Compliant or not compliant, that is the question: the UAE’s progress in meeting OECD international tax standards

Happiness, well-being and prosperity are high on the agenda for the UAE government’s plans to create an inclusive and cohesive society, while contributing to a growing global economy. But to do this, the Emirates government has had to address a grey area – namely, its status as an international tax haven.

In recent years, the UAE has been collaborating with the OECD to bring about significant tax reforms to meet international standards. This commitment from the UAE shows the country’s willingness to build a fair and equal tax system in line with other economies, and its efforts to help the fight against harmful tax practices.

Here’s a look at the UAE’s progress in meeting OECD international tax standards, and how the changes will affect businesses in the Emirates.

What is the OECD?

The Organisation for Economic Co-operation and Development (OECD) is a unique, international forum committed to promoting fair and sustainable global economic growth through collaboration and international standard-setting.

The OECD’s aim to ‘build better policies for better lives’ involves countries working together to address the challenges of globalisation. One such challenge is the issue of international tax evasion through base erosion and profit sharing (BEPS). According to the OECD, $USD 240 billion in revenue are lost each year due to harmful tax practices by multinational corporations.

BEP Inclusive Framework

Working towards a level playing field to create a modern and fair international tax framework, the OECD has provided the instruments to combat tax avoidance and facilitate participating countries in becoming compliant with international tax rules, ensuring a more transparent tax environment.

On 16 May 2018, the UAE joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). In doing so, it committed to implementing measures in compliance with international tax standards, to counter harmful tax practices and improve tax transparency.

These measures include three significant changes to help boost the domestic economy, while aligning the UAE’s tax system with those of other nations.

1. VAT

On 1 January 2018, the UAE introduced a value-added tax of 5% on most goods and services in the Emirates. Businesses must register for VAT if their taxable income exceeds 375,000 AED (around $USD 102,000).

According to the Ministry of Finance (MoF), the 5% levy was introduced to create an alternative source of income, helping to reduce the country’s dependence on oil and other hydrocarbons. The MoF, working alongside the Federal Tax Authority, aims to achieve economic diversification and financial stability in the UAE by focusing on profits that are not derived from oil-based sources.

The extra revenue is being used to help maintain the UAE’s high level of public services such as schools, universities, hospitals, and police services. Since its implementation, the total revenue from VAT, distributed so far in the UAE, has amounted to over 95.4 billion AED (around $USD 26 billion).

Businesses now have an added responsibility to ensure their financial records are correct and up to date to remain compliant. In turn, this helps the UAE achieve transparency best practice and compliancy with the OECD framework. As over 150 countries have VAT or an equivalent (in some countries, as much as 20%), introduction of the tax in the UAE has also helped it to become more aligned with other nations, while strengthening its credibility as a globally competitive and diverse economy.

2. Corporate Tax

In a much more ambitious move to comply with international tax standards and transparency requirements set by the OECD, the UAE will introduce a 9% corporate tax from June 2023.

In order to support small businesses and startups, the new tax rate of 9% will only apply to businesses with a taxable profit over 375,000 AED. Those with a taxable income below this amount will be charged a 0% tax rate.

The move shows the UAE’s willingness to support the international minimum CT rate, proposed by the OECD’s BEPS Inclusive Framework. The new CT regime will enable the UAE to apply a different level of corporate tax to larger multinationals, who will be subject to a global minimum rate of 15% under the OECD Framework rules.

While the UAE is historically regarded as an attractive tax-haven, a lack of transparency and a disproportionate number of tax treaties has left it vulnerable to exploitation by those looking to evade tax. The new corporate tax move will help the UAE become more consistent with tax policies of other countries, contributing to the OECD’s goal of a fair and equal international tax standard.

Rather than deterring foreign investors, businesses, and individuals, these measures mean that the UAE can now offer one of the most competitive tax systems in the world, while complying with global best practices to prevent worldwide tax evasion. Companies that pay foreign taxes can offset them against the new UAE corporate tax, avoiding the risk of double taxation. This benefit, together with no personal income tax and minimal compliance burden for SMEs, will help strengthen the UAE’s standing as a leading global hub for business and investment.

3. Ultimate Beneficial Ownership (UBO)

According to the OECD, the identity of ‘real beneficiaries’ of an entity is vital for tax transparency and is a key element in the fight against money laundering (AML) and terrorist financing. To comply with the Framework’s exchange of information standards, and align itself with international AML best practices, the UAE has ramped up its regulations on ultimate beneficial ownership (UBO).

Under the recently updated UBO law, almost all companies licensed and registered in the UAE must maintain a register which discloses detailed information about the ‘real beneficiaries’ of that business. Under the law, an Ultimate Beneficial Owner (UBO) is a natural person who has ultimate control and ownership of a business, with at least a 25% share in the company – in other words, the person who benefits the most from a company’s transactions.

The tightened regulations concerning UBO information not only helps mitigate AML risks, but can also help to preserve a company’s credibility and reputation. Without due diligence, a corporation could inadvertently find themselves embroiled in deals with criminals, putting the future of their business at risk.

Again, the stricter regulations are in response to the UAE’s willingness to comply with international tax standards, especially regarding transparency and exchange of information. In a 2019 Global Forum Peer Review assessment on the UAE’s legal and regulatory framework, the country’s introduction of a comprehensive beneficial ownership regime, was noted as one of the most significant improvements under its exchange-of-information (EOI) measures.

The UAE’s continuing co-operation

The UAE’s tax reforms are still very much a work in progress, and the road to full compliancy with OECD international standards is a long one. But the country is showing its determination to meet international requirements by building a strong and sustainable tax system through sensible and considered policies and legislations. With that in mind, the partnership and collaboration between the UAE and the OECD has been recently extended to 2024.

Moving forward, a more solid, practical, and transparent fiscal system, combined with a new approach to alternative revenues, will help the UAE strengthen its position as an attractive and competitive hub for international business and investment.