Mark Schofield, Partner, PwC Middle East Tax & Legal Services Leader: Viewpoint

Viewpoint: Mark Schofield

The UAE is a business centre for the MENA region and an attractive destination for investors for a number of reasons, including infrastructure, logistics, access to skilled labour and geographical proximity to almost two-thirds of the global market. According to PwC and the World Bank’s “Paying Taxes” 2019 study, the UAE continues to have the single easiest system for paying taxes in the world for the seventh year running. The UAE has proactively negotiated its double tax treaties, 90 of which are currently in force. If the pending treaties are also accounted for, the UAE’s double treaty network would be more extensive than those of more established jurisdictions like the Netherlands and Singapore.

In a region where more than 50% of government revenue comes from oil and gas, the fluctuation in global oil prices and the associated budgetary pressures have led to increased speculation that tax reform will take place in the UAE. The country implemented an excise tax and value-added tax (VAT) in October 2017 and January 2018, respectively. These two indirect taxes place the tax burden on the consumption of goods and services, and they can provide a sustainable approach to increasing public revenue generation, while simultaneously being largely neutral for business and limiting any distortions in the economy.

The UAE and Saudi Arabia were the first two GCC states to implement VAT in accordance with the GCC’s Common VAT Agreement. Other member states have announced a staggered timetable for implementation, and most are expected to enact VAT in 2019, though Kuwait could wait until 2021. VAT is expected to significantly change the revenue sources and policy directions of the UAE and the wider GCC in the next few years.

The introduction of these taxes has seen the establishment of the UAE Federal Tax Authority (FTA), which marks the first time in the UAE that tax matters have been centrally considered. As businesses continue to interpret these tax rules, the FTA is actively working with taxpayers to provide guidance in their application, and we expect that process to continue as these tax systems are embedded in daily operations. The success of implementing these regimes would be enhanced if the FTA uses systems to reduce compliance efforts and also embraces new models for conducting audits.

As governments and businesses continue to adjust their approaches and attitudes in the new era of taxation, the UAE is responding to developments in the international tax landscape with agility and a practical approach. For example, the UAE is now part of the OECD’s BEPS Inclusive Framework, which means it has made explicit commitments to combatting artificially created tax planning opportunities that lack genuine commercial reality. Furthermore, the UAE has also signalled its participation in various multilateral disclosure initiatives, such as the country-by-country reporting required as part of the BEPS Inclusive Framework, which has further cemented the UAE’s commitment to an efficient and transparent tax system.

While the UAE’s involvement in such initiatives could indicate that a broader corporate income tax framework is coming, the government has made no announcement with respect to a timetable, a scope of coverage, or how this regime, if any were to be implemented, would interact with the existing income tax rules or the various incentives and exemptions offered by the country’s free zone authorities.

All of the above developments highlight the need for a strong tax function to successfully navigate the challenges ahead. In a region that has historically relied on finance functions for tax, the increasingly complex tax environments are likely to require businesses to have a more structured and holistic approach to understanding and managing their tax risks and opportunities. Such “Tax Function of the Future” should incorporate elements like governance, strategy and technology into its operations, as well as identify areas to consult with government agencies, to ensure the development of an efficient and successful system for everyone involved.