30 Jul
UAE to see increased demand for BNPL services
Online shoppers increasingly opting for Buy Now Pay Later (BNPL) services when purchasing various products and services
Consumer appeal, accessibility, and the assurance of no interest or fees – as long as payments are made on time – have been the main driving forces behind the growth of Buy Now Pay Later (BNPL) services across the UAE and MENA region, experts have said.
Nick Curran, head of Endava in the Middle East, and North Africa, says that BNPL has become one of the most prominent retail trends due to the effects of the Covid-19 pandemic and the exponential growth of e-commerce.
Consumer appeal, accessibility, and the assurance of no interest or fees – as long as payments are made on time – have been the main driving forces behind the growth of Buy Now Pay Later (BNPL) services across the UAE and MENA region, experts have said.
Nick Curran, head of Endava in the Middle East, and North Africa, says that BNPL has become one of the most prominent retail trends due to the effects of the Covid-19 pandemic and the exponential growth of e-commerce.
Curran says that BNPL is well-liked among all demographics for many reasons, but it is particularly well-liked among millennial and Gen Z customers as a tool for financial empowerment. “Customers benefit from rapid gratification, a flexible return policy, easy access to credit, and the ability to manage their finances by spreading the cost of purchases over a predetermined time frame.”
For retailers, he noted that BNPL boosts sales, adds stickiness, and lowers basket abandonment without risk. BNPL providers pay retailers upfront and lend money to customers while taking on all of the program’s administrative costs and credit risk. “Aside from the fact that embracing BNPL can improve sales, the appeal is that it can be used for much more than just payments. BNPL firms have vast amounts of data that retailers can use to enhance customer loyalty by offering more targeted products.”
Looking ahead, he said that BNPL will continue to grow across various industries, including banking, luxury retail, travel, hospitality, insurance, trading, and healthcare. This is because the ecosystem is becoming more saturated with big banks, payment schemes, and new entrants vying for a market share. The introduction of banks into the BNPL market is another trend poised to disrupt the industry. BNPL lenders are stealing a portion of banks’ credit card and consumer loan revenue.
“The time is right for banks to enter the BNPL market; nevertheless, having the correct market entry strategy and business model is critical to succeeding,” Curran noted. “Banks are experienced in regulatory compliance and credit underwriting and have the data and client base to compete in this market. Banks are also well-positioned to ascertain affordability and can tailor BNPL offers based on a customer’s risk profile using financial data. However, they must move quickly or risk missing the boat.”
Furthermore, as BNPL players scale and enhance engagement, Curran says that consumers can expect to see super apps that combine retail, financing, payments, and banking offerings. Globally, Klarna, Affirm, and PayPal have already jumped in with their super apps. Super apps distinguish themselves by providing an integrated, fluid, and efficient experience without the need to transition between applications. As competition intensifies, these solutions will become a significant differentiator in the BNPL market.
Security has to be ‘top of agenda’
Saeed Ahmad, managing director, Middle East and North Africa, Callsign, cautioned that as the BNPL industry grows and providers increase their capabilities, it is expected to become a more attractive target for fraudsters.
“While the financial repercussions are troubling, the long-term consequences are far more concerning,” he said. “Fraud undermines consumer trust and, as a result, the long-term potential of the BNPL ecosystem. The most prevalent way users have been victimized by fraud is through the creation of a false BNPL account using stolen card information and identities. Due to the fact that consumers are not invoiced billed immediately, it may take a while for the victim to realise they’ve been targeted.”
Another tactic frequently used by fraudsters are account takeovers, in which they hack into a legitimate user’s account to order items. The dangers are heightened for retailers and BNPL as they are typically held accountable for BNPL fraud consequences. Retailers and BNPL providers are often left to bear the consequences of fraud and repossession, while the fraudsters receive items they have not paid for. Furthermore, because BNPL providers have partnered with various mainstream retailers, consumers often open multiple BNPL accounts. This broadens the field for fraudsters. Account takeover or credential theft is a common precursor to BNPL fraud.
Ahmad says that cconsumers should be cautious of responding to SMS text messages or emails claiming to be from their favourite stores, as they may contain links that lure them to disclose personal information.
“These ‘Phishing’ attacks are frequently the first tool in a fraudster’s toolbox when conducting BNPL and other forms of fraud,” he said. “Consumers who use the same password for all their BNPL accounts are more vulnerable to BNPL fraud. As a result, to decrease the possibility of ATO fraud, consumers should use different passwords for their BNPL services.”
“Along with raising customer awareness of security best practices, BNPL providers need to improve their knowledge of each user interaction’s associated identification and how much trust can be placed in it,” he added. “Layering in approaches such as device fingerprinting, behavioral biometrics, and location analysis helps to build a more comprehensive understanding of the risk level associated with each user. BNPL providers can make more informed and precise decisions throughout onboarding, login, and payment by having a better grasp of users’ digital identities. Apart from preventing fraud, this can also help reduce false decline rates.”
Source: https://www.khaleejtimes.com/tech/uae-to-see-increased-demand-for-bnpl-services?_refresh=true
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
