On 23 January 2018, the Economic and Financial Affairs Council (ECOFIN) announced that the United Arab Emirates(UAE) and seven other countries (i.e. Panama, Barbados, Grenada, South-Korea, Macao SAR, Mongolia and Tunisia) will be removed from the list of non-cooperative jurisdictions for tax purposes (also referred to as the EU black list). This is of course very good news so quickly after the publication of the EU black list. The removal from the black list is the result of commitments given by the United Arab Emirates with respect to the implementation of certain anti-tax avoidance measures. In this newsletter we set out the measures to be introduced and the impact thereof on businesses established in the United Arab Emirates.
On 5 December 2017, the ECOFIN determined a list of 17 non-cooperative jurisdictions for tax purposes (the EU black list). This list was established based on three screening criteria: tax transparency, fair taxation (no harmful tax regimes) and implementation of BEPS minimum standards. A detailed overview can be found in Annex V to the Council Conclusions.
The United Arab Emirates was one of the 17 countries that appear on the black list. The ECOFIN recommends (but does not oblige) that Member States apply tax sanctions. The EU may apply non-tax sanctions towards these jurisdictions.
Furthermore, with respect to a number of countries the screening raised concerns on one or more of the screening criteria, but commitments were given by the relevant countries to address such concerns. these countries are listed for close monitoring of the progress on their commitments (the ‘grey list’).
Application of screening criteria to the UAE
The Council Conclusions clarify why each of the listed countries is included in the black list. It shows that the United Arab Emirates does not apply the BEPS minimum standards and did not commit to addressing these issues by 31 December 2018. It also indicated that the United Arab Emirates' commitment to comply with criteria 1.1 and 1.3 will be monitored.
Removal of the UAE from the black list
From today’s ECOFIN resolutions, it appears that the United Arab Emirates have been removed from the black list. Instead, they will be added to the grey list, more in particular to sections 1.1 (sub-section 1), 1.3 (sub-section 1) and 3 (sub-section 1) of Annex II to the Council Conclusions. From this listing it can be derived that the United Arab Emirates have committed to adhere to the minimum standards of the OECD’s Action Plan for the avoidance of Base Erosion and Profit Shifting (BEPS) by 31 December 2018.
But what does this actually mean? What are the BEPS minimum standards and how does it affect businesses established in the United Arab Emirates?
The BEPS minimum standards
To ensure a level playing field, four minimum standards (Actions 5, 6, 13 and 14) have been included in the BEPS package.
BEPS Action 5 focuses on the requirement of substantial activity for preferential tax regimes and improving transparency in connection with rulings. In principle, the following actions have been determined as the minimum standard:
- The application of the “(modified) nexus approach” to decrease the risk of preferential regimes being used for artificial profit shifting. This approach allows the taxpayer to benefit from an IP (or other preferential) regime only to the extent that the taxpayer itself incurred qualifying R&D expenditures that gave rise to the income.
- The improvement of transparency by compulsory spontaneous exchange on rulings related to preferential regimes, which could give rise to BEPS concerns.
BEPS Action 6, aimed at preventing treaty abuse, includes a minimum standard to counter treaty shopping. The minimum standard of Action 6 consists of the following:
- The implementation of one of the following anti-abuse rules to counter treaty shopping:
- A principal purpose test (PPT);
- A PPT combined with a limitation-on-benefits rule (LOB);
- A (detailed) LOB supplemented by a mechanism that deals with conduit arrangements.
- The inclusion of a preamble in treaties stating that tax treaties are not intended to be used to generate double non-taxation.
- Policy considerations that need to be considered before entering into a tax treaty with another country.
BEPS Action 13 contains revised standards for transfer pricing documentation and a template for Country-by-Country Reporting. A three-tiered approach has been developed as a minimum standard:
- MNEs are required to provide tax administrations with high-level information regarding their global business operations and transfer pricing policies in a ‘master file’;
- Detailed transactional transfer pricing documentation and information relating to intercompany transactions should be provided in a ‘local file’ specific to each country.
- Large MNEs are required to file a Country-by-Country report, annually providing e.g. the amount of revenue, profit before income tax and income tax paid and accrued for each tax jurisdiction in which the MNE employs business activities.
BEPS Action 14 contains a minimum standard with respect to the resolution of treaty-related disputes. Article 25 of the OECD Model Tax Convention provides a mutual agreement procedure (MAP) through which authorities may resolve differences regarding the interpretation or application of the Convention. The minimum standard will ensure the following:
- Treaty obligations related to the MAP will be fully implemented in good faith and MAP cases will be resolved in a timely manner;
- The implementation of administrative processes that promote the prevention and timely resolution of treaty-related disputes, and;
- Taxpayers can access the MAP when eligible.
The impact on businesses in the UAE
The United Arab Emirates does not de facto levy a tax on the profits of most companies that are established in the country. Some exceptions to this general profit tax freedom apply, such as for oil and gas companies and branches of foreign banks, but as this regards a limited number of companies, we will not address their position here.
For companies that do not pay profit taxes in the United Arab Emirates (either in a free zone or in the mainland) the implementation of Action 5 does not have a material impact. Also the implementation of Action 14 will not adversely affect companies in the United Arab Emirates.
However, the implementation of Actions 6 and 13 could have a bearing on companies in the United Arab Emirates.
Firstly, the implementation of Action 6 (i.e. anti-abuse provisions in tax treaties) could have an impact on businesses established in the United Arab Emirates, especially when they use the Emirates as a hub for their international activities and as such benefit from tax treaty application (e.g. reduced withholding tax rates).
Secondly, the implementation of Action 13 (i.e. the introduction of Country-by-Country reporting (CbCR) and Master File/Local File requirements) may result in a substantial compliance burden for companies that exceed the thresholds. Of course it should be borne in mind that companies that fall within the scope of CbCR are likely already subject to similar provisions in other countries where they operate, as such companies are often multinationals with a wide geographic presence. As a result, in practice, it could be that mainly companies that have a turnover below the CbCR threshold, but in excess of the Master File/Local File threshold will be affected by these new rules. Some of these companies may already avail of a Master File prepared to satisfy requirements of other jurisdictions in which they operate, and will therefore only have to prepare an additional Local File. Others may have to prepare both Local Files and a Master File.
What should inhouse tax managers do next?
For companies that may be affected by the introduction of anti-abuse provisions in tax treaties, it is highly recommended to take the following actions:
- Determine which tax treaties are applicable to the company;
- Determine if benefits under such applicable tax treaties could be affected if the required anti-abuse provisions are included in such treaties;
- Determine appropriate mitigation strategies where relevant;
- Monitor the developments in respect of applicable tax treaties.
Depending on the required mitigation strategies, the implementation may take considerable time. Therefore, it is recommendable to map areas of potential risks well in advance.
Based on our experience, the preparation for CbCR and the preparation of Master Files and Local Files can result in a substantial additional compliance burden, especially if intra-group transactions are not sufficiently mapped or documented, or no clear transfer pricing policy is available. Therefore, for companies that will fall within the scope of these new requirements, it is highly recommendable to consider its intra-group transactions and transfer pricing policy well in time.
It should be anticipated that the BEPS minimum standards as described above will be implemented by the UAE within the given deadlines in order to avoid being blacklisted again. Therefore, we recommend companies that are established in the United Arab Emirates to carefully monitor the developments and consider the impact of these new provisions timely.