New UAE tax: What it means for large companies

The UAE's new 15 per cent tax on large multinational companies didn't come as a shock to many corporates, according to analysts. And, despite a short-term impact on profits, experts say it offers businesses the clarity they need to plan for the future.

The Ministry of Finance said the Domestic Minimum Top-up Tax will take effect from January 1, and will apply to multinational enterprises with consolidated global revenue of €750 million ($793 million) or more in at least two of the four financial years immediately preceding the financial year in which the tax applies.

“Those taxpayers effected by the new regulations were aware of these incoming changes following much movement globally in line with the OECD Pillar Two framework and the completion of the UAE’s public consultation around Pillar Two,” said Vishal Sharma, managing director and UAE tax practice leader at Alvarez & Marsal. “Many of these taxpayers have already begun to assess the scope of these rules against their group, identifying the potential future tax and compliance impact.”

Operationally, multinationals must gear up to introduce the tax in the UAE and its overall implementation as applicable, said Nilesh Ashar, senior managing director and head of Middle East Tax at FTI Consulting.

“MNEs need to assess the impact of DMTT on the UAE businesses, on their tax policy and also need to review system capabilities for tax reporting and compliances. Importantly, MNEs should evaluate the availability of any reliefs (like transitional safe harbour) in addition to the potential incentives announced in UAE for R&D and high-value employment activities,” he said.

The DMTT will require many UAE companies to further make operational and structural adjustments to deal with its impact and compliance, according to Basel Arafe, tax partner, Deloitte Middle East.

“Companies will need to enhance their financial reporting systems to meet the detailed record-keeping and reporting requirements under the DMTT and OECD rules,” he told The National.

It will also require many companies to review their tax and corporate structures to optimise liabilities, he said.

“Overall, while many UAE companies have begun adapting to the evolving tax landscape, additional preparation and restructuring may likely be required for full compliance. Large multinational enterprises are preparing by aligning with OECD's Pillar Two rules, yet smaller domestic enterprises are generally unaffected,” Mr Arafe said.

Impact on profits

In the short term, a higher tax regime will inevitably have an impact on profitability for businesses that were used to enjoying the relatively lower taxes offered by the UAE, said Bal Krishen, chairman of Century Group. “However, corporations in the country’s free zones will maintain their tax-exempt status, and despite a 15 per cent tax rate, the UAE would still be an attractive business destination, relative to countries like the UK and Saudi Arabia, which have a 25 per cent and 20 per cent corporate tax rate, respectively,” he said.

After the 9 per cent corporate tax was introduced in 2023, it was a “major deal”, but companies revised their financial strategies in order to comply with the new regulations, Mr Krishen added. According to Mr Sharma, handling the new tax system will require collaboration and commitment from the finance, IT, legal and HR teams, and not just the tax department.

The announcement gives the qualifying companies “a strong mandate to press on with their Pillar Two implementation plans, obtaining additional budget from their business leads to invest in transformation and technology to support with tackling the extensive Pillar Two compliance burden, which is heavily data dependent”, he added.

OECD's reforms

The OECD's Pillar Two reform programme set up a global minimum corporate tax to ensure large multinational enterprises pay a minimum 15 per cent tax on profits in each country where they operate.

The global minimum tax, which is based on Global Anti-Base Erosion (Globe) Model Rules, aims to reduce the incentive for profit shifting and places a floor under tax competition, bringing an end to the race to the bottom on corporate tax rates, the OECD said.

More than 140 jurisdictions have signed up for the reform programme, which was announced in October 2021. The global minimum tax is in effect in more than 30 jurisdictions, and an increasing number of other jurisdictions have announced their intention to implement the Globe rules within the next year, the OECD said in May.

Bigger picture

The DMTT is unlikely to deter multinational companies aiming to expand into the UAE, according to Amro Zakaria, a global financial markets strategist and the founding partner of Kyoto Network and Madarik Ventures.

“This region offers so many benefits … Global capital is gravitating towards the region. And the region itself has a lot of organic capital from sovereign wealth funds, big regional companies that are becoming multinationals and family offices,” he told The National on the sidelines of Abu Dhabi Finance Week.

The Gulf stands out globally when it comes to factors that businesses look for, such as demand, stability and growth and so “even if there is a gradual increase in taxation, I don't think it is going to dent the attractiveness of the region”, he added. Companies tend to focus on “the big picture” rather than just one piece of data, agreed Glendy Kam, chief product officer at US-based blockchain services provider Tassat, which plans to expand into the UAE.

“When you start to do business in any region, you have to look at the big picture – what are the opportunities, what are the revenue, [all of these] factor into the cost of doing business,” she told The National.

According to Simon Evenett, professor of Geopolitics and Strategy at IMD, the move "brings UAE closer into line with the new OECD minimum tax standard".

"The package is balanced – a higher corporate tax rate will offset by more generous allowances that will favour innovative firms and those companies with regional or global headquarters in UAE," he told The National.

"These measures reinforce the attractiveness of UAE as a base for the cutting edge firms keen on having strong commercial ties throughout the world.”

Some of the key incentives in this region include connectivity, infrastructure support, the workforce and the knowledge in technology and innovation, Ms Kam said. The company, which, this year, reached more than $2 trillion in transactions since its inception in 2019, has operations globally.

“We have looked at Europe, APAC and we just started looking at Mena. One advantage here is that it is a new market and I can see the energy and effort put into a very good regulatory environment to support the development of new business, new technology,” Ms Kam said. “It doesn't have some of the burdens of other regions where you have very old regulations and then you are trying to figure out how you work backward into those regulations.”