Understanding the Global Minimum Tax

The Global Minimum Tax and UAE Corporate Tax

The global minimum tax, also known as the OECD 2 Pillar solution, is a new tax framework aimed at ensuring that multinational corporations pay a fair share of taxes regardless of where they operate. This article explores the implications of the global minimum tax UAE and the UAE's approach to implementing the tax.

Purpose of the Global Minimum Tax UAE

The global minimum tax will be enforced through the imposition of a minimum effective tax rate of 15% on large companies. If a company's profits are subject to a tax rate lower than 15% in a foreign jurisdiction, it would be required to pay the difference as additional taxes. The global minimum tax is designed to prevent multinational corporations from shifting their profits to low-tax jurisdictions and avoiding taxes in the countries where they operate. The tax will be applied to groups with revenue of at least EUR 750 million. The global minimum tax aims to level the playing field by setting a minimum effective tax rate that applies to all multinational corporations, regardless of where they operate. This will help ensure that these corporations pay a fair share of taxes in the countries where they generate profits, while also reducing the incentive for tax avoidance.

Table: Introduction of the Global Minimum Tax UAE

Key Stages	Description
2018	The UAE joined the comprehensive framework of the BEPS program.
2022	The UAE introduced a federal corporate tax of 9% for the first time in its history.
2023	The UAE has implemented the global minimum tax rules. Additional details on the implementation of the global minimum tax UAE will be published once available.
2024	Continued enhancements in corporate tax regulations and compliance measures are expected. Updates will be provided as new policies are introduced.
2025	The Domestic Minimum Top-Up Tax (DMTT) at 15% is set to take effect for financial years starting on or after January 1, 2025, applying to multinational enterprises with consolidated global revenues of EUR 750 million or more in at least two of the past four financial years.

Domestic Minimum Top-Up Tax (DMTT) in the UAE

Applicability:

The DMTT applies to large multinational groups with consolidated global revenues of at least EUR 750 million (approximately AED 3.15 billion) in at least two of the past four financial years.

Key Features:

• Ensures that the UAE retains a portion of the tax revenues that might otherwise be collected by other jurisdictions under Pillar Two.
• Applies a 15% tax rate to profits that are taxed below the global minimum threshold.

OECD 2 Pillar Solution

The OECD 2 Pillar solution is a two-part framework for addressing tax avoidance by multinational corporations. Pillar 1 focuses on reallocating taxing rights between countries, while Pillar 2 introduces a global minimum tax.

• Under Pillar 1, a portion of the profits of multinational corporations will be reallocated to the countries where their customers are located, regardless of whether the corporations have a physical presence in those countries. This will help ensure that the profits are taxed in the jurisdictions where they are generated.
• Pillar 2, on the other hand, introduces a global minimum tax of 15% on the profits of multinational corporations. This means that even if a corporation manages to shift its profits to a low-tax jurisdiction, it will still be required to pay at least 15% tax on those profits.

Key Elements of the Global Minimum Tax UAE

The GMT consists of three main rules under Pillar Two of the OECD/G20 agreement:

• Income Inclusion Rule (IIR): Requires the parent jurisdiction to tax the income of a foreign subsidiary if it is subject to tax below the minimum rate of 15% in the subsidiary's jurisdiction.
• Undertaxed Payments Rule (UTPR): Allows jurisdictions to impose a top-up tax on payments like interest and royalties between related parties if the recipient is subject to tax below the minimum rate.
• Subject to Tax Rule (STTR): Denies deductions or requires an equivalent adjustment for payments that are exempt from tax in the recipient jurisdiction or are subject to tax below the minimum rate.

These rules are designed to work together to ensure that all multinational groups are subject to a minimum effective tax rate of 15% on their worldwide profits. The IIR is the primary rule, while the UTPR acts as a backstop in cases where the IIR does not apply. The STTR supports the other two rules.

Implications for Businesses in the UAE

The global minimum tax will have significant implications for UAE corporations, particularly those that operate in multiple jurisdictions. The following are some of the key considerations:

1. Multinational Enterprises (MNEs):
   • MNEs operating in the UAE will need to evaluate their effective tax rates (ETRs) to ensure compliance with the new rules.
   • The DMTT allows the UAE to remain attractive while adhering to global tax standards.
2. Small and Medium Enterprises (SMEs):
   • SMEs that do not meet the EUR 750 million revenue threshold will continue to be taxed at the standard 9% corporate tax rate.
3. Increased tax compliance and reporting requirements: Businesses in the UAE will need to carefully consider the implications of the GMT rules and ensure they have adequate systems and processes in place to comply with the new reporting requirements.
4. Potential for double taxation: The interaction between the UAE CT and the GMT rules may result in double taxation for some businesses. It will be essential to understand the mechanisms available to mitigate such risks, including tax treaty provisions and domestic law reliefs.
5. Impact on cross-border transactions: The GMT rules may impact the tax treatment of cross-border transactions, including the potential for increased withholding taxes on certain payments. Businesses will need to review their existing arrangements and consider any necessary restructuring.
6. Impact on investment decisions: The introduction of the UAE CT and the GMT may affect investment decisions, as businesses will need to consider the overall tax implications of investing in the UAE compared to other jurisdictions.
7. Need for tax planning and restructuring: Businesses may need to review their current tax planning strategies and consider restructuring their operations to minimize the impact of the GMT rules.

Additional Tax Incentives for UAE Businesses

The UAE has introduced several incentives to support businesses while complying with the global tax framework:

1. R&D Tax Incentive (Effective January 1, 2026):
   • Offers a tax credit ranging from 30% to 50% for businesses investing in research and development.
   • Encourages innovation and technological advancements across various sectors.
2. Refundable Tax Credit (Effective January 1, 2025):
   • Designed to promote high-value employment activities.
   • Allows businesses to claim a refundable tax credit based on eligible salary costs, supporting workforce development in the UAE.

Read more about: Guide on Corporate Tax in UAE on Oil and Gas Industries

Steps for UAE Businesses to Ensure Compliance

1. Assess Eligibility:
   • Determine if your business qualifies as an MNE under the EUR 750 million revenue threshold.
   • Evaluate the effective tax rate (ETR) of each subsidiary in your group.
2. Understand Pillar Two Rules:
   • Familiarize yourself with the IIR, UTPR, and STTR to identify potential obligations or adjustments required.
3. Review Internal Processes:
   • Ensure accurate record-keeping and reporting of taxable income across jurisdictions.
   • Develop strategies to align with the 15% DMTT requirement.
4. Seek Expert Advice:
   • Consult with tax advisors to understand the implications of the DMTT and global minimum tax on your business operations.

FAQs

What is the purpose of the global minimum tax?

The purpose of the global minimum tax is to ensure that multinational corporations pay a minimum level of tax on their profits. The initiative is aimed at preventing multinational corporations from shifting their profits to low-tax jurisdictions and avoiding taxes in the countries where they operate. The global minimum tax is designed to level the playing field and ensure that all companies pay their fair share of taxes.

Conclusion

The introduction of the Domestic Minimum Top-Up Tax (DMTT) at 15% marks a significant development in the UAE’s tax landscape. This move ensures compliance with the OECD/G20 global tax framework while maintaining the UAE’s reputation as a leading business.

If you need assistance with navigating the UAE’s corporate tax regulations, our team of experts is here to guide you every step of the way. Contact us today and Working closely with corporate tax advisors and staying abreast of developments will be crucial in navigating these complex changes.