01 Aug
Large groups can set up a tax group to minimise their compliance cost
As required by International Financial Reporting Standards (IFRS), groups are required to prepare consolidated financial statements where inter companies’ transactions are eliminated, and losses of one entity are adjusted against the profits of the other entities
Large businesses are structured as a group for better management and reporting purposes. Moreover, companies wanted to enjoy the tax benefits and reliefs which are generally available to the groups, so this is another reason that large businesses are organized in the form of groups. Tax planning and minimising the compliance cost are other critical factors for which large entities assemble themselves as a group.
As required by International Financial Reporting Standards (IFRS), groups are required to prepare consolidated financial statements where inter companies’ transactions are eliminated, and losses of one entity are adjusted against the profits of the other entities. The net profits of the groups are adjusted to arrive at the taxable profits of the group.
Keeping in view the above factors, tax grouping has been proposed in the Corporate Tax Public Consultation Document, which suggests that eligible businesses would be able to create the tax groups and transfer their losses between group companies that are seventy-five per cent or more commonly owned.
It has been proposed in the document that the group of companies which are residents of the UAE and whose ninety-five per cent shares and voting rights are held by the parent company can form a tax group. In addition, a subsidiary can also be part of the tax group if it is owned indirectly by the parent company and other subsidiaries own at least ninety-five per cent of its shares. The branch of a parent company or group subsidiary company can also be a part of the tax group.
To form a tax group, it is compulsory that neither the parent company nor any of the subsidiaries can be an exempt person or a free zone person that benefits from the zero per cent corporate rate, and all group members must use the same financial year.
Based on the above-proposed requirements, the following businesses cannot be part of the tax group:
• Non-resident companies
• Companies which are in the free zones and enjoying zero per cent corporate tax
• Entities in which the parent company or other group companies are not holding at least ninety-five per cent shares and voting rights.
• The companies which have different financial years.
The group will be formed with the mutual consent of all entities, and the entities that want to be part of the tax group will submit a notice signed by all relevant entities to the Federal Tax Authority (FTA). The FTA will review the application and, upon satisfaction of the criteria, will process the application by issuing one tax number to the tax group.
The tax group will be considered a single entity for corporate tax purposes, and the parent entity will be liable to prepare consolidated financial statements. While consolidating the financials, the transactions between the group entities will be eliminated, and the losses of one entity will be adjusted against the profits of other group entities/entities.
The group entities that do not meet ninety-five per cent ownership criteria or the entities that meet the criteria but do not want to be part of the tax group, such entities can still transfer their losses from one group company to another group company, provided certain conditions are met. As discussed in our previous article, the tax losses of one group company can be adjusted against the seventy-five per cent of taxable income of other group companies that would be receiving the losses. Moreover, the group companies that are exempt or subject to a zero per cent corporate tax regime, would not be allowed to transfer their losses against the profits of other group companies.
The parent entity would be responsible for the administration and the payment of corporate tax on behalf of the tax group, and where the parent defaults, then each member of the tax group will be jointly and severally responsible for the payment of corporate tax. This joint and several liabilities can be limited to the specific members of the group with the approval of the FTA.
The large groups should check the ownership of the group entities and the status of their tax residency. If the entities are eligible to be elected to the tax group, then business owners should align their tax years so that the entities can be added to the tax group to minimise the tax impact and reduce the administration cost. Where the businesses are finding any difficulties in assessing the eligibility of the entities to be added in the tax groups, they should take professional advice for better planning.
Source:https://www.khaleejtimes.com/business/large-groups-can-set-up-a-tax-group-to-minimise-their-compliance-cost
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
