The UAE has joined the Inclusive Framework on BEPS

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Albert Davidson
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1 The UAE has joined the Inclusive Framework on BEPS May 2018 In brief The United Arab Emirates ( UAE ) joined the OECD Inclusive Framework on Base Erosion and Profit Shifting ( BEPS ) on 16 May 2018, bringing the total number of participating jurisdictions to 116. Through joining the Inclusive Framework, the UAE has (for now) committed to implementing the following four BEPS minimum standards: Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances Action 13: Transfer Pricing Documentation and Country-by-Country Reporting ( CbCR ) Action 14: Making Dispute Resolution Mechanisms More Effective In addition to the above, the UAE will be subject to (and assist with) peer reviews focusing on monitoring the implementation of the BEPS Action Points. In the immediate to short term, this would include the four minimum standards. The UAE has already implemented certain measures, which should assist with complying with the minimum standards. Further, in order to ensure the UAE is considered as compliant with the minimum standards, the UAE would also be required to undertake the following: Update the UAE s domestic legal and regulatory framework to allow for the collection and sharing of information and CbCR requirements Update the UAE s double tax agreements ( DTAs ) to (i) prevent treaty abuse, and (ii) introduce mutual agreement procedures ( MAP ) Prepare a MAP profile and guidelines/procedures applicable to the UAE. In detail The UAE s position on BEPS so far Previous position for the UAE On 5 December 2017, the UAE (along with 16 other jurisdictions) was added to the EU Black List of Tax Havens (the EU Black List ). Jurisdictions on this list are considered by the EU to be non-cooperating against a wider tax evasion agenda, and could potentially be subject to defensive actions by EU Member States. These actions could include increased audit risks and denial of certain benefits. In response to being included on the EU Black List, the UAE committed to undertake certain tax reforms, which led to its removal from the EU Black List and being placed on the so-called Grey List on 23 January Grey-listed jurisdictions are considered by the EU to have deficiencies in their tax regime, but have committed to introduce relevant changes to improve tax transparency and tax regime fairness, and implement BEPS related measures. In line with this commitment, the UAE has now joined the Inclusive Framework on BEPS.

2 What does it mean to be a part of the Inclusive Framework on BEPS By being a member of the Inclusive Framework, the UAE has, in the immediate to short term, committed to (i) implementing the four BEPS minimum standards, and (ii) being subject to (and participating in) peer reviews to evaluate the country s implementation of the four BEPS minimum standards as described in the OECD 2015 Action Reports, and discussed further below. In addition to implementing the four BEPS minimum standards in the short term, the UAE has also committed to implement the other (11) BEPS measures in the medium to long term. As the UAE has only recently joined the Inclusive Framework, we expect a peer review to take place to assess the UAE s progress towards meeting the four minimum standards in the short to medium term. We also expect such review would set out recommendations on additional compliance actions required for the UAE. What are the Four BEPS minimum standards and what does the UAE need to do to comply Action 5: Countering harmful tax practices more effectively, taking into account transparency and substance This Action seeks to counter harmful tax practices and improve transparency between jurisdictions through the compulsory spontaneous exchange of information on tax rulings on certain specific topics. This Action also seeks to address preferential tax regimes by requiring changes to these regimes where they are considered to be abusive. Compulsory spontaneous exchange of information on tax rulings on certain specific topics Action 5 requires countries to implement a transparency framework, which requires the participating countries to spontaneously exchange information with other relevant jurisdictions on tax rulings issued on the following specific topics: 1. Rulings relating to preferential regimes; 2. Unilateral advance pricing agreements or other cross-border unilateral rulings in respect of transfer pricing; 3. Cross-border rulings providing for a downward adjustment of taxable profits; 4. Permanent establishment rulings; 5. Related party conduit rulings; and 6. Any other type of ruling agreed by the Forum on Harmful Tax Practices that in the absence of spontaneous information exchange gives rise to BEPS concerns. Preferential regimes Action 5 also requires countries to ensure that taxpayers benefitting from a preferential tax regime have substantial activity in the relevant jurisdiction. For example, benefits of preferential regimes relating to intellectual properties (IP) should only be granted to taxpayers engaging in such activities and incurring actual expenditure on such activities in the relevant territory. When applying the substantial activity test to other non-ip related preferential regimes (e.g. holding company regimes), the taxpayer would further need to establish a link between the income qualifying for benefits and the core activities necessary to earn the income. Given the potentially wide variation in the application of different countries non-ip related preferential regimes, compliance (or otherwise) of the non-ip related preferential regimes would be assessed at a later date and in the context of the specific regime being considered. 2

3 Spontaneous exchange of information To allow for the compulsory spontaneous exchange of information, a jurisdiction must have the necessary legal framework that allows collecting of information on past and present rulings, and the necessary government-to-government mechanisms to facilitate the spontaneous exchange of information with other jurisdictions. IP-related preferential regimes Changes to domestic law are required to address IP-related preferential regimes which are considered as harmful (e.g. where the regime imposes no or low effective tax rates). Spontaneous exchange of information The UAE signed the Convention on Mutual Administrative Assistance in Tax Matters ( CMAATM ) on 21 April This Convention is a comprehensive multilateral instrument, and provides for all forms of administrative assistance in tax matters, including exchange of information on request, spontaneous exchange of information, and automatic exchange of information. IP-related preferential regimes Given the current tax framework in the UAE, it does not have an IP-related preferential regime. As such, there should be no immediate actions required in this regard. The UAE s participation in the CMAATM establishes a mechanism for the UAE to exchange a greater extent of information relating to a wider range of taxes with fellow jurisdictions who are also signatories to the CMAATM when compared to the channel of information exchange under existing bilateral treaties. Whilst the UAE has been identified in a 2016 peer review undertaken in respect of Global Forum on Transparency and Exchange of Information for Tax s as requiring to update their legal and regulatory framework to allow the collection of information, the implementation of VAT in the UAE as of 1 January 2018 (which requires taxpayers registration with the UAE s Federal Tax Authority and in doing so, furnishing information to a central tax administration agency) has allowed the UAE to make progress in this regard. Action 6: Preventing the granting of treaty benefits in inappropriate circumstances This Action seeks to prevent treaty abuse through the inclusion of model treaty provisions and/or changes to domestic legislation. A statement clearly indicating that the contracting states intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including treaty shopping arrangements, should be included in the preamble of the relevant DTAs. The above intention would be implemented through including in the DTAs: 1. the combined approach of a general anti-abuse rule based on the principal purposes of transactions or arrangements (the principal purpose test or PPT rule) and a specific anti-abuse limitation of benefits ( LoB ) rule which limits the availability of treaty benefits to entities that meet certain conditions (based on legal nature, ownership in, and general activities of the entity) 3

4 2. a PPT rule alone; or 3. an LOB rule supplemented by specific rules dealing with conduit financing arrangements. Countries may also include in their DTAs rules to address other forms of treaty abuse, including situations of dual resident entities, and rules that apply to taxable presence situated in third states. The following statement should be in the preamble of the relevant DTAs: Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States) In addition to the above, either a LoB rule or a PPT should be included in all DTAs or included as part of domestic anti-avoidance laws. The above minimum standards could be implemented by signing the Multilateral Instrument ( MLI ) (a mechanism established under BEPS Action 15), which allows a swift and uniform implementation of amendment to the signatories covered tax agreements (being the DTAs mutually elected by the jurisdictions to be amended by the MLI). For completeness, some provisions of the MLI go beyond the minimum standard as indicated in the action reports, and are therefore not necessary to ensure compliance with the four BEPS minimum standards. Signatories to the MLI can select which provisions they wish to include in the MLI. In most cases, both jurisdictions are required to opt for the same position for a provision to apply. However, in certain situations, and notably in the approach to preventing treaty abuse, the PPT would prevail if there is a mismatch of the approach to be adopted by the jurisdictions. The signing of the MLI itself is not one of the four minimum standards that members of the Inclusive Framework is required to adopt in the immediate term. Members could elect to amend their existing DTAs on a bilateral basis to include the upfront statement required. Additionally, jurisdictions could also choose the approach to be adopted to preventing treaty abuse on a treaty-by-treaty basis through bilateral negotiation, or through the inclusion of domestic anti-avoidance provisions. The UAE has begun to include the new preamble wording in some of its recently concluded DTAs (e.g. the UAE-Argentina DTA). Further, the UAE has also been including provisions or articles in some of its recently concluded DTAs (e.g. the UAE-UK DTA) that specifically denies treaty relief if one of the main purposes of the arrangement is to secure treaty benefits. It is currently unclear whether the UAE intends to sign the MLI and whether it would adopt a position which would be applied across all of its DTAs, or whether it would consider the approach on a case by case basis. Common holding jurisdictions such as Singapore, Netherlands and Luxembourg have signed the MLI to implement the treaty abuse provisions (as well as other BEPS action related changes) rather than enter into bilateral renegotiation of their DTAs. Further, most of the signatory countries to the MLI have adopted either a simplified PPT approach or the approach of a PPT with the option for the relevant competent authority to have the final discretion of granting treaty relief (the position adopted by Singapore, Netherlands and Luxembourg). It remains to be seen what approach the UAE may adopt in this respect. 4

5 Action 13: Transfer pricing documentation and country-by-country reporting This Action sets out rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules include a template for CbCR of multinationals global allocation of income, economic activity and taxes paid among countries, which together with Local file and Master file requirements constitute a three-tiered approach to transfer pricing documentation. Implementation of annual CbCR requirements for large multinationals, which will include, for every tax jurisdictions in which the business operates in: the annual revenue, profits before income tax income tax paid and accrued, number of employees, stated capital, retained earnings, and tangible assets. Action 13 recommends a consolidated group revenue threshold of 750 million, above which the CbCR requirements take effect for the subsequent reporting year. CbCR will generally be filed in the jurisdiction where the ultimate parent entity of the group is resident, and will be shared between the relevant jurisdictions through automatic exchange of information. Action 13 proposes a three-tiered standardised approach to transfer pricing documentation, i.e. a Local file, a Master file and CbCR reporting. However, the implementation of Local and Master file requirements for transfer pricing documentation purposes is not part of the minimum standard. In order to implement the minimum standard, a jurisdiction would be required to (1) enact domestic legislation that requires the filing of CbCR by relevant multinationals, and (2) have in place the necessary government-to-government mechanisms to facilitate the automatic exchange of the CbCRs. The OECD 2015 Final Report on Action 13 includes model CbCR legislation, which can be used as a template to introduce the relevant regulations into their domestic framework (where required). In respect of the government-to-government mechanism, a jurisdiction could achieve this by: 1. signing the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports ( CbCR MCAA ), a supplementary instrument for the signatories in the CMAATM to agree on automatic exchange of information in respect of CBCR; or 2. signing the Competent Authority Agreement ( CAA ) on the Exchange of country-by-country Reports on the basis of a Double Tax Convention with all jurisdictions which they have concluded a DTA; or 3. signing a CAA with the required jurisdictions on the basis of a Tax Information Exchange Agreement. The first mechanism has been the most widely adopted approach by countries that have implemented CbCR rules. The UAE will be required to introduce domestic legislation to require the filing of CbCR by relevant multinationals. As mentioned earlier, the UAE has already signed up for the CMAATM, as well as the Multilateral Competent Authority Agreement ( MCAA ), which is a supplement to the CMAATM used to implement Common Reporting Standards. 5

6 As such, the government-t0-government mechanism for implementing CbCR in the UAE could be achieved by the UAE signing the CbCR MCAA. Other jurisdictions who have signed the CMAATM and MCAA have also signed the CbCR MCAA. We do not yet have visibility as to whether the UAE will sign the CbCR MCAA or choose one of the other mechanisms for implementing CbCR. It is currently also unclear whether the UAE will adopt the OECD CbCR Model legislation or enact its own tailored legislation. Action 14: Making dispute resolution mechanisms more effective This Action seeks to address the obstacles that prevent countries from solving treaty-related disputes under MAP, via a minimum standard in this area, as well as a number of best practices. The OECD 2015 Final Report on Action 14 includes 21 minimum standards, which broadly focus on the following four key areas: 1. Preventing disputes 2. Availability and access to MAP 3. Resolution of MAP cases 4. Implementation of MAP agreements There are a number of actions required to implement the 21 minimum standards, these include (but are not limited to) (i) adopting the updated Article 25 of the OECD Model Tax Convention with respect to MAP (ii) domestic legislative changes, and (iii) administrative processes. The objective of which are: To allow access to MAP process when the access requirements are met To ensure countries domestic process do not hinder access to MAP process To ensure countries implement Article 25 of the OECD Model Tax Convention (which deals with MAP) in good faith. The OECD 2015 Final Report on Action 14 includes 12 best practices relating to MAP that supplement the minimum standards established under the three main objectives. A jurisdiction should first ensure their domestic rules or DTAs include appropriate provisions to allow for the use of MAP. In order to do so, the relevant the jurisdiction could update their DTAs to include Paragraphs 1 to 3 of Article 25 of the OECD Model Tax Convention. This could be done through the MLI or by way of bilateral renegotiation of the jurisdiction s DTAs. Additionally, the jurisdiction would be required to publish rules, guidelines, and procedures to access the MAP as well as a preparation of their MAP profile. Most if not all of the UAE s DTAs include a MAP Article, which allows the countries to access the MAP process in the event of a dispute. However, we do not have visibility as to how the UAE intends to comply with the remaining minimum standards, nor on the UAE s position with respect to adopting the recommended best practices in this respect. 6

7 Other jurisdictions such as Singapore, Netherlands and Luxembourg have signed up to the MLI to implement the MAP-related changes rather than enter into bilateral renegotiation of their existing DTAs. It remains to be seen on the official approach the UAE may adopt in this respect. Key takeaway Whilst the UAE has only become a member of the Inclusive Framework on 16 May 2018, the UAE has already been making strides into ensuring its compliance with the four BEPS minimum standards through its participation in various Conventions issued by OECD that are designed to facilitate the implementation of the four BEPS minimum standards. Further, the UAE has already in place in its domestic rules certain information collection mechanisms. As a next step, the UAE would need to review, update and put in place domestic legislation to comply with the minimum standards. Let s talk For a deeper discussion of how this issue might affect your business, please contact: international tax contacts Jochem Rossel, UAE Middle East International Tax Services Leader T:+971 (0) E: jochem.rossel@pwc.com Mohamed Serokh, UAE Middle East Transfer Pricing Leader T: +971 (0) E: mohamed.serokh@pwc.com 2018 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers (Dubai Branch), its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 7

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