Global Minimum Tax and Corporate Tax UAE 

A global minimum tax, more commonly referred to as the OECD 2-Pillar solution, is an emerging tax structure designed to ensure multinationals pay their fair share of taxes regardless of where they operate from. In this article we explore its implications in the UAE as well as their approach in applying this tax structure. 

Purpose of Global Minimum Tax UAE 

Global minimum taxes will be established by setting an amount equal to 15% for big corporations. If their profits are taxed at less than 15% elsewhere in the world, however, then more taxes must be paid by that business. Global minimum taxes were developed to prevent multinational corporations from shifting profits offshore and avoiding paying their share of taxes in countries in which they operate. It will apply to companies with revenues exceeding EUR 500 million. The global minimum tax aims to create a level playing field by setting a minimum effective tax rate on every multinational corporation regardless of which country it operates in, guaranteeing they pay their due amount of taxes while decreasing any incentive for tax evasion. Corporate tax consultants provide different corporate tax services, and they can be of great help in understanding these global minimum taxes as they might be a little confusing to learn. 

OECD 2-Pillar Solution 

The OECD 2-Pillar solution offers a two-pronged strategy to counter corporate tax avoidance: Pillar 1 is intended to redistribute taxing rights between nations while Pillar 2 establishes a worldwide minimum tax. 

• Pillar 1 stipulates that multinational corporations will distribute a portion of the profits generated in each country where their clients reside regardless of physical presence. This will guarantee tax-free profits within those nations where they were produced. 
• Pillar 2 establishes a global minimum tax of 15% for earnings of multinational corporations, meaning even when profits can be moved tax-free locations, companies will still owe at least 15% of those profits as taxes. 

Key Components of Global Minimum Tax UAE 

The Global Minimum Tax is comprised of three rules which form part of Pillar Two of the OECD/G20 agreement: 

• Income Inclusion Rule (IIR): When earnings of foreign subsidiaries are taxed at rates lower than 15% within their host nation, their parent jurisdiction must tax these earnings as income taxable under its laws. 
• Undertaxed Payments Rule (UTPR): This permits states to impose an undertaxed payments topping-up tax if royalties or interest between related parties is taxed at less than their required taxation rates. 
• Subject to Tax Rule (STTR): Requires deductions or an equivalent adjustment for payments that are either tax-free in their country of receipt, or subject to taxes below minimum rate thresholds. 

These rules are intended for cooperation to guarantee multinational corporations legally adhere to a minimum tax rate of 15 percent on global earnings. The IIR serves as the main rule, while the UTPR acts as backup in case it cannot apply and STTR serves to enforce all three rules. 

Stages of Global Minimum Tax 

• In 2018, the UAE joined the BEPS program. 
• In 2022, UAE adopted the federal corporate tax at 9.9% at its inception. 
• In the year 2023, UAE has introduced international minimum tax regulations. More details regarding what is happening with the world minimum tax UAE are yet to be shared. 
• Finally in 2024, continuous improvements are anticipated in corporate tax laws and compliance measures, with updates as new regulations take effect. 

Implications for Businesses in the UAE 

An international minimum income tax could have significant ramifications for UAE-based businesses that operate across multiple countries. Here are a few important points: 

• UAE companies should be aware of their tax and reporting responsibilities and compliance obligations under new GST guidelines and implement necessary systems and procedures in place to meet their new reporting responsibilities. 
• The interaction of UAE CT and GMT rules could result in double taxation for certain companies. Therefore, it is crucial that all available mechanisms exist to limit these risks, such as tax treaty provisions or legal reliefs within your own country. 
• GMT rules could have an impact on tax treatment for transactions that cross borders, such as potential increases to withholding taxes on specific payments. Businesses should review current arrangements to see whether any modifications should be implemented. 
• The introduction of UAE CT and GMT could have an impactful influence on investment decisions as businesses must consider tax repercussions when investing within UAE as opposed to other nations. 
• Businesses could need to assess their existing tax planning strategies and reorganize to minimize the effects of GMT rules. 

FAQs  

What is the purpose of the global minimum tax? 

The deal, which was proposed by the Organization for Economic Co-operation and Development (OECD), imposes a minimum effective rate of 15% on corporate profits. The policy is aimed at ending the benefit of shielding multi-billion-dollar profits in tax havens. 

What is the global minimum level of taxation for multinational groups? 

With the new year, the EU directive imposing a minimum effective tax rate of 15% for multinational corporations operating within the Union has come into effect. After lengthy negotiations, all 27 members unanimously voted in favour in December 2022, as is customary for tax matters. 

What is the pillar of the global minimum tax? 

Pillar Two, the key components of which are commonly referred to as the “global minimum tax” or “GloBE,” introduces a minimum effective tax rate of at least 15%, calculated based on a specific rule set.