24 Jun
UAE Corporate Tax: ‘Cross charge’ is an area that will need additional inputs
Businesses await for more insights into how taxes apply on these services
Many corporate groups operate through multiple entities, at times involving more than one tax jurisdiction or in some instances between free zones and the mainland. It is not cost-effective to have teams for various support functions in each entity of the group.
A group operating in multiple countries will have a single team providing IT support to the group. Functions such as legal, accounting, finance, HR, payables, and R&D are usually centralized. The entity providing support services is referred to as a ‘service center’, and the entity availing the services as ‘service recipient’.
‘Cross charge’ is a mechanism whereby the costs incurred by the service center are recovered from the service recipient, generally based on an allocation key. In the case of IT support services, the costs incurred by the service center (hardware, software, and employee costs) may be allocated to other entities based on the number of tickets created. Similarly, costs incurred on the legal function may be allocated based on the time devoted by the legal team, or the costs incurred on the accounting function may be recovered based on the number of accounting entries passed.
Having appropriate allocation keys is critical. Commonly, headcount, area occupied, and revenue are used as allocation keys. Cross charges are subjected to an audit by tax authorities of both locations – i.e., the country/free zone of the service center and the country of the service recipient, especially under Transfer Pricing regulations.
In the country of the service center, the tax authorities will scrutinize whether appropriate profits have been earned and offered to tax by the service center. The arms’ length test is applied in such a case, whereby the tax authorities seek to compare the profits earned by the service center with those earned by other third-party service providers engaged in providing similar services.
‘Arm’s length’ approach
Essentially, it is verified as to whether the service centers have recovered the full costs, plus an appropriate markup from the associated enterprises, after taking into consideration factors such as nature of services, functions performed, assets utilized, risks assumed, the extent of involvement by the associated enterprises. Where the profits are not at an arms’ length, a Transfer Pricing adjustment is made, whereby profits equivalent to arms’ length profit are subjected to tax.
In the country in which the service recipient is based, the payments made to the service center are subjected to the benefits test and the arms’ length test by tax authorities. Under the benefits test, the authorities verify whether the service recipient has actually availed and benefited from the services provided by the service center. A deduction from profits of the payments made to the service center is allowed by the tax authorities only to the extent the benefits have been availed.
Master service agreements
The service recipient generally proves benefits availed either as cost savings or increase in revenues. If the payments are found to be in excess, a Transfer Pricing adjustment is made, whereby the excess payments made are disallowed as a deduction from profits and subjected to tax.
Tax authorities perceive payments of shared service center costs/group costs as ‘repatriation of profits’ or excessive arms’ length price, hence the need to defend with facts and documentation when asked to do so.
The UAE would grant credits if a tax were deducted in an overseas jurisdiction. The OECD has encouraged countries to levy a withholding tax only on the profit element in the cross charges.
Considering the overall tax litigation risk involved in case of cross-charges, overseas or between free zones/mainland entities, it is necessary for organizations to have a robust pricing policy in place. A ‘Master Service Agreement’ or separate agreements should be entered into between the service center and service recipients.
A regular study should be undertaken to test compliance of the pricing policy with the arms’ length principle. This shall help organizations to defend and mitigate litigation risk. In certain cases, where complex issues like IP development or marketing intangibles are involved, organizations may also consider obtaining clarification from the Federal Tax authority once the rules are known.
Source:https://gulfnews.com/business/analysis/uae-corporate-tax-cross-charge-is-an-area-that-will-need-additional-inputs-1.1655988316070
08 Jun
How to file an application for corporate tax on free zones businesses
Each free zone has its own framework. Based on these frameworks, the income of the free zone persons will not be subject to corporate tax for a specific period
Free Zones are a crucial part of the UAE economy and have a key role to attract foreign investment that plays a pivotal role in the development of the country. Keeping in view the importance of the free zones special rules have been proposed in the corporate tax (CT) public consultation document for the businesses registered in the free zones (hereinafter referred to as ‘free zones persons’).
Each free zone has its own framework. Based on these frameworks, the income of the free zone persons will not be subject to corporate tax for a specific period. According to the consultation document, the CT regime will honor the tax incentives being offered to the free zone persons subject to the condition that free zone persons maintain adequate substance and comply with all regulatory requirements.
To understand the proposed application of CT on the free zone persons, we have considered all possible options and classified the transactions into the following four categories.
Income from businesses in the rest of the world
It has been proposed in the consultation document that the income earned from transactions with businesses located outside of the UAE will be subject to zero per cent corporate tax. The consultation document is silent about the income earned from transactions with individuals located out of the UAE, which we believe will be subject to the same zero per cent corporate tax.
Income from businesses in the same free zone
The consultation document highlights that the income earned from trading with businesses located in the same free zones will be subject to zero per cent corporate tax. The document is silent about the income earned from transactions with individuals located in the same free zones, which we believe will be subject to the same zero per cent corporate tax, but we will have to wait for the law for further clarification regarding this.
If the free zone person is located in the designated zone for value-added tax (VAT) purposes and selling goods to the mainland person on INCO term where delivery of the goods is being given in the designated zone and the mainland party is clearing the goods in its own import code, still designated zone person can benefit from the zero per cent corporate tax.
Income from the persons in other free zones
The consultation document is clear about the proposed application of the corporate tax on the income earned from persons located in other free zones, and these transactions will be subject to zero per cent corporate tax.
Income from persons on the mainland
Free zone persons may have transactions with persons located on the UAE mainland. It is clearly stated in the consultation document that if the mainland entity and free zone person are part of the same CT group, then income earned by the free zone persons will be subject to zero per cent corporate tax. However, to ensure the CT neutrality of such transactions, payments made to the free zone person by a mainland group company will not be an allowable expense to calculate the taxable profits of the group.
If the mainland business and free zone person are not part of the same CT group, then the legal structure of the free zone person is critical. Like, if the free zone person has a branch on the mainland, then the income of the free zone person will be taxed at the regular CT rate on its mainland sourced income, whilst continuing to benefit from the zero per cent CT rate on its other income. However, if the free zone person has no branch on the mainland, then free zone person can continue to benefit from the zero per cent CT rate of its passive income from mainland persons. The passive income would include interest and royalties, dividends and capital gains from owning shares in mainland UAE companies.
Where a free zone person earns income from the mainland persons which is subject to a zero per cent CT rate, such income would be subject to a withholding tax of zero per cent.
Source:https://www.khaleejtimes.com/finance/how-to-file-an-application-for-corporate-tax-on-free-zones-businesses?_refresh=true
06 Jun
UAE readies for GCC’s lowest tax regime as global corporates brace for tariff hikes
The median corporate tax rates in leading economies worldwide fell to a new low of 25.1 per cent in 2021, which is nearly three times of the nine per cent tax rate that the UAE is going to implement from June 2023
Businesses worldwide are bracing for higher tax costs as cash-strapped governments seriously consider increasing taxes on corporates following a period of low tax regime, according to a study by a leading accounting network.
The median corporate tax rates in leading economies worldwide fell to a new low of 25.1 per cent in 2021, which is nearly three times of the nine per cent tax rate that the UAE is going to implement from June 2023.
The study by UHY, the international accounting and consulting network, says that with the Covid-19 pandemic leaving a gaping hole in the public finances of countries around the world, the trend of declining corporate tax rates worldwide is likely to be over for the foreseeable future.
“Countries around the world have wanted to remain competitive by keeping the tax burden on companies as low as possible in recent years. The cash strapped governments of 2022 will likely now be considering increasing taxes on corporations,” said Subarna Banerjee, chairman of UHY.
He said public finances will have to be shored up somehow and corporations can be an easier target politically than individuals. “Businesses worldwide should be prepared for their tax costs to begin to rise in the coming years.” Several countries have announced their intention to raise the tax rate. The UK already announced its intention to raise corporation tax rates to 25 per cent from April 2023, more than two percentage points higher than the European average.
President Joe Biden has also pledged to raise federal corporate income tax to 28 per cent, after it was cut to just 21 per cent by his predecessor Donald Trump in 2017.
Global corporate tax rates have been steadily decreasing over recent years, with the G7 average for a business recording profits of $1.0 million falling from 32 per cent in 2014-15 to just 26 per cent in 2020-21. Many countries sought to incentivise businesses to invest in their economies with attractive tax rates. France, often seen as a higher tax European economy, has lowered its headline rate from 31 per cent to 26.5 per cent in just the past three years.
The UAE, typically renowned as a low-tax jurisdiction, recently introduced corporate tax at one of the lowest rates across the globe — nine per cent — for financial years starting on or after June 1, 2023. “This measure is in line with the UAE’s ambition to establish a more transparent local economy while continuing to retain its attractiveness as a global hub for foreign investment,” the study said.
With the SME and start up sector constituting up to 94 per cent of the UAE economy, the UAE leadership has ensured the economic engine of the business landscape is empowered towards growing strategically while striking a balance in meeting compliance and regulatory obligations that protect businesses in the long haul, said the study.
“In the realm of multinationals, UAE will adhere to the global minimum tax rate of 15 per cent, which 136 countries have agreed to under the aegis of the Organisation for Economic Cooperation and Development (OECD),” it said.
James Mathew, chief executive and managing partner of UHY James Chartered Accountants, said the introduction of corporate tax in the UAE clearly reiterates the nation’s commitment towards aligning its economic environment with global best practices.
“However, the investor friendly corporate tax rate of nine per cent is indicative of the country’s efforts in cementing its position as a destination of choice for foreign investment while building a foundation on tenets of regulatory compliance, legislative obligations, and robust AML (anti-money laundering) measures.”
Mathew said corporate tax will bring a positive ripple effect into play in the UAE economy.
“The arrival of corporate tax in the UAE in 2023 has already put into motion discussions around effective tax planning,” he said.
“SME’s make up 94 per cent of the UAE economy and almost two thirds of the SMEs feel constrained due to lack of access to finance at a reasonable cost. With the introduction of VAT in the UAE in 2018, banks adopted a favourable approach in channelising finance to SMEs and now with corporate tax coming into force, the SME sector will stand to gain significantly with measures that increase the transparency factor of their business,”
Source:https://www.khaleejtimes.com/business/uae-readies-for-gccs-lowest-tax-regime-as-global-corporates-brace-for-tariff-hikes
03 Jun
Dubai emerges popular destination for entrepreneurs, millionaires and startups
Recent visa reforms, change in weekend in line with international markets and conducive environment for business will attract high net worth individuals (HNIs) and worldwide investors in key sectors of the economy
Dubai is an established international business hub and recent visa and labour reforms will further strengthen its position as a popular destination for entrepreneurs, millionaires, startups and scale-up businesses, experts say.
Analysts, executives and industry specialists said recent visa reforms, change in weekend in line with international markets and conducive environment for business will attract high net worth individuals (HNIs) and worldwide investors in key sectors of the economy.
Referring to the new rules for the 10-year Golden Visa, five-year Green Visa and other reforms, experts said Dubai will attract global talent, skilled professionals, freelancers, investors, and entrepreneurs that will ultimately benefit the economy
Saad Maniar, senior partner at Crowe, said Dubai has always been and will continue to be the popular destination for HNIs from tourism perspective, as Dubai has very high standards of safety and security coupled with the amazing infrastructure and plenty of to-do things in Dubai.
“From the business perspective the overall infrastructure is business friendly, with airlines offering connectivity to all major cities in the world, makes it very attractive for business owners to establish their presence in Dubai,” Maniar told Khaleej Times on Sunday.
“Over the years, we have seen that a small percentage of tourist are attracted toward Dubai, so much so that they end of getting employment or start their own business, which is not normally the case for other places in the world,” he said.
Tourism a major beneficiary
Fadi Rizkallah, general manager, Freedom2Work.com , echoed the similar views and said recent reforms will have positive impact on Dubai economy in general and tourism sector in particular.
“I believe that visa reforms will in turn have an encouraging effect on personnel from all high end backgrounds. The better facilitation for individuals to find and explore the economic benefits of a country, the more inclined they are to take risks and jump on the business wagon of establishing the next successful enterprise,” he said.
“Better visa reforms are a social security indicator which provides a safe investing haven for people with the right financial mentality, opening up a place and attracting the young and innovative mind to come,” he said.
Dubai a safe destination
Pratik Rawal, managing partner, Ascent Partners, said Dubai is an established international commercial hub and it is one of the safest destinations for high net worth individual and entrepreneurs.
“All of that and more. The banks appear optimistic with the new visa reforms, which reveal Dubai to be a stable and safe place to conduct business and scale-up for a long-term investment,” Pratik told Khaleej Times on Sunday.
Ms Sakina Dickenwala, associate partner – Legal at MBG Corporate Services, said a major purpose for the new visa reforms was to make the country more attractive investors, entrepreneurs, and HNIs.
“For one, holders of golden visas are no longer restricted by the amount of the time they can spend outside the country. This allows HNIs with international commitments the freedom of movement that they require. It will also be possible for those looking to create startups to apply for a green visa. Much like the golden visa, a green visa will not require a sponsor. This visa will allow entrepreneurs the ability to move to Dubai with the exclusive purpose of establishing a business, without having to be concerned with the hassle of finding a sponsor,” Dickenwala said.
Investors paradise
Hatem Elsafty, managing director, Business Link, said Dubai has long been home to various tourists and businesses in different industries – which to date, are flourishing increasingly.“This makes Dubai a massive business hub that continues to bring in local and foreign investors. With some of the best incentives offered and a highly flexible business environment, it’s one of the top locations for businesses of any size,” he said.
He said the reasons for the same are quite straightforward. Firstly, given the large scale at which businesses in the city operate, Dubai offers the opportunity to house your business in an economic zone best fit for your needs. Known as mainland, freezone, and offshore, these zones have their own laws and cater to your unique business requirements and needs, he said.
Secondly, he said the federal corporate tax imposed by UAE is among the lowest in the world. “Placed at nine per cent on profits up to Dh375,000, the tax regime is set to be effective after June 1, 2023. To run operations in an economy as vibrant as the one UAE has with minimal tax is nothing less of a dream for investors,” he said.
Lastly, he said with the UAE government looking to grow its economy, it is home to a plethora of startup incubators and funding initiatives.
“Partnering with investors looking to grow and start their brand not only helps the country and its economy but also provided necessary aid to investors looking for support,” Elsafty concluded.
