UAE is branching out into new virtual realms with the launch of the Dubai Metaverse Strategy, designed to propel the Emirate’s economy into the future. A new era of blockchain technology has emerged that would promote Dubai as the Global Capital of Web 3.0 with a scrupulously documented regulatory framework.

Today, the UAE is considered to be one of the top metaverse economies in the world and Dubai, with its recent metaverse strategy, is seen as a pioneer in offering the most advanced metaverse and blockchain ecosystem worldwide.

Blockchain technology, which is essentially an immutable distributed ledger that facilitates the process of recording transactions and tracking assets in a business network, finds widespread usage in Cryptocurrency, Non-Fungible Tokens or Tokenized assets and the metaverse.

Metaverse is a virtual space where people can interact with digital objects. We need to create our digital avatars to enter the metaverse, an expansive network of real-time 3D worlds and simulations. A decentralized metaverse incorporates blockchain technology and blockchain-powered assets. Web 3.0 is the World Wide Web, www as our internet, however advanced, incorporating concepts such as decentralization, blockchain technologies and tokenized economics.

The emergence of web 3.0 and metaverse presents endless possibilities of how this innovation can positively impact the economy of UAE through industries and communities.

Dubai Metaverse Strategy

Originally announced in June 2022 by Dubai Ruler Sheikh Mohammed bin Rashid Al Maktoum, the strategy aims at ensuring that the metaverse increases its contribution to 1% of the emirate’s overall GDP.

The Dubai Metaverse Strategy focuses on four sectors including tourism, education, government services and retail &real estate to become one of the leading economies in the world and a major hub for the global metaverse community.

The strategy was officially unveiled at the Dubai Metaverse Assembly on September 28, 2022. Headed by the Dubai Crown Prince, Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, heads this strategy which has five main pillars including innovation, government implementation of metaverse technologies and talent development and will be focused on extended reality, augmented reality, virtual reality, mixed reality and digital twins.

The strategy also aims at doubling the number of blockchain companies in Dubai plus generating 40K new jobs in this field.

Unveiling of the metaverse strategy will witness Dubai host more than 1,000 companies in the blockchain and metaverse sectors that presently contribute 500 million USD current for the UAE’s national economy. This contribution would considerably increase in the future, experts predict. Four billion dollars of the country’s GDP in the coming five years is targeted through the Dubai metaverse strategy.

The strategy plans to build multiple secure platforms for metaverse users by developing a standardized system as per international standards along with a regulated infrastructure for controlled inclusion and enhanced simulation of such innovative technologies.

Metaverse- Application

The application of the metaverse is widespread with the following key applications.

Healthcare

Augmented reality, AR is the best example of a metaverse application in the healthcare sector helping surgeons in various surgical procedures.

Education

Virtual reality, VR is an example of a metaverse application in the education sector where a VR headset helps students attain a high level of effectiveness in comprehending concepts through visuals. Students also get increasingly motivated to learn with the use of VR technology.

Real Estate

Real estate is another glowing example of metaverse application through VR where real estate agents can leverage the power of this technology for offering immersive virtual tours of properties to prospective buyers.

Defence

Defence is another area where metaverse technology finds many applications. Tactical Augmented Reality (TAR) like night-vision goggles (NVG) can display a soldier’s precise location.

Metaverse applications are becoming huge in many industries and facilitating their transformation through seamless virtual operations.

Metaverse Market

Metaverse market size globally will be valued at 1.6 trillion USD by 2030. Many multinationals like Meta (Facebook), Microsoft, Google, and Nvidia are also making significant investments in the metaverse. Mubadala Capital, a leading global venture platform has been proactive and making investments in the blockchain technology space.

Metaverse in UAE

The metaverse strategy is in perfect alignment with the UAE Artificial Intelligence strategy. The Ministry of Health and Prevention, in its proactive stance, has launched a blockchain platform to ensure that medical data is secure.

The Dubai government formed the Dubai Virtual Assets Regulatory Authority (VARA) to help safeguard investments in crypto and NFTs. As MetaHQ is established, the VARA has started functioning as the regulatory body for foreign transactions providing a safeguard for investors in the virtual asset industry for the first time.

Business and Dubai Metaverse

Facebook, the global major presently named Meta, has opened its headquarters in the country.

Dubai has already documented and implemented business setup regulations in fintech, blockchain, and Web 3.0 to safeguard crypto and digital assets. Dubai World Trade Center (DWTC) is dedicated to virtual assets.

Dubai’s fintech sector offers tremendous opportunities for business in the digital space and is currently valued at 2.5 billion dollars. The Dubai International Financial Center (DIFC) Innovation Hub is the first ecosystem in the gulf with more than 2,400 companies in fintech. Dubai Financial Services Authority (DFSA) has been made responsible for overseeing the regulation of investment tokens.

Dubai – The Crypto Hub

Dubai’s metaverse strategy aims to make the city the crypto capital of the world, with over 400 businesses operating in the crypto space including Crypto.com, FTX, and Binance, the leading and famous FinTech and cryptocurrency firms with licenses in possession.

Business Licences – Metaverse

Investors seeing for a company formation in Dubai in the metaverse space must engage with the following government authorities who are responsible for offering metaverse services license.

• Dubai Economy and Tourism (DET)
• Dubai Silicon Oasis Authority (DSOA)
• Dubai Multi Commodities Center (DMCC)
• International Free Zone Authority (IFZA)

Introduction

Corporate Tax (CT) implementation in UAE was announced on 31st January 2022 by the Ministry of Finance and it was confirmed that one of the mechanisms substantiating the new tax law would be the introduction of Transfer Pricing (TP), based on the Organisation for Economic Co-operation and Development (OECD) principles.

The transactions and entities that would come under the scope of transfer pricing are to be announced in due course along with the reporting and compliance requirements.

What is transfer pricing (TP)?

TP is an intra-company market mechanism used for accounting and taxation purposes and allows for internal pricing transactions within businesses and between subsidiary companies operating under common ownership and control. The TP practice involves both domestic and cross-border transactions. For taxation purposes, the transfer price is essentially at an ‘open market’ or ‘arm’s length value for preventing tax evasion.

What is the role of OECD in transfer pricing (TP)?

OECD has been striving for the prevention of tax avoidance through its ‘Base Erosion and Profit Shifting’ (‘BEPS’) action plan for several years by establishing measures to prevent multinational businesses from evading tax by artificially shifting profits to different low or no-tax jurisdictions.

The UAE, in line with most of the developed countries, has stood by the BEPS program and the adoption of the OECD rules for TP has been a logical move as part of the introduction of CT.

What is OECD’s guidance on transfer pricing?

The essence of OECD transfer pricing guidance revolves around the ‘arm’s length principle that represents an international consensus on the valuation of cross-border transactions between associated enterprises as per OECD. Under prevailing market conditions, a value is stated to be equivalent to arm’s length if it is the same as the price that would be paid between two unrelated entities without any influence over each other.

Detailed guidance is provided by OECD on measures to test, analyze and compare the transfer price for establishing the arm’s length valuation. The prescribed formats for documentation purposes are also provided by the OECD and include Master file, Local file and Country by Country Report (CbCR).

Valuation of TP can be quite complex and needs sufficient data that influences the price to be gathered from both external and internal sources. There are five methods advocated by OECD to determine the arm’s length price.

Which UAE business will be affected?

Theoretically, all businesses will be within the scope of the transfer pricing rules however, in practice, the major effects of the TP regime will be felt by the multinational companies that are involved in transferring goods or services between group establishments. These businesses, in all likelihood, will be required to maintain the records stipulated by the OECD including the preparation of additional annual reports demanded by the FTA.

One-time transactions e.g. sale of high-value assets may also come under the TP rules and may need to be critically reviewed for evaluating TP implications even if the businesses generally don’t undertake intra-group transactions that come under the TP rules.

Family businesses in the UAE providing financial support to each other may be under greater scrutiny and may need to review their TP policies and adapt some of their practices to comply with the TP regulations.

Free zone businesses may need to take into account certain TP considerations and may need to make some additional assessments accordingly. The applicability of the arm’s length principle to such free zone businesses would need to be analyzed once the detailed TP rules are available to satisfactorily address situations where the Free Zones based companies carry out business with mainland UAE entities.

How should UAE businesses get prepared for the transfer pricing (TP) regime?

It is believed that most of the businesses in the UAE have already carried out a high-level impact assessment of the forthcoming TP regime and identified transactions to be affected by it.

Once the detailed TP requirements are issued by the FTA, businesses must undertake an optimization exercise to align existing TP policies with the OECD guidelines followed by implementation of the revised TP policies, as appropriate, by amending policy documents and contracts.

Upon successful implementation, businesses must focus on the compliance aspect and prepare the TP Master file/ Local files/ returns, wherever applicable.

THE TAKEAWAY

The proposed UAE CT regime has kept a provision for TP for ensuring that the price of a transaction is not influenced by the relationship factor between the parties involved.