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Understanding OECD Pillar 2: Global Minimum Tax In UAE

On March 15, 2024, the Ministry of Finance of the United Arab Emirates started a discussion with the public about new global tax rules. These rules are known as the Global Minimum Tax or GloBE (Global Anti-Base Erosion) Model Rules, part of Pillar Two. The UAE and the OECD have signed the Base Erosion and Profit Shifting (BEPS) agreement, which aims to stop multinational corporations from evading taxes. Base Erosion and Profit Shifting (BEPS) has published 15 actions to counteract profit shifting and tax evasion, and it has described the United Arab Emirates corporate tax structure to follow and adhere to the global norms as predicted by the OECD in 2015. The UAE has taken several actions to adhere to the established tax norms worldwide. The implementation of corporate tax by the United Arab Emirates is a fantastic accomplishment of the government, marking a significant turning point in tax history that aligns with international norms. One of the actions taken in the process of putting these international regulations into effect is determining whether an individual or corporation is subject to taxation.

Consulting a tax consultant in Dubai can provide additional clarity and assistance in navigating these new regulations and ensuring compliance with the UAE’s corporate tax requirements.

What Are the Building Blocks of BEPS (Base Erosion and Profit Shifting)?

Base Erosion and Profit Shifting (BEPS) is made up of two primary parts that are referred to as “pillars.”.

  • The First Pillar: The primary goals of this pillar are to distribute a portion of the multinational’s consolidated earnings to the countries in which sales are made and to standardize the compensation for continuing marketing and sales efforts.
  • The second pillar:- A 15 percent global minimum tax rate is proposed to imposed by BEPS (Base Erosion and Profit Shifting), in alignment with OECD principles on the worldwide profits of MNCs (multinational corporations) to make the tax ratio effective and efficient. 

Read more: Transfer Pricing Under Corporate Tax in UAE

What Are The UAE Agreements With BEPS?

The UAE-BEPS agreement was reached to be finalized in October 2021 for the implementation of Base Erosion and Profit Shifting (BEPS) in the United Arab Emirates along with 130 other countries. The United Arab Emirates has worked tirelessly to eliminate detrimental practices and raise the bar for efficient tax methods following OECD principles.

Pillar 2: OECD recommended implementation by the UAE:

The Organization for Economic Cooperation and Development (OECD) and the Ministry of Finance (MOF) inked a preliminary agreement in 2007 to establish robust collaborations on tax matters. This involved exchanging information and experiences, particularly concerning economic substance regulations and country-by-country reporting standards. To address tax-related concerns arising from the economy’s continuous digitization, the OECD has suggested two main approaches: the “first pillar” and the “second pillar.” 

What is the treatment of multinational corporations?

Application to Multinational Companies: Regardless of the country in which they conduct business, large multinational corporations (i.e., those with a consolidated turnover of over 750 million) are required to meet the requirements of Pillar 2 by paying a tax of at least 15% of corporate tax rate  on their overall income. It is anticipated that the second pillar’s provisions will take effect in 2023.

How OECD Principles applied to UAE Corporate Tax Vide 47th Federal Decree Law of 2022?

The United Arab Emirates is actively working with G twenty countries to comply with international standards for the implementation of the second pillar concept of BEPS (Base Erosion and Profit Shifting). The practical example can be observed in the double tax treaties signed by the UAE and the implementation of the UAE’s new corporate tax law vide Federal Decree-Law No. 47/2022, declared effective on December 9, 2022. This involves levying corporate tax on corporations and industries that comprise such features of the existing tax system by expanding the United Arab Emirates federal tax law’s capabilities, application, and reach. This law states that after June 1, 2023, the application will be implemented in the commercial sector per accepted worldwide tax laws and regulations. The worldwide codes of principles are contained in it by providing more information on how the Pillar 2 laws are incorporated into the system available in the United Arab Emirates.

What are the Country-by-country reporting (CBC) criteria for foreign reporting?

Large multinational corporations are obliged to provide country-by-country (CBC) reports under the original BEPS project, which include financial information on the overall distribution of their income, business earnings, taxes paid, and details on the various nations’ tax policies for various industries. Territories where they conduct business.

UAE and Country-by-Country Reporting (CBC):- 

Multinational corporations operating in the United Arab Emirates must implement country-by-country reporting (CBC) for financial years starting on or after January 1, 2019. According to the UAE’s Corporate Income Tax Law, all requirements and most recent rules have been accepted and declared to be effective on June 1, 2023, as scheduled. 

All UAE businesses (both onshore and in free zones) must evaluate their financial records, determine whether they must file taxes, register for corporate income tax, and, if required, receive a corporation tax registration number to comply with the new corporate tax law. The UAE and the Base Erosion and Profit Shifting (BEPS) organization of the OECD have inked an agreement to prevent internationally recognized corporate entities from evading taxes. The United Arab Emirates has implemented numerous efforts to adhere to international tax norms. As part of the implementation of these global policies, one of the tasks is to determine if a business or individual is subject to taxation.

Read more: Commercial Activities Certificate for VAT in the UAE

FAQs (Frequently Asked Questions) 

1. Whether UAE Corporate Tax impose a global minimum tax on multinational corporations as per OECD BEPS principles?

The UAE is dedicated to tackling the difficulties faced by tax jurisdictions worldwide and is a member of the OECD BEPS Inclusive Framework. To give the UAE a framework to implement the Pillar Two regulations, a corporate tax system has been introduced. Multinational corporations will be liable for corporate tax under the standard UAE corporate tax structure until the UAE adopts pillar two regulations. On the possible application of the Pillar 2 regulations in the United Arab Emirates, more details will be made available eventually. 

2. How do we define “large” international corporations?

A multinational company uses foreign subsidiaries, branches, or other forms of presence or registration to conduct business both domestically and abroad. If a business solely makes money from sources outside of its home country without being physically present or registered abroad, it is not considered a multinational firm. On a global income of 750 million euros equal and above, any multinational company comes in the ambit of MNCs (multinational corporations) as the standard set by the second pillar of the BEPS (Base Erosion and Profit Shifting) in alignment with the OECD principles initiative. 

3. When is Pillar Two, or the Global Minimum Tax, scheduled to be implemented in the UAE? 

According to the Ministry of Finance, pillar two will not be applicable in the United Arab Emirates in 2024. Nonetheless, a public consultation on the Pillar Two suggestions will be made available by the Ministry in the first quarter of 2024. Through this consultation, key stakeholders will be asked for their opinions on the structure and implementation schedule of the Pillar 2 regulation in the UAE.

4. Can pillar two organizations file their 2024 pillar two returns in the United Arab Emirates?

The UAE plans to permit the submission of the Globe Information Return (GIR) for 2024 through the UAE’s authorized authorities for Pillar 2. Based on current knowledge about Pillar Two return filing in the UAE, the United Arab Emirates (UAE) will not implement the Global Anti-Base Erosion (Pillar Two) standards before 2025. It follows from this that, starting in 2024, Pillar Two organizations will not be permitted to file their returns using the UAE’s authorized methods. So, it is significant that the United Arab Emirates changed its corporate tax law to facilitate the introduction of future domestic minimum taxes following Pillar 2 regulations. For the first part, there will also be a public consultation over Pillar 2. Multinational companies (MNEs) with an Ultimate Parent Entity (UPE) in the United Arab Emirates in 2024.

Shayan Khan is an experienced Corporate Tax Consultant with over 4 years of expertise. He's skilled in negotiating and investigating taxes with government bodies like the Federal Tax Authority. Shayan excels in reviewing and drafting tax documents and offers strategic advice on complex tax matters. Clients trust his guidance in navigating tax procedures and minimizing liabilities. Read more