Andersen Tax Alert – UAE Ministry of Finance issues public consultation paper on Global Minimum Tax rules

The UAE Ministry of Finance (MoF) has recently issued a digital public consultation paper on the implementation of Global Minimum Tax (GMT)/ Global Anti-Base Erosion (GloBE) rules in the UAE. Consultation Paper constitutes of the consultation questionnaire and guidance paper.

The consultation paper is open for public comments till 10 April 2024. UAE Ministry of Finance is particularly keen to hear from the global community of multinational enterprises operating in the UAE along with their advisors, service providers and investors.

Please note that the consultation paper does not reflect the final view and is not intended to address all possible aspects of the GloBE Rules or its implementation in the UAE. Also, further information on the UAE’s implementation of GMT will be made available in due course on the MoF’s website.

A. Brief Summary of Pillar 2 and GloBE Rules?

Pillar 2 is intended to ensure that Multinational Enterprises (“MNE”) with a consolidated revenue equal to or above EUR 750 million pay a minimum tax of 15%. In this relation, GloBE Rules and other supporting guidance documents have been issued by the Organisation for Economic Co-operation and Development (OECD) / G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) that provides for the framework for implementing such a Global Minimum Tax.

Broadly, the GloBE rules operate by charging a top-up tax on MNE Groups which have profits that have an effective tax rate (ETR) below 15%. The calculations are done on a jurisdiction-by-jurisdiction basis and the ETR is calculated for all in-scope entities [Constituent Entities (“CEs”)] in a jurisdiction. There are detailed rules prescribed within the GloBE Rules to determine the tax base (GloBE Income), what would be considered to be covered taxes, how to calculate the ETR and how to impose the top-up tax.

The GloBE Rules have two inter-locking rules:

• Income Inclusion Rule (“IIR”): It takes a top-down approach and it requires the Ultimate Parent Entity (“UPE”) of the group to pay to in to the authorities in its jurisdiction the top-up Tax due by the MNE group for all jurisdictions that have been taxed below the minimum rate of 15%. If the UPE jurisdiction has not implemented a Qualifying IIR, then the next intermediate parent entity down the ownership chain is required to collect the Top-up Tax.
• Under Tax Profits Rule (“UTPR”): This is the second charging mechanism and operates as a back-stop to the IIR. Thus, the UTPR will apply when low-taxed subsidiaries / CEs are not held by parent entities that are required to apply a Qualified IIR. Any UTPR Top-up Tax will be reduced by the amount of Top-up Tax charged under an IIR to ensure that the IIR takes priority. There are potentially two approaches on how UAE should bring into charge the UTPR Top-Up Tax (reduced by IIR Top-up Tax) allocated to it:
  • Denial of a Corporation Tax (CT) deduction: This approach increases the cash tax expense for an entity by denying a deduction (i.e. UTPR Top-up Tax amount allocated to the UAE divided by the UAE CT rate).
  • Introduce a new charge on a UAE CE based on the top-up allocated to UAE.

Qualified Domestic Minimum Top-up Tax (“QDMTT”): In addition to IIR and UTPR (GloBE rules), countries that have signed up to Pillar 2 can opt to implement a Domestic Minimum Top-up Tax (DMTT). If a jurisdiction implements a DMTT that is consistent with the outcomes of the GloBE Rules, such DMTT will qualify QDMTT and can be deducted from the Top-up Tax liability under the GloBE Rules in respect of that jurisdiction. Thus, QDMTT would apply over the GloBE rules of IIR and UTPR. Adopting a QDMTT will ensure that any top-up tax that would have otherwise been collected in an overseas jurisdiction will remain in the country where the taxable profits are generated. A DMTT introduced by a jurisdiction will be assessed by a peer review process to establish whether it is functionally equivalent to the GloBE Rules so that it can be treated as a QDMTT.

Substance Bases Income Exclusions (SBIE): The GloBE rules provide for SBIEs, where certain percentages of payroll costs and tangible assets located in a jurisdiction are reduced from the GloBE income. This may potentially reduce the top-tax liability in a jurisdiction. The GloBE rules provide for a 10-year transition period and starts with a 10% carve-out for payroll costs and 8% carve-out for tangible assets, with these percentages finally declining to 5% over a 10-year time. Thus, the amount of this SBIE is equal to the sum of (i) applicable % of the carrying value of tangible assets located in the jurisdiction; and (ii) applicable % of the payroll costs for employees that perform activities in the jurisdiction.

De-minimis exclusions: Furthermore, there is also a de-minimis exclusion for operations in a jurisdiction where the MNE has (i) Average GloBE Revenue that is less than EUR 10 million and (ii) Average GloBE Income is less than EUR 1 million or it is a losss, computed on a three-year average basis.

Broadly, the steps required in determining the Top-up Tax liability for an MNE are as follows:

• Step 1 – Identify whether the MNE is within scope of the GloBE Rules and the location of each CE of the group on a jurisdictional basis
• Step 2 – Determine the GloBE Income of CEs in a jurisdiction.
• Step 3 – Determine the amount of Covered Taxes attributable to Income of CEs in a jurisdiction.
• Step 4 – Calculate the ETR of all CEs located in the same jurisdiction and determine the resulting Top-up Tax.In the event an MNE is subject to an ETR below 15% in any jurisdiction, Step 4 sets out the mechanism for calculating the top-up tax in respect of that low tax jurisdiction.
• Step 5 – Impose Top-up Tax under a IIR or UTPR. The Top-up Tax will be reduced by any QDMTT payable. The calculations will be as follows:
  • Top-Up Tax in a jurisdiction (allocated to CEs having GloBE income in that jurisdiction) = [Excess Income * Top-Up Tax percentage] (less) Taxes under QDMTT.
    Jurisdiction is eligible for de-minimis exclusion if jurisdictional average GloBE revenue < EUR 10 mn & average GloBE income < EUR 1 mn.
  • Top-Up Tax percentage = 15% minimum rate (less) ETR
  • Excess Income = Net GloBE Income (less) [Substance-Based Income Exclusion (SBIE) which is based on payroll costs & tangible assets]

GloBE Rules have status of common approach which means the countries that chose to adopt the GloBE Rules should implement and administer the rules in a way that is consistent with GloBE Model Rules, its Commentary and Administrative Guidance.

B. UAE’s Public Consultation - Consultation Questionnaire and Guidance Paper

The Guidance Paper summaries the OECD GloBE Rules and QDMTT rules. The consultation questionnaire covers the below two areas:

• Pillar 2 Implementation in UAE covering GloBE implementation, the design of a potential UAE domestic minimum Top-up Tax (DMTT) and administration matters; and
• Substance-based incentives.

Some of the key aspects mentioned in the Consultation Questionnaire are highlighted below:

• GloBE Rules
  • The consultation paper is targeted towards MNEs that have subsidiaries or permanent establishments in the UAE and UAE headquartered MNEs.
  • Many questions are geared towards the impact of Pillar 2 on the investment decision of MNEs. This is reflected in the questions and there are few related to whether businesses will prefer a 15% CT rate over IIR and whether there is a preference to pay top-up tax in UAE or another jurisdiction under IIR/ UTPR.
  • There is a reference that the Pillar 2 rules will be applicable to Free Zone companies.
  • The public consultation mentions that in the event of UAE's adoption of the GloBE Rules, the intention is to apply such provisions to UAE headquartered MNE Groups whose revenues equal to or exceed EUR 750 mn. UAE does not propose to apply IIR to smaller UAE headquartered MNE Groups to alleviate unnecessary compliance burdens and reduce administrative costs
  • While GloBE Rules allow revenue threshold to be set in currency other than Euro, the UAE advocates for adopting the common Euro threshold instead of an equivalent AED threshold. This approach aims to improve coordination among jurisdictions and prevent unnecessary discrepancies in the scope and operation of the GloBE Rules.
• QDMTT
  • It appears that the UAE intends to apply a QDMTT with provisions that ensure outcomes are consistent with the GloBE rules. The MOF has sought inputs from stakeholders on certain variations permitted from the GloBE rules and how such variations should be implemented
  • MoF does not propose to apply QDMTT to purely domestic groups or to MNE Groups that are not in-scope of the GloBE Rules.
  • It has been proposed to use International Financial Reporting Standard (IFRS) for computation of income and losses under QDMTT, which is in alignment with the UAE CT Law.
  • It has been proposed to adopt SBIEs for QDMTT as well, however, such SBIEs cannot be broader than that permitted under the GloBE.
  • MoF has proposed to reduce QDMTT amount to zero where an MNE Group is in its initial phase of international activity in cases where none of the Ownership Interests in the CEs located in the UAE are held by a Parent Entity subject to a Qualified IIR.
  • MoF suggests that liabilities due in the UAE under the GloBE Rules, are paid annually, potentially aligning with the payment dates stipulated by UAE CT Law or adhering to timelines specified in the GloBE Rules. In this regard, the MoF has further sought suggestions on whether there should be separate QDMTT return [in addition to GloBE Information return (GIR) and potential local GloBE Tax return], format of return and Top-up Tax notification, payment deadline, admendment to current record keeping requirements under UAE CT Law, penalties for non-compliance in relation to the GloBE Rules & QDMTT where they are aligned to those as in the UAE Tax Procedures Law.
• Substance-based incentives
  • MoF has considered potential introduction of additional tax incentives in the UAE CT regime aligned with the GloBE Rules
  • The tax incentives could be in the form of income-based incentives such as income exemptions and reduced tax rates, as well as expenditure-based incentives such as tax credits, tax deductions (such as accelerated depreciation) or tax allowances linked to tangible/ intangible assets.
  • Questionnaire seeks comments from the stakeholders on the nature of incentives available in other jurisdictions, whether tax incentive is one of the key factors impacting investment decision in the UAE, etc.

Andersen Takeaway

The release of the public consultation paper seeking stakeholders’ inputs on implementation of Global Minimum Tax in UAE is a step towards UAE’s intention to adopt Pillar 2 Rules.

While the consultation paper talks about various aspects of GloBE Rules (i.e. most importantly UAE domestic minimum top-up tax), it is silent on certain aspects such as the timeline for release of the final rules, its roadmap ahead and year of its implementation in the UAE.

MOF’s intention to exclude purely domestic groups and smaller UAE headquartered MNEs from domestic minimum top-up tax is a welcome relief.

It is also a welcome step that the UAE wishes to adopt substance-based income exclusions to reduce the impact of top-up tax and the QDMTT. Further, the UAE has also referred to its intention of providing substance-based incentives that are aligned to GloBE rules. This may further incentivise businesses.

Going forward, it is recommended that all relevant Groups analyze the impact of adoption of Pillar 2 rules in the UAE on their businesses and work with experts and relevant stakeholders to provide their inputs on key implementation matters that are covered in the consultation questionnaire.