International taxation and its harmonization is an age-old agenda that has been a matter of priority to Government think tanks across ages. The problems of tax evasion and tax avoidance are as old as taxes themselves. Every nation whether developed or not tax their residents. And when these residents start exploiting loopholes to shift earnings to low tax regimes, the Governments would have no other go but to find ways to expand collections on activities out of their geographical boundaries. The co-ordination of cross-border tax collection for any Government is never an easy task as their counterparts in the host nations would not acknowledge a cut in their tax revenue or concede to reduce their ‘tax free’ status.
The Organisation for Economic Co-operation and Development (OECD) with its objectives of stimulating economic progress and global trade is the frontrunner in harmonisation of international tax laws. The OECD publishes and updates a model tax convention that serves as a template for allocating taxation rights between countries. This model is accompanied by a set of commentaries that reflect OECD-level interpretation of the model convention provisions. In general, these guidelines help countries and multinational corporations identify the basis and form of cross border transactions, and the jurisdiction in which an income has to be taxed. In addition, there are other conventions like the UN Model Tax Convention, US Model Convention, Andean model convention and a myriad of Double Taxation Avoidance Agreements (DTAAs) between countries to alleviate the predicaments of multiple taxation. The UAE as on date has 135 such DTAAs signed with various countries of economic and trade importance, the latest one being with Israel. All of these are to tackle tax problems, harmonise tax disparities and facilitate exchange of information and co-ordination between nations for betterment of global trade.
While all these have been existent, slow pace of developments in the international tax regime and unhurried negotiations between countries pave way for grey areas providing plentiful ways for multi-national corporates to erode the bases and shift profits. Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property are the main areas where profit shifting is rampant.
With Governments bleeding money like never before on support and revival measures of Covid-19, there is now an ardent outlook to quickly bring the scope of international taxation and transfer pricing to yield results. The concept of Multilateral Tax Conventions are one such step. Unlike Bilateral tax treaties (DTAAs) which are between two countries, Multilateral tax Conventions are a common consensus between numerous countries on a common ground. ‘Global Minimum Tax’ is one such common consensus which is part of the BEPS (Base erosion and profit shifting) 2.0 package. Finance Ministers from the Group of Seven (G7) rich nations reached a landmark accord on June 2021 backing the creation of a global minimum corporate tax rate of at least 15%, an agreement that could form the basis of a worldwide deal. This is as on date agreed by 136 countries, which according to OECD could account for over 90% of the Global Economy.
The Global Minimum Tax rate would apply to a Company’s overseas profits. Host Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country (<15%), their home governments could “top-up” their taxes to the minimum rate, eliminating the advantage of shifting profits.
The metrics of how the proposed scheme applies to multinationals, the exemptions, deductions, trials, and appeals are pressing questions pending to be answered. In a post-Covid world, where the countries will be looking to rejuvenate their economies, there may be some concerns that a Global Minimum Tax could cause economic recovery to stutter, particularly in countries that are heavily reliant on the inward investment encouraged by tax incentives. Also, clarity on the concept of tax holidays on specific economic zones would have to be analysed. Middle East economies (like Qatar) who already have an income-tax law would need to provide guidelines on applicability of their tax holiday policies for investments allowed on areas marked as free-zones.
As a member of the inclusive framework, any agreement on global minimum tax rate by the countries of the
inclusive framework is likely to create a significant impact on the taxation framework of the UAE.
The Council of Ministers will now need to evaluate the potential implications of this agreement including what their options are and how they might respond. If this agreement comes through globally, it may be an obvious option for the UAE to start taxing corporates at minimum rate instead of letting them top-up the same to their home countries. As its GCC neighbors including KSA, Oman and Qatar have already adopted a corporate tax regime, there will plenty of data to analyse the potential implications of a new tax in the economy. The businesses operating in the country will also need to evaluate how they will be impacted under different scenarios.
Tax policies does not operate in vacuum, and there can be no one-size-fits-all option. While the global minimum tax is an easy fix for international taxation ambiguities and benefit economies with a matured tax regime, it may prove challenging for countries providing investment linked tax incentives. We must wait and see how a broad consensus will be achieved, and who gets rewarded and who would compromise.