How to understand the new global minimum tax in the UAE: What you need to know!

The UAE Ministry of Finance (MoF) is gearing up to implement a global minimum tax, a move that could significantly impact multinational enterprises (MNEs) operating within the country. The Ministry has launched a digital public consultation, inviting feedback from corporate stakeholders, particularly those in the global community. This consultation seeks insights on how to integrate this tax into the UAE’s existing Corporate Tax (CT) system, minimize compliance costs, and explore policy options for the potential implementation of key rules.

What is the Global Minimum Tax?

The global minimum tax (GMT) targets MNEs with an annual consolidated revenue of or above €750 million (approximately AED 3 billion). The tax mandates that these enterprises pay a minimum tax of 15% on excess profits across all jurisdictions where they operate. This tax is enforced through two primary rules:

• Income Inclusion Rule (IIR): Ensures that the profits of MNEs are taxed at a minimum rate globally. If foreign subsidiaries of an MNE are taxed below this threshold, the parent entity must pay a top-up tax.
• Undertaxed Profits Rule (UTPR): Acts as a secondary measure, allowing countries to adjust tax deductions for domestic companies that transfer profits to low-tax jurisdictions. This rule ensures that all profits are taxed at the agreed minimum rate.

Is the UAE Implementing the Tax?

While the MoF has initiated a public consultation, the current document is not the final policy. The consultation will gather stakeholder input to inform the government’s approach. The UAE, which signed the GMT agreement in November 2023, is aligning its corporate tax laws with global standards, but the implementation of specific measures, like the OECD’s Pillar Two rules, is expected in 2025.

Who Will Be Affected?

The GMT will apply to large multinational enterprises across various industries, provided they meet the revenue threshold. This tax is designed to ensure that these companies contribute fairly, regardless of their industry or location.

Global Implementation

Countries like Ireland, Luxembourg, Switzerland, and Barbados have already begun implementing the GMT. Switzerland, known for its lenient tax policies, is moving towards a 15% minimum corporate tax rate, which could come into effect in 2024. Over 40 countries are currently progressing towards adopting this tax, signaling a major shift in global tax policies.

Key Considerations for UAE Stakeholders

The UAE’s approach to implementing the GMT will consider domestic issues such as how it interacts with the existing Corporate Tax system and how to minimize compliance costs for businesses. The public consultation will also explore the design of a domestic minimum top-up tax (DMTT), ensuring that any additional tax revenue generated stays within the UAE.

Conclusion

The global minimum tax represents a significant development in international taxation, aiming to create a level playing field for multinational enterprises. As the UAE prepares for its potential implementation, businesses should stay informed and participate in public consultation to help shape the country’s tax policies.