax Budget has not been in the forefront to date; The need to re-think allocation of resources to tax; — Early allocation will reduce catch-up inefficiency
- Recruiting talent
Global demand for tax resources is significant; Regional demand for high tech skills; Data scientists and economists will become increasingly important; Jump traditional tax compliance
- Leveraging technology for effective cost
Need to be clever about leveraging new technology to ensure efficiencies; Leverage data rather than be consumed by the need to report it
The future of tax in the MESA region
- Tax policy will continue to develop fast across the region in response to both global tax policy developments and local economic and fiscal needs.
- Corporates need to build Tax Functions that enable their businesses to address those developments. Those functions will be broader and deeper in resources and skills than has traditionally been the case in the region.
- Key focus areas for those Tax functions will be (1) tax technical including, importantly tax accounting, skills and (2) technology and data management expertise. Given the lack of a deep bench in such skills in the region there will be competition for talent and so moving early is critical to getting this right for your business.
Regional Economic Update
- Global growth will be weaker than anticipated this year given ongoing supply chain disruptions emanating from China and spiking inflation which has been exacerbated by the war in Ukraine. The risk of policy missteps by central bankers is high as they start aggressively hiking rates.
- Emerging markets within the MENA region such as Egypt are especially exposed to higher food prices. By comparison, the GCC countries are in a good position as compared to most of the world as it stands to benefit from higher oil prices at the same time as they ramp up production.
- Despite this oil windfall we do not expect governments to ramp up spending as they might have done in the past as they look to decouple their growth cycles from the ups and downs of the oil prices. Instead, governments are focusing on rebuilding their balance sheets and investing for the long term through their sovereign wealth funds.
The future of data management in tax
- Current data available in your organisation
- Assess current data requirements; work with people in the business such as IT, commercials, etc., to see what data available can be harnessed from and used as input / output data for the tax function.
- Key message – start small with what is available. Integrating data does not need to be an expensive multi-year ERP transformation project
- Budget and simple solutions; use of data manipulation on Excel and power BI
Key message (same as the above) – start small with what is available. Integrating data does not need to be an expensive multi-year ERP transformation project
- Tax Authorities getting more and more sophisticated with their use of data in protecting their jurisdictional tax bases
- Data manipulation tools used during an audit to conduction audits more speedily and thoroughly
- Tax Authorities building risk assessment tools which have inputted jurisdictional, regional and industrial / sector data to help identify the most risk taxpayers to open an audit for.
Key message – The days of taxpayers getting randomly selected for an audit are over. Tax Authorities are getting more sophisticated and expect data for multi-years and potentially across multi-jurisdictions to be available when auditing. Poor data quality / lack of data will not be an acceptable excuse.
Transfer Pricing, BEPS and the Global Minimum Tax
- The implementation of BEPS 2.0 and in particular the Global Minimum Tax or Pillar Two is not a matter of if, it is a matter of when, with the most realistic implementation date of the primary rule (the Income Inclusion Rule or IIR), being 1 Jan 2024 for the majority of the world, however, an IIR effective date of 1 Jan 2023 can not be ruled out at this stage for certain jurisdictions, including (but not limited to) the UK, Japan and South Korea.
- It is crucial that all multinational groups assess the impact of the changes on their effective tax rates/top-up taxes, commercial pricing and practical implementation consequences, for example, from a resourcing and data management perspective.
- All CFOs and Heads of Tax should use this opportunity to consider the transfer pricing and tax governance impact of the changes and ensure all stakeholders (including the board) are kept regularly informed of the developments and what they may mean for your organization from a local and global financial, disclosure and compliance perspective.
Value Added Tax
- E-invoicing will be a reality soon in the UAE and Bahrain. With the lessons learnt from VAT implementation a few years ago and e-invoicing phase 1 implementation in Saudi Arabia, businesses should start preparing early – especially those running multiple systems and with large volumes of transactions.
- The VAT landscape is still relatively new. As both businesses and tax authorities continue coming to grips with the complexities and as we approach the statute of limitation period of 5 to 6 years in Saudi Arabia, the UAE and Bahrain, the “real” VAT audits are just around the corner!
- Dealing with the tax authorities in the region can be challenging. The appeal process is still evolving as the tax authorities continue to build capability and knowledge. Businesses need to tread carefully and may need to make commercial decisions on whether they challenge tax authority assessments.
- With the 5 year statute of limitation period approaching in the UAE we have seen a significant increase in audit activity and assessments being issued to taxpayers. The format of these audits has shifted from full field audits to desktop audits focused on industries relying heavily on zero ratings and exemptions, taxpayers need to be very careful when providing information to the FTA to ensure any penalty exposures can be minimised.
Tax Accounting and Provisioning
- The UAE will introduce corporate tax and this will require significant preparation and understanding in terms of being ready for day 1 impact for accounting and provisioning. The design and implementation (or update) of tax processes and controls will be required to accommodate this to ensure that accurate and reliable provision and disclosures are prepared.
- The provision process will include estimates and judgement that will need to be supported by accounting policy choices, management intentions for determining the manner of recovery, exit strategies, etc. These are key topics that should be discussed timely with relevant stakeholders.
- Understand and assess the impact for financial reporting upon (substantively) enactment of the UAE corporate tax law for this year and going forward. It is essential that messaging around the enactment and reporting issues are correctly messaged within the organization to gain sufficient support and understanding of the challenges that (most likely) will be encountered. We recommend to do a test run (pilot) on the tax provisioning process once finalized to tweak the process (if needed).
Tax Disputes and Resolution
- Tax authorities in many jurisdictions are employing data analytic tools to flag audit issues and risk-assess taxpayers. Clients across the region are seeing that tax authority audits now involve enhanced spectrum and frequency of questions.
- Corporate tax litigation is on the rise in areas of tax treaty application, related party transactions, high pitched tax assessments resulting in denial of expenses/losses, permanent establishment and withholding tax. Because of legislative developments, tax disputes are expected to increase with respect to new business models, interplay of corporate tax with VAT/customs and BEPS related measures affecting tax treaties, amongst others.
- Tax heads and corporate management are increasingly looking at formal (or informal) advance rulings, settlement and alternative dispute resolutions, where possible. Organizations will be placed to have dedicated internal resources, centralized control to ensure consistency in case of operations across different countries and access to skilled tax advisors to manage the increasing tax disputes across the region.
Tax Risk Mitigation
- Tax risks are increasing as BEPS, ESG, transparency laws and corporate tax continue to gain traction. A combination of increased challenges from tax authorities, pressure from counterparties and investment partners, and investigative journalism on tax matters has raised the profile of tax issues for corporate boards and stakeholders.
- Poor tax governance or aggressive tax practices can have substantial negative impacts on businesses leading to shareholder divestment, increased risk of tax challenges, and adverse publicity. These may translate into financial costs.
- Corporations can get in front of these risks by focusing on establishing a comprehensive tax policy, building an in-house tax function, and establishing strong relationships with tax advisors. These moves will help a corporation manage the known tax risks, and enable them to quickly address novel tax risks.
Impact of tax on M&A
- 2021 was a strong year in terms of M&A in the MESA region, with a roughly 15% jump in M&A activity over the previous year. From a deal makers' perspective, this has been largely led by Sovereign Wealth Funds which continue to deploy capital. We expect this trend to continue in the foreseeable future.
- The newly announced corporate tax in the UAE will play an important role in M&A transactions. Corporate tax should be considered when determining investment structures, developing tax models and negotiating indemnities and warranties.
- Warranty and Indemnity (W&I) insurance for M&A deals is gaining traction in the region. W&I insurance typically provides cover in respect of breaches of the warranties and indemnities in the sale and purchase agreement (SPA). Such a policy can be taken out by either the buyer or the seller. W&I insurers may require that additional tax due diligence is performed on the target company in order to provide coverage. Therefore, tax specialists must be involved early in the process. Insurance companies generally limit tax coverage in relation to high-risk tax jurisdictions and transfer pricing.
- It is important to involve the tax specialists (in- house or advisors) early in the deal process to make sure scoping and budgeting is done properly, materiality is appropriately determined, and extent of tax did coverage is appropriately set.
- Any pre deal carve out or structuring is becoming common so it's important to understand the tax consequences of such carve outs from a buyers perspective and determine if any tax risks require consideration in the deal documents.