UAE’s Public Consultation on Global Minimum Tax

Global Minimum Tax: What Is It?

The Global Minimum Tax is exactly what it sounds like. It is the minimum corporate tax that specific companies around the world are required to pay. Global Minimum Tax applies to Multinational Enterprises (MNEs) with annual revenue exceeding 750 million Euros in at least two of the last four fiscal years, as per their Consolidated Financial Statements. These companies must pay a minimum effective tax rate of 15% on their profits. The Global Minimum Tax intends to create a floor that may reduce competition among countries to lower their corporate tax rates and tackle the issues of base erosion and profit shifting (BEPS) effectively. According to this rule, if a MNE pays a 5% corporate tax in one country, then, basis the manner of adoption of the Globe Rules in the said country or the jurisdiction of the Ultimate Parent Entity (‘UPE’) of the group, one of the jurisdictions will charge the difference in the form of a Top-up Tax. This process includes a series of complicated calculations, ensuring the company pays at least the minimum effective rate of 15% globally. ?

In this article, we'll take a closer look at the UAE's public consultation on the Global Minimum Tax. But first, let's briefly touch on the two-pillar solution, especially Pillar Two, which outlines the framework and sets the rules for the implementation of the Global Minimum Tax.

The Two-Pillar Solution

In October 2021, the OECD/G20 Inclusive Framework on BEPS, comprising over 130 jurisdictions, reached a consensus on a two-pillar solution to address base erosion and profit shifting ("BEPS") stemming from rapid globalisation and digitalisation.

Pillar One is designed to ensure a fairer allocation of tax revenues. According to Pillar One, Multinational Enterprises (MNEs) need to pay taxes not only in the countries where they have a physical presence but also in the regions where they generate sales and maintain customer bases, known as Market Jurisdictions.

Pillar Two, on the other hand, lays the groundwork for the Global Minimum Tax. This pillar is implemented primarily through two interlocking GloBE (Global Anti-Base Erosion) Rules: the Income Inclusion Rule (IIR) and the Under-Taxed Profits Rule (UTPR). The IIR mandates that a group's Ultimate Parent Entity (UPE) is responsible for collecting and paying to its tax authority the total Top-up Tax due by the group across all jurisdictions that have not been taxed at a minimum rate of 15%. Should the UPE fail to implement a Qualifying IIR, this responsibility is transferred to the subsequent entity in the corporate hierarchy.

Any Top-up Tax required after the application of the IIR is collected via the UTPR. Pillar Two also has provisions for the Domestic Minimum Top-up Tax (DMTT) and the Subject to Tax Rule (STTR). Pillar Two excludes certain entities from the scope of GloBE Rules such as government institutions, international organisations, non-profits, etc.

UAE’s Public Consultation

The UAE Ministry of Finance's public consultation on Global Minimum Tax aims to gather insights and feedback from stakeholders, including businesses, tax professionals, and particularly multinational groups operating in the UAE. The consultation intends to gather views on how these rules will integrate with the UAE’s Corporate Tax system. It also seeks inputs on minimising compliance costs and effective implementation strategies for IIR, UTPR, and DMTT. The Consultation Paper consists of a Guidance Paper, providing details on the GloBE Model Rules, and a Consultation Questionnaire that covers the implementation of Pillar Two in the UAE and substance-based initiatives. Stakeholders are encouraged to provide their responses clearly and concisely along with examples, data, and other information to support their views. They will need to submit their views by April 10, 2024.

International Efforts Towards Implementing the Global Minimum Tax

Implementing the GloBE rules is estimated to generate 150 billion USD annually in addition to global tax revenues. As reported by Thomson Reuters, more than 140 countries have already agreed to implement Global Minimum Tax measures. The UAE’s Public Consultation on Global Minimum Tax aligns with the international movement towards the legislation of the GloBE rules. On March 21, 2024, US Treasury Secretary Janet Yellen appealed to their lawmakers to approve the US President's Global Minimum Tax deal. The OECD said in a report to G20 Finance Ministers and Central Banks that "The implementation of the global minimum tax is now well underway and will come into effect from the beginning of next year," and that from 2025, 90% of all MNCs with annual revenue over 750 million Euros will be subject to the Global Minimum Tax. The UAE’s initiative to consult with stakeholders on the policy design and implementation of the Global Minimum Tax reflects its proactive stance on global tax reforms and a collaborative approach to gathering a wide range of perspectives.

Conclusion

Although there has been a significant move towards a Global Minimum Tax, implementing it throughout the world can be challenging. It will require international collaboration on an unprecedented scale, as GloBE rules will need to be integrated with diverse corporate tax systems employed by different countries. It is likely to impact the tax incentives companies receive too. As countries legislate the Global Minimum Tax regulations into the existing corporate tax framework, it might impact the overall corporate tax laws of different countries as well.

Discover how AKW Consultants can help you understand the future impact of GloBE Rules on the UAE’s Corporate Tax and outline a possible roadmap to follow.