The winds of regulatory change are sweeping through the GCC, and businesses need to be prepared to navigate this dynamic landscape. Once known for its low-tax regime, the region is rapidly evolving, with major changes in legislation being implemented across Saudi Arabia, UAE, Oman, Bahrain, and beyond. This shift aligns with the OECD/G20 Inclusive Framework on BEPS, which pushes for a minimum corporate tax rate of 15% for multinational enterprises. This was followed by the UAE introducing Corporate Tax (“CT”) in 2023.
This committed approach reflects a noticeable trend in the evolution of the UAE’s tax landscape, mirroring its adaptability to the rising demands of international standards, including the Global Anti-Base Erosion Rules (“BEPS Pillar 2”) and Environmental, Social, and Governance (“ESG”) principles, among others.
This new directive follows an earlier announcement which stated that over 140 countries supported the concept of a global minimum tax rate of 15% for large multinationals and the reallocation of taxing rights for the world’s largest groups.
As businesses in the UAE and across the GCC adapt to new taxation laws, it is crucial for them to prioritise the development of performance monitoring and impact evaluation frameworks. These frameworks serve to safeguard shareholder value and benefit society at large. Amid the transition to the new taxation regime, companies must not neglect their global statutory responsibilities and compliance obligations.
The OECD’s Base Erosion and Profit Sharing [BEPS 2.0] project proposes a two-pillar approach to international tax reforms with changes coming into effect in 2023. Pillar One is a significant departure from the standard international tax rules of the last 100 years, which largely require a physical presence in a country before that country has a right to tax. Pillar Two secures an unprecedented agreement on a global minimum level of taxation which has the effect of stipulating a floor for tax competition amongst jurisdictions. All signatories of the new taxation regime have committed to implementing 15 actions to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
From a compliance and restructuring perspective, companies need to do an impact assessment on different business functions and operations, the current value chain, and the existing ERP system from a technical compatibility standpoint to be better prepared for the transition. This assessment should include quantification of the impact on pricing, incentives, profitability, top-line, and cash flows.
Businesses with an Ultimate Parent Entity in the UAE or GCC, or MNEs with subsidiaries in the UAE or GCC, should monitor the developments around BEPS Pillar Two. Its implementation is likely to significantly impact the UAE and the regional tax landscape across the GCC region.
According to the agreement, it is estimated that approximately more than $125 billion of profits will be reallocated from (initially) around 100 of the world’s largest and most profitable multinational enterprises (MNEs) from their home countries to the markets where they have business activities and earn profits. The agreement also imposes a new minimum tax rate of 15% to be applied to companies with global revenue above €750 million, which is estimated to generate around $150 billion in additional global tax revenues annually. These changes are expected to have significant implications for taxpayers as well as policymakers globally and particularly across the region.
For CEOs, these developments have placed tax squarely among the top growth risks. This wake-up call is urging executive teams to prioritise tax transformation and digitisation. Failing to do so could lead to unexpected tax liabilities and penalties down the road.
So, how can businesses prepare for the future in this dynamic tax environment?
- Assess your current tax capability: The first step is to conduct a thorough assessment of your current tax capabilities. Do you have a documented tax strategy in place outlining your focus areas for the next three years? Is your tax team equipped with the necessary skills and resources to handle the complexities of the evolving landscape?
- Reimagine your tax talent mix: Tax authorities are increasingly digitising their systems, and so should your tax function. This necessitates a shift in skillsets, requiring professionals with expertise in technology, data analytics, project management, and other digital disciplines. The future of high-performing tax teams lies in embracing these capabilities.
- Embrace digital technology: Leverage artificial intelligence (AI) to expedite and enhance data management, automate routine tasks, conduct data analysis and research, monitor and analyse risks, and perform scenario-based planning.
- Elevate tax to the boardroom: Similar to major MNCs in developed markets, it’s crucial to integrate tax into the boardroom agenda in the GCC. This ensures appropriate attention and timely discussions on critical tax matters, minimising the risk of unexpected liabilities.
- Partner with tax experts: The unprecedented pace of change underscores the importance of partnering with technically and practically sound tax consultants. They can keep you updated on legislative changes, bridge any gaps in your digital tools, and provide invaluable support during audits and appeals.
By taking these steps, businesses in the GCC can navigate the evolving tax landscape with confidence, mitigate risks, and unlock new opportunities for growth. Remember, the future of tax is not just about compliance; it’s about embracing technology, building a skilled team, and proactively shaping your tax strategy to thrive in the ever-changing environment.
