Whether 9% or 15%, UAE businesses have work to do on their tax planning. Image Credit: Shutterstock

With the announcement of the UAE’s corporate tax, should businesses undertake any kind of restructuring, or should they wait for the regulations to be released is a question every CFO and business owner is thinking. This is important because some of the businesses did not get ready before the 2018 VAT implementation, and had to bear the consequences of being non-compliant. This resulted in harsh penalties.

Their approach should be quick, but the decisions must be taken patiently, keeping in mind the long-term view since any hasty decisions may prove costly later. The first thing that every organization should do is to conduct a high-level fiscal impact of 9 per cent - or a higher rate of potentially 15 per cent for multinationals - on net profits. This should be done on an ‘as-is’ basis. A scenario-based approach is suggested to ensure that the business owners are aware of the best- and worst-case scenarios.

In designing the scenarios, the group’s presence in countries outside the UAE and in free zones, the type of expenses booked, and their eligibility for a tax deduction, the extent of debt (internal and external) in the group, and its ratio with the shareholder’s equity, loss-making vis-à-vis profit-making group entities, the extent of management cross charges within group entities and future business plans would play a key role.

For a multinational having its headquarters overseas and subsidiaries in the UAE would trigger calculation of the ‘effective tax rate’, and any tax paid in the UAE (potentially 9 per cent or 0 per cent if the subsidiary is in the free zone) that is less than the global minimum tax (GMT) would result in an additional tax imposed by the HQ country. Likely, the UAE would either bring a top-up tax to charge corporate tax on the differential or introduce the GMT (under OECD Pillar 2 provisions), thereby bringing all multinationals (either UAE-headquartered or otherwise) into a higher rate of corporate tax (likely 15 per cent).

Free zone bases

Any presence of a subsidiary in a free zone should potentially create different challenges. Therefore, two separate scenarios are required to be plotted where the free zone entity is conducting business with mainland entities.

One, the tax impact where the free zone entity’s income is taxed only to the extent of its transactions with the mainland entity. And second, if the free zone entity loses its tax exemption by virtue of having dealings with the mainland entities and, consequently, the income of the free zone entity gets taxed.

Similarly, a mainland branch of the free zone entity could potentially result in tax implications, which should be assessed and put as part of the scenario planning framework. Another scenario is to assess whether grouping provisions would allow a free zone entity to be grouped with a mainland entity.

It is important to know that the corporate tax grouping provisions could be different from VAT grouping as it is expected the former may require a much higher shareholding vis-à-vis VAT. Consequently, some entities are currently part of the VAT group could potentially move out of the corporate tax group.

If such entities are loss-making, the group would be unable to utilize the losses to set it off with other profitable entities. In addition to the fiscal impact, the other item of immediate attention is assessing the group’s transfer pricing (TP) policies.

With an introduction of a full-fledged transfer pricing, valuing the intra-group transactions, both overseas and domestic, will play a crucial role in the overall tax management. It is critical for business owners to start assessing the immediate impact of CIT on their organizational structure and profits, discuss among relevant stakeholders, and consciously prepare a detailed roadmap to implement the necessary changes.