UAE corporate tax credit on 'high-value employment' will be major incentive for global businesses
UAE move sets up 'potential alternative to European and international head offices'
Dubai: Technology companies would be an obvious beneficiary of the UAE’s move to offer tax refunds for those engaged in ‘high-value’ employment activities.
But businesses in other sectors, whether they have their origin in the UAE or are subsidiaries of global entities, too could benefit from the new tax break, according to consultants. What this does is a portion of the employment costs generated by such a business will be eligible for the tax credit.
This would apply to the salary costs of CEO and other senior management personnel who are ‘performing core business functions that add substantial value to the UAE economy’, according to the Ministry of Finance.
“This is one of the first tax incentives in the world to foster innovation and creativity,” said Girish Chand, Senior Partner at MCA Consultants.
"We need to wait for some more clarity. Generally, such tax incentives in other countries are given for strategic industries with high-value investment, high employment generating activities, sustainable developments, and export-oriented industries."
(Staff cost-linked) tax incentives in other countries are given for strategic industries with high value investment, high employment generating activities, sustainable developments, and export-oriented industries.
Who will qualify as 'high-value'?
Now, this is still a proposal, but the Ministry is likely to move fast to fleshing out all associated details and putting it out as a full-scale regulation.
Once that’s done, the impact will be felt in the number of global businesses that would consider the UAE as their headquarters, whether regional or with much more scope than that. For businesses that are already established, it provides them an assurance of a generous tax break.
“This is not dissimilar to Saudi Arabia’s efforts to incentivise companies to establish regional headquarters in the Kingdom,” said James Swallow, Commercial Director at Sovereign PPG. “The measures, along with waived penalties on Economic Substance Regulation (ESR) violations and proactive adjustments to the tax framework, reflect the UAE’s bid to solidify its position as a global business hub.
“And as a potential alternative to European and international head offices considering relocation to a tax-friendly jurisdiction.”
UAE’s bidding to solidify its position as a potential alternative to European and International head offices considering relocation to a tax-friendly jurisdiction.
That’s the key point. The global tax regime is passing through an extremely fluid phase, with Western governments in the mood to impose higher rates of tax on businesses and high-networth individuals. Gulf states are introducing corporate tax, but within that ambit, there's plenty of room to offer tax breaks too. This is the message that the UAE is putting out with the latest updates.
Recently, the hotel operator Fairmont and the telecom company Veon, which has operations in Pakistan and Ukraine, shifted their global HQ to Dubai.
15% tax for multinationals
It was on Monday (December 9) that the Ministry of Finance came up with major updates on the corporate tax regime in the country.
First, there was the confirmation of a ‘domestic minimum top-up tax’ of 15% for multinationals that generate global revenues of 750 million euros for two of the four financial years preceding the financial year from which this tax top-up applies.
This becomes effective in the UAE for financial years starting on or after January 1, 2025.
That multinationals will be subject to a higher tax than the 9% standard corporate tax rate in the UAE was a given. There is a move to impose a global minimum 15% corporate tax on companies with operations cutting across geographies under the Pillar 2 rules. Until now, companies generating billions of dollars in profit could get away with light tax obligations simply by being nominally headquartered in a low-tax jurisdiction.
Multinationals will also need to review their system capabilities to assess their ability to extract the relevant data that will be necessary for GMT (global minimum tax) calculations and tax reporting, which will now become an annual exercise.
Now, that’s being done away with.
“UAE businesses have been expecting the GMT (Global Minimum Tax) rules given UAE’s earlier cabinet decision to amend the law to introduce GMT at 15%,” said Nilesh Ashar, Senior Managing Director, Head of Middle East Tax at FTI Consulting.
There was also a public consultation on this earlier in the year.
“Besides, UAE-based multinational groups and foreign multinationals with UAE presence have already had to monitor the GMT implementation in other countries where they operate,” said Ashar.
The global implementation of Pillar 2 rules has started in several countries, including the UK, the EU bloc, and Turkey.
“Multinational businesses need to perform an impact assessment of the GMT rules in the UAE/GCC/ internationally based on their global presence, and understand whether it can qualify for some of the reliefs provided for in GMT laws to reduce the transitional burden,” said Ashar. “And the tax liability is based on a number of reliefs provided in the rules.
“Having said this, the Pillar 2 rules are complex and require additional administrative and compliance obligations on multinationals, including the requirement to adequately disclose the impact of GMT in the audited financial statements under appropriate accounting standards.
“They will also need to review their system capabilities to assess the ability to extract the relevant data that will be necessary for the GMT calculations and tax reporting which will now become an annual exercise.”
750 million euro cut off
Even the cut-off revenue comes across as being favourable for global businesses. "The high threshold of global revenues at 750 million euros would mean even many big corporate houses would not fall within this definition," said Atik Munshi, Managing Partner at Finexpertiza UAE.
High level of C-suite and senior staff spends would bring relief, though it remains to be seen how these would be calculated practically. We are a tax regime now and new complexities plus reliefs are bound to happen.
"Only the very large corporates would have to comply. In most jurisdictions, the corporate tax level is more than 15%. The UAE adopting a lower top-up corporate tax rate means such MNCs could be attracted to base in the UAE, though there are many other criteria to be fulfilled."