Corporate Tax - MS Dashboard

OECD announced a new two-pillar plan towards international tax reforms during the recent virtual G20 Tourism Ministers Meeting on 1st July 2021. This comes after 130 countries and jurisdictions agreed to sign up for a global corporate minimum tax rate proposal that the G-7 presented in June. The two-pillar plan – the outcome of negotiations coordinated by the OECD for much of the last decade – aims to ensure that large Multinational Enterprises (MNEs) pay tax where they operate and earn profits while adding much-needed certainty and stability to the international tax system. The world has taken a big step toward sweeping changes to global taxation as 130 countries endorsed setting a minimum rate for corporations along with rules. This deal would probably come into effect in 2023.

UAE has welcomed the statement issued by the Organization for Economic Cooperation and Development and the G20 (G20/OECD) on the Inclusive Framework on Base Erosion and Profit Shifting. This will enhance the Nation’s efforts to strengthen ties with various world countries regarding financial and economic cooperation. The UAE is one of the 130 member countries that have joined the consensus.

UAE is actively participating in various initiatives and discussions to improve the transparency of the international tax environment and the coherence of the global tax system. The successful implementation of economic substance and transparency rules proves the Nation’s ability to adapt its practices to meet international standards. This remarks a new beginning for the Nation to expand global parallel connections and secure global tax stability.

Through the ages, governments everywhere have grappled with different ways to design and implement taxes. But the recent announcement by the G7 Finance Ministers is significant in that governments are coming together to coordinate and synchronise their systems of corporate taxation.

The proposals involve fundamental changes to international tax rules – they will mean allocating more taxing rights of the largest and most profitable multinational enterprises to where their customers are; and implementing an internationally-agreed minimum effective corporate tax rate for large multinational enterprises (MNEs) wherever they operate. While the agreement is the first step in a long process before it can become a reality.

The G20, as expected, endorsed the OECD Inclusive Framework political agreement on the key components of international tax reform under Pillar One (reallocation of profits to markets) and Pillar Two (global minimum tax). The G20 has urged the OECD Inclusive Framework to address remaining issues and policy design elements, and prepare a detailed implementation plan, by the next G20 Finance Ministers meeting on 15-16 October 2021.

What will these changes mean for UAE?

For now, it is too early to say. What we know for sure is that the international rules for corporate taxation will change, and all jurisdictions will need to adjust their tax systems and rules. As for the revenue impact, it will depend on the parameters being set, the rules to be made, and crucially, how different governments and businesses respond to them.

UAE’s overall competitiveness has never been based on taxation alone. It’s about ensuring a conducive environment for businesses and entrepreneurs to thrive as an international hub. Trust, lifestyle and geography are ultimately what makes UAE an attractive place for substantial economic activities. UAE will be keen to be seen as part of the global system rather than a tax haven.

Thoughts:

Countries needs to support a multilateral consensus-based solution that is anchored on sound economic principles, promotes tax certainty, and ensures a level playing field across all jurisdictions.

However, the new rules should not inadvertently weaken the incentives for businesses to invest and innovate. Otherwise, countries will all be worse off, fighting over share of a shrinking revenue pie.