Pillar 2

The Global Minimum Tax: Leveling the Playing Field

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.

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:

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.
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.
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.
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.
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.

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 Federal Corporate Tax and the implementation of the Global Minimum Tax UAE will significantly impact businesses operating in the country. It will be essential for businesses to understand the implications of these changes and consider the necessary tax planning and restructuring measures to mitigate any potential adverse effects. Working closely with corporate tax advisors and staying abreast of developments will be crucial in navigating these complex changes.

Mostafa Mansour

Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.