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Middle East – Historic OECD/G20 Inclusive Framework Agreement on BEPS 2.0
  • Bahrain, Kuwait, Newsletter, U.A.E

Middle East – Historic OECD/G20 Inclusive Framework Agreement on BEPS 2.0

In a historic and broad-based consensus on the needed reforms for the international tax system to address the digitalisation of the global economy, the Organisation for Economic Co-operation and Development (OECD) / G20 through the Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) set out a Statement on the two pillar solution for global tax challenges that was approved by 130 of the member jurisdictions and countries as of 5th July 2021.

The agreement was reached after carrying out lots of technical work and holding a series of discussions by the 139 member countries of the Inclusive Framework. A ” two-pillar” approach developed jointly, proposes the allocation of profit to countries in which a multinational entity (MNE) engages itself in selling activities to derive value and imposition of a global minimum rate of tax.

Pillar One is a significant shift from the century-old international tax system where only an entity with a physical presence in a country can only be taxed.

There are many countries announcing consensus with the proposals and include China, India, Switzerland, Singapore, the United Arab Emirates (UAE), Bermuda, Jersey, Guernsey and the Isle of Man. Inclusive Framework (IF) member countries that have not yet approved the proposals are European Union (EU), Ireland and Hungary.

Countries that do not currently levy corporate income tax or have effective tax rates below the proposed global minimum tax rate of 15% such as the UAE and Bahrain, will be subject to some key decisions.

The draft ‘Blueprints’ of the technical aspects of the proposals under these two pillars were issued by OECD on 12th October 2020. However, discussions on the design of measures continued and got refined over time by some concerned jurisdictions and included regulations for addressing profit allocation issues, Pillar One and the global minimum tax rate, Pillar Two.

Afterwards, the Biden Administration in the USA simplified the proposals in April 2021 and updated them to facilitate the political agreement reached by the G7 countries in June 2021.

October 2021 has been set as a target to finalize the detailed implementation plan including resolution of any pending issue.

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting based on a two-pillar solution has some key components for each Pillar as outlined below.

PILLAR ONE

Pillar One has been designed to reallocate profits for large companies to market countries.

‘Amount A’ of Pillar One would provide a new right of taxation to market jurisdictions on residual profit. The statement stipulates important developments regarding the scope and computation of Amount A. The statement states that Amount B is meant for streamlining the application of the arm’s length standard to routine marketing and distribution activities, but does not substantiate Amount B.

Scope

Multinational enterprises (MNEs) with global turnover exceeding 20 billion euros and profitability of more than 10% measured as ‘profits before tax divided by revenue’, come under the purview of Pillar One. This turnover limit would be reduced to 10 billion euros 7 years after Pillar One comes into force contingent on successful implementation.

Extractives and Regulated Financial Services are not included in Pillar One.

New Taxing Right Calculation

The statement sets forth a new special-purpose nexus rule allowing allocation of Amount A to a market jurisdiction when the qualifying or in-scope MNE derives a minimum of 1 million euros in revenue from that jurisdiction. For Jurisdictions with a GDP of fewer than 40 billion euros, the nexus will be set at 250 000 euros.

The special-purpose nexus rule applies solely for assessing if a jurisdiction qualifies for the Amount A allocation.

The statement specifies that for qualifying businesses, 20 to 30% of their residual profits, more than 10% profit level needs to be reallocated to market countries using an allocation key based on revenue.

Revenue Sourcing

Revenue sourcing will be done to the end market jurisdictions where goods or services are consumed. Detailed sourcing rules will be developed for specific categories of transactions to facilitate the underlying principle. In applying the sourcing rules, an MNE must use a reliable method depending on specific facts and circumstances of the business.

Determining Tax Base

Profit or loss of the in-scope businesses will be based on financial accounting income, as relevant with minimum adjustments and carry forward of losses will be done.

Segmentation

The statement specifies that segmentation would only be needed in exceptional cases in which, depending on the segments figured in financial accounts, a segment would meet the scope limit.

Marketing and Distribution Profits Safe Harbour

Where the residual profits of an in-scope business are already taxed in a market jurisdiction, a marketing and distribution profits safe harbour will limit the residual profits allocated to the market jurisdiction through Amount A.  For outlining a more comprehensive scope, future work will be undertaken on designing a safe harbour.

Elimination of Double Taxation

Reliefs on double taxation of profit allocated to market jurisdictions will be either through exemption or credit method.

The entities that will be subjected to taxation would be compensated from those that earn residual profit.

Tax Certainty

The statement provides a commitment that MNEs will benefit from dispute prevention and resolution mechanisms including avoidance of double taxation for Amount A and all issues related to Amount A such as transfer pricing and business profits disputes in mandatory binding dispute prevention and resolution mechanism. Disputes on whether issues may relate to Amount A will be resolved in a mandatory and binding manner.

The statement says that consideration will be given for an elective binding dispute resolution mechanism for issues related to Amount A for certain developing countries with few and no mutual agreement procedures and who are eligible for deferral of their BEPS Action 14 peer review.

The statement commits simplification and streamlining of ‘Amount B’ for application of the arm’s length principle to in-country baseline marketing and distribution activities particularly focused on the needs of low capacity countries and completion by the end of 2022.

Administration

The statement provides a commitment to streamlining tax compliance and filing by allowing MNEs to manage the process through a single entity.

Digital Service Tax (DST) Removal

The statement assures appropriate and unilateral measures on the application of newly introduced international tax rules and the removal of all Digital Service Taxes and other relevant similar measures on all companies.

Implementation

The statement offers that ‘Amount A’ will be implemented through a multilateral instrument which will be developed and made available for signature in 2022 and the ‘Amount A’ will come into force during 2023.

PILLAR TWO

Pillar Two deals with the Global Minimum Tax rate and will ensure that in-scope businesses pay a minimum effective tax rate of at least 15% on profits in all jurisdictions.

Overall design

The statement describes Pillar Two as consisting of two interlocking domestic rules, Income Inclusion Rules (IIR) and Undertaxed Payment Rule (UTPR) together called the Global anti-Base Erosion Rules or GloBE rules and the Subject to Tax Rules (STTR).

Income Inclusion Rule (IIR), will impose a top-up tax being payable by a parent entity to the tax authorities in respect of the low taxed income of a constituent entity.

Undertaxed Payment Rule (UTPR) will be applied as a secondary rule that denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR.

The Subject to Tax Rule (STTR)), a treaty-based rule incorporated in bilateral treaties by countries will allow source countries to enact limited source taxation on certain related payments including interest, royalties and other payments to the parties subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the GloBE rules.

Status of Rules

The statement specifies the GloBE rules as a ‘ common approach’ implying that IF member countries are not needed to adopt the GloBE rules however must accept their application by other IF members. If the member countries that adopt the application of the GloBE rules would agree to implement and administer the rules consistent with the agreement reached on Pillar Two.

Scope

The statement notes that GloBE rules will apply to MNEs with revenues exceeding 750 million euros and as determined under BEPS Action 13 country by country (CBC) reporting. The statement notes that countries can freely apply the IIR to MNEs headquartered in their country even if they are not in scope.

Exclusions are noted as GloBE rules will not apply to Government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities, organisations or funds.

Design of Rules

The statement provides that the IIR allocates top-up tax based on a top-down approach wherein the application of IIR by the country at or near the top of the ownership chain of the MNE group is prioritized subject to a split-ownership rule for shareholdings below 80%.

The statement also notes that UTPR allocates top-up tax from low-tax constituent entities including those located in the UPE jurisdiction under a methodology to be agreed upon.

Calculation of Effective Tax Rate (ETR)

The GloBE rules specify imposition of top-up tax by utilizing an effective tax rate test that will be calculated based on jurisdictions and using a common definition of covered taxes including the tax base determined by reference to financial accounting income with small and agreed on adjustments consistent with the tax policy objectives of Pillar Two and mechanisms to address timing differences.

Regarding the existing distribution tax systems, there will be no top-up tax liability if earnings are distributed within 3 to 4 years and taxed at or above the minimum level.

Minimum Rate

The statement notes that the minimum tax rate to be used for the IIR and UTPR will be at least 15%.

Carve-outs

The statement notes that GloBE rules will provide a formula based substance carve-out that will exclude an amount of income that is at least 5% and a minimum of 7. % during the transition period of 5 years of the carrying value of tangible assets and payroll.

The statement commits to a de minimis exclusion In the GloBE rules.

Additional Exclusions

International shipping income using the definition of such income under the OECD Model Tax Convention also finds an exclusion in the GloBE rules

Simplifications

To avoid compliance and administrative costs that are disproportionate to the policy objectives, the implementation framework will include safe harbours and/or other mechanisms to facilitate the administration of GloBE rules for the targeted jurisdictions.

Global Intangible Low Taxed Income (GILTI)

The statement notes that to ensure a level playing field the Pillar Two will apply a minimum rate on a jurisdictional with consideration given to the conditions under which the US GILTI regime would coexist with the GloBE rules.

STTR and Bilateral Treaties

The statement highlights that IF members recognise STTR as an integral part of achieving a consensus on Pillar Two for developing countries. IF members that apply nominal corporate income tax rates below the STTR minimum rate to interest, royalties and a defined set of other payments if requested will incorporate the STTR during bilateral treaties with developing IF members.

The statement provides that the difference between the minimum rate and the tax rate on the payment would limit taxing right and the STTR minimum rate will vary from 7.5% to 9%.

Implementation

The statement notes that on reaching an agreement the IF members will release an implementation plan contemplating that Pillar Two should be brought into law in 2022 and to be made effective during 2023.

The implementation plan will include:

  • GloBE Model rules with proper mechanisms for facilitating GloBE rules coordination
  • An STTR model provision for facilitating the adoption
  • Transitional rules with a provision for a deferred implementation of the UTPR
Clarifications Requirements

Though the statement clarifies many issues and technical aspects, some key political and technical aspects remain unanswered including

  • The definitive minimum rate to be applied
  • ETR calculation mechanism
  • Designing of the “de minimis exclusion” carve-out
  • Designing of exclusion for MNEs during the initial phase of their international activity
  • UTPR designing
  • The scope of the simplification plan
  • STTR minimum rate
Future Steps

The IF agreement on BEPS 2.0 highlights the hopes and desires of the member countries for a global minimum tax rate with limited impacts on MNEs performing real economic activities with substance. The two-pillar proposals will be again discussed amongst the G20 Finance Ministers on 9th and 10th July 2021.

The consensus amongst 130 member countries is a significant development and in all likelihood will be implemented and accepted internationally as planned.

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Why is Post Covid and Post Brexit Corporate Migration to UAE intensifying among the UK SMEs
  • Newsletter, U.A.E

Why is Post Covid and Post Brexit Corporate Migration to UAE intensifying among the UK SMEs?

Shifting a company’s operations into foreign soil for business expansion is usually a complicated, time-taking and costly affair and due to these very reasons, only a few companies venture upon corporate migration without solid economic reasons such as favourable labour and market conditions spurring business growth.

Both large and small enterprises can benefit from relocating overseas and only when there is a real-time strategically assessed move considering all possible benefits and hurdles. Though in general, the main reasons driving a business to migrate to another country are taxes, regulations, market access and labour cost, the situation this time is entirely different compared to the past as the recent covid pandemic is constantly demanding the companies to be more agile and resilient for survival and growth.

Brexit has been a source of uncertainty for UK based business entities ever since the country’s electorate voted for this decision. As the consequences were unknown and unpredictable, many global establishments including Panasonic, Barclay’s, Honda, Sony, HSBC shifted their European headquarters out of the UK to mitigate risks and challenges.

The European Union (EU) has long been the UK’s biggest trading partner and accounted for more than 40% of all UK exports and almost half of all UK imports in 2019. In all probabilities, the effect of Brexit on the UK’s business and trade over the next couple of years could result in

  • Higher inflation
  • Increased import/export costs
  • Higher taxes
  • Supply chain disruptions and logistics issues
  • Skilled labour shortages
  • Subdued market due to lower demand from the EU


Persistent business challenges of every kind are apprehended besides the prevailing higher inheritance tax even after the last-minute trade deal with the EU and the resumption of vaccination programs.

Many UK businesses are mulling over relocating their businesses to the UAE fully or partially and this was also confirmed in a survey conducted in the recent past when more than 30% of SMEs expressed their desire for complete relocation or additional facilities setups in the business-friendly and no-tax desert nation.

With UAE’s foreign ownership laws outlined in the country’s 2015 commercial companies law being amended, onshore companies will no longer require 51% of local majority shareholding effectively lowering overhead costs and easier business set up for foreign investors in both mainland and free zones in the country including the most sought after DIFC company formation.

The UAE has always been considered an attractive business destination for UK companies with more than 5,000 British business setups and 120,000 British citizens and expats residing in the country. The UAE also provides powerful business solutions exclusively meant for UK citizens.

Apart from mainland and DIFC, other UAE free zones are also becoming vastly tempting to the UK companies due to diversified platforms and easy and low-cost business setups and include DMCC company formation and JAFZA company formation. UAE free zones, besides 100% foreign ownership offer a plethora of other opportunities to the business communities than the onshore ones.

The UK has also proven and very successful track records in the field of finance, technology, FMCG, renewable energy, healthcare and IT which are in great demand in the UAE and other gulf countries further validating business relocations. It is also worth noting that the UAE is the largest export market for the UK in the Middle East region. Additionally, the UK is also the biggest foreign direct investor in the UAE with a great reputation for ethical business conduct.

Migration to the UAE by a UK company is simple and straightforward involving only shifting to a new jurisdiction while maintaining the same legal identity without affecting the customer base and brand identity.

Relocating your business isn’t an easy decision though, no matter how much more cost-efficient it may appear. If you are considering moving your company to another country several other things need to be considered that can ensure you make the most of the opportunities presented including business rules and regulations, cost of removing the existing setup, language barrier, culture and future market challenges.

Even when the Brexit challenges are kept aside, setting up a business establishment in the UAE has always been a compelling proposition due to the world-class infrastructure built over the years with unmatched communication, transportation, education and healthcare facilities besides zero corporate tax environment, 100% repatriation benefits on profits, multiple corporate structures availability and double tax avoidance treaties with 115 countries.

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Eureka Network Opens Global Co-Innovation Opportunities for Local Singaporean Firms
  • Newsletter, Singapore

Eureka Network Opens Global Co-Innovation Opportunities for Local Singaporean Firms

Cross border innovative collaboration has now become possible and easy for local business establishments with company registration in Singapore as the country joins 45 member countries across the globe as a member of the Eureka network. Local Singapore companies will benefit from multiple opportunities by collaborating with foreign partners on innovative value-added projects and grow.

Eureka was launched in 1985 as an Intergovernmental network to facilitate and support real-world market-based R&D projects propelled by innovative technologies from academic institutions, industries and research centres. There are more than 45 member states in Eureka presently including the European Union represented by European Commission, South Korea as a partner country and four associated states namely Singapore, Canada, Chile and South Africa. The other members are from different countries from Europe, North America, Asia and Africa representing almost all the major continents.

Singapore embraced the Eureka network concept, extending its support and officially joining this network of international cooperation in research and development as an associate country on Tuesday, May 18 2021.

Partner countries working as a consortium on an R&D project must focus either on a new product or a service or a new process with a maximum of 3 years duration. No individual country or organisation is allowed to claim more than 70% of the total cost of a project. For a Singapore local company, it must meet the eligibility criteria of Enterprise Development Grant (EDG) before applying.

The agreement was signed by Trade and Industry Minister Gan Kim Yong and Austrian minister for digital and economic affairs Dr Margarete Schrambock at the Global Innovation Summit 2021 convened virtually.

As per this agreement, Enterprise Singapore (ESG) will support the facilitation and funding of joint innovation projects between entities from Singapore and other Eureka member countries and explore further partnerships within the network.

Singapore’s association with the Eureka network will enable local firms greater access to other markets by participating in joint innovation projects and by exploring various initiatives including

  • Eurostars calls given twice a year for joint innovation projects between entities from 36 member countries
  • Eureka Clusters, Thematic calls announced by European industries under Eureka which are normally long term and strategically significant
  • Eureka Network Projects Programme, a flexible vehicle that allows Eureka member countries to build a country specific product, process or service theme as short term projects


Before joining the network officially, ESG worked with Eureka on three co-innovation calls, through which more than 40 Singapore firms worked on joint innovation projects with overseas enterprises from more than 20 countries.

– The first Eureka Globalstars-Singapore call was introduced in 2019 and there were seven Eureka countries including Belgium, Czech Republic, Denmark, Netherlands, Spain, Turkey and the UK. This call received 36 joint applications along with 17 projects across the medtech and advanced manufacturing sectors chosen for funding.

– In 2020, the second Eureka Globalstars-Singapore call was even bigger and included 14 participating countries e.g. Austria, Belgium (Flanders), Canada, Estonia, Hungary, the Netherlands, Poland, South Africa, South Korea, Spain, Switzerland, Turkey, Ukraine and the UK from the Eureka network besides Singapore. It received the highest joint applications to date among all the Eureka Globalstars calls, 84 numbers in total. More than 20 new projects across the transport and logistics, medtech and space tech sectors were selected for granting funds.

–  Singapore was among the 16 countries that participated in the first Eureka Clusters Artificial Intelligence (AI) Call last year. Two projects involving Singapore companies were funded.

EverComm, an energy start-up, was one of the firms that received funding from the second Eureka Globalstars-Singapore call last year with the partnership of British tech firm Ionate to develop a platform for equipment performance optimization and now looking for opportunities in Taiwan and Thailand as well.

Artificial intelligence cluster call in 2020 also witnessed two projects involving local firms getting selected for grants.

Enterprise Singapore’s director of global innovation network Jonathan Lim commented, “Even amid the challenging conditions of a Covid-19 environment, Singapore companies actively participated in these co-innovation calls. This shows their keen interest to engage in research and innovation to develop stronger offerings, as well as their desire to capture new overseas opportunities. We are excited to become an Associate Country of the Eureka network as this provides the opportunity for Singapore companies to participate in all Eureka initiatives and tap into the know-how of entities from over 45 countries. We also welcome Eureka member countries to work with us, and leverage Singapore as a launchpad to access the growth opportunities in Southeast Asia.”

Earlier, Singapore local companies had to partner with a minimum of two other entities represented by two Eureka member countries as an Associate member. However, Singapore companies can participate on a one to one basis.

To benefit from the enormous opportunities presented to the investors by Singapore, it is advised that foreign investors seek support from a professional and credible local firm and find out how to start a business in Singapore as a foreigner and comply with ESG and EDG eligibility requirements.

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Six Accounting Tasks that We Can Quickly Automate for Time Saving
  • Newsletter

Six Accounting Tasks that We Can Quickly Automate for Time Saving

Now it is time to reinvent accounting and get rid of some repetitive manual accounting processes. Many accounting and financial operations tasks can be readily automated resulting in smoother time savings, smoother operation and increased profitability.

Several accounting tasks have already transformed by enabling them to be automated from manual.

Different tools are in use to automate different accounting tasks though all are designed to improve efficiency by reducing repetitive manual work. As manual work is lessened, the accountants can free themselves from manual data entry and bookkeeping and devote their time to providing value-added advice on corporate taxation and tax incentives.

Here are six accounting tasks that you can immediately consider automating for time-saving with some basic understanding of automating accounting processes.

1. Bookkeeping

The most time consuming and repetitive task in accounting is undoubtedly data entry and perhaps the scariest amongst accountants during monthly and yearly closing time. Calculating returns and taxes are all about huge amounts of data and take hours and days for accountants to make manual entries and calculations with the associated risk of incorrect data entry inadvertently.

Data analytics software available in the market can save hours wasted on data entry with mostly 100% accuracy. Choose a software that can easily integrate into existing systems and tools including spreadsheets and CSV files enabling you to carry out calculations from multiple sources and secure it at a single location.

2. Invoicing

The process of sending and receiving invoices can also be easily automated with many benefits derived.

If you go for software designed for cloud accounting for small businesses that integrate invoicing software, you can create and edit invoices easily for emailing. Besides, the software will monitor if invoices have been paid or not and send automatic reminders making the process of invoicing faster, easier and more accurate. As data recognition and data upload are automatic, there is no need for manual data entry.

3. Tax Filing

For tax filing, accountants usually send clients a tax form for filling out tax details. Clients then take a printout of the tax form, fill and scan and then mail the filled-in form in a PDF format involving many embarrassing manual steps. Once the information reaches, the info is manually checked by the accountant for storing in a shared file.

We can easily avoid this manual and time-consuming task by replacing it with web forms and collecting information electronically. Templates from web forms can help you customize client information and allow clients to attach digital files that can be securely stored on an online platform. Easy integration with your emailing system is also possible with a web form software that can keep you posted on client’s tax information submission.

4. Expense Reporting

For many companies, much has changed over the last decade and a half about expense reporting for accountants. Previously these reports used to be handwritten or printed-out spreadsheets with receipts attached and submitted manually.

However, it is now possible for employees to automatically fill out and route expense reports without attaching supporting receipts as software is generally integrated with the payment platforms able to capture and store data.

Not only the accounting department but a great deal of administrative work is also taken away from the busy schedule of HRD.

5. Signature Authentication

Many accountants still demand tax paying clients to print the form, put signatures, scan and email it back to the accountants causing a huge discomfort and time wastage for the clients as they don’t have ready access to a printer or scanner most of the time.

Making use of eSignature technology in place of physical signatures with a pen and paper can be a much convenient and easy way to obtain customer signatures only needing the software provider to be compliant with the regulatory authority for eSignature.

6. Payroll services

Payroll can be time-consuming and a real nightmare for accounting professionals. Automated payroll software can take the burden off their shoulders by automatically calculating wages and applicable deductions such as TDS, PF, Gratuity, Bonus etc.

Even individual employees can securely access their payslips online, submit their attendance online and receive salary through electronic payments.

Automating accounting tasks will provide several advantages to the accounting and finance professionals however it also demands a careful selection with some advanced planning and research. Once the platform and software integrations are perfect, it would pave the way for a smooth accounting journey.

It is advised that you speak to somebody who is a qualified professional and has hands-on experience in accounting practice and automation. The best is to outsource accounting and finance services that can help you with necessary training besides an on-site demonstration.

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Chinese Corporates Eye on Singapore and Malaysia amongst Asean for Business Growth and Expansion
  • Newsletter, Singapore

Chinese Corporates Eye on Singapore and Malaysia amongst Asean for Business Growth and Expansion

The Chinese corporates are eyeing the Association of Southeast Asian Nations (ASEAN) with increasing focus on Singapore and Malaysia as these two countries are all set to witness significant growth and opportunities in business and investment over the next year.

Approximately 43 per cent of companies surveyed echoed their confidence in Singapore company incorporation and company registration in Malaysia as leaders of future growth and expansion in the emerging ASEAN economy and a majority of Chinese corporates hopeful on ASEAN economic potential expect to see their businesses grow in near future.

The survey was conducted for the bank’s Borderless Business highlighting the China-Asean Corridor report and exploring prospects and opportunities for the future cross-border growth between both regions.

All the 43 China-based companies surveyed during last April considered Singapore and Malaysia as the most potential markets for growth and expansion opportunities of their businesses in the ASEAN.

While the highest number of China-based companies to the tune of 65% voted in favour of Malaysia, 60% of participants from the surveyed companies emphasized their future business focus on expanding in Singapore for increased market share by promoting sales and production opportunities. Thailand too figured in the list with 53% China-based companies expressing faith in the ability of this emerging ASEAN economy to do well during the post-covid period.

Singapore is being considered by the China-based corporations as a major regional procurement hub and 44% of these companies expressed their willingness to build a regional Research and Development (R&D) centre, an innovation centre basically in the country, as these companies plan to expand across ASEAN.

The survey observed that 56% of the companies have been focusing on the ever-increasing vast consumer market access as the most critical success factor while some 53% of similar companies considered government support and business incentives by the ASEAN as critical for business viability, stability and long term sustainability.

51% of the company participants mentioned that the availability of a reliable supplier base in the ASEAN is also one of the most significant rationales behind their business expansion in the ASEAN region while 47% of the companies were found in agreement with the fact that the presence of the Free Trade Agreements (FTA) network in the ASEAN is crucial for the world market access.

88% of companies noted that the Regional Comprehensive Economic Partnership (RCEP) in this region is one main reason for attracting foreign investments and even the China-based companies are seriously considering increasing their investments in the region by a minimum of 25% in the coming three to five years.

Chinese business houses were also seen to be aware of the risks and challenges within the ASEAN with 70% stressing upon the Covid-19 pandemic or other health issues. A good number of respondents, some 67%, considered ASEAN’s geopolitical instability and trade conflicts as business risks when another 67% of corporates raised concerns over the muted revival of the economies in this region along with a decrease in consumer spending.

One of the most important challenges cited was the way the Chinese business entities would align their business model to the existing ASEAN business environment and trade practices while initiating new business ventures in this region over the next six months and a year.

The survey revealed 56% of corporates strongly evaluating other business risks and challenges such as regional regulatory aspects, monetary transactions and payment methods and infrastructure besides relationship building with prospective suppliers. 56% of respondents have also been found strategizing on getting along with the regional supply chain and logistics.

During this survey, a sizable number of respondents comprising 58% of the China-based companies were found interested in executing digital transformation programmes and another 47% were seen looking for long term growth and sustainability driven by environmental, social and governmental (ESG) initiatives. Another 44% of the surveyed companies have been found eager in exploring new partnerships and joint ventures to enhance market share during business engagement in this ASEAN region.

Chinese companies have been seen seriously considering strategic support for business growth and expansion in the ASEAN. Approximately 60% of these Chinese companies were found desirable for suitable banking partners with a strong repute of finance and cash management potential and 56% of these companies also wanted to foray into trade financing services widely. Fundraising and corporate financing services projects are also being eyed upon by 56% of the corporates.

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The UAE Israel Conclude Double Taxation Avoidance Agreement (DTAA)
  • Newsletter, U.A.E

The UAE Israel Conclude Double Taxation Avoidance Agreement (DTAA)

To promote bilateral trade and investment between the two countries, the UAE and Israel entered into a Double Taxation Avoidance Agreement (DTAA) on Monday 31st May 2021.

It was first tweeted by the Israeli Finance Minister Israel Katz who described the move as a boost to develop business and investment between the two nations after signing the Abraham peace accord last year.

“The agreement will accelerate the development of economic relations and contribute to prosperity in both countries,” Katz said in his tweet.

Katz noted in a briefing that the treaty is primarily based on the OECD model and it will provide certainty and favourable conditions for business activity and will also strengthen the economic ties with the UAE.

The treaty is subject to the parliament and cabinet approval of Israel and is expected to come into force on 1st January 2022. “Israel is a party to 58 double taxation treaties,” Israel’s Finance Ministry remarked.

DTAA being a bilateral agreement, the two countries involved formulate and establish rules that apply to income and assets of the two countries, the Israeli Finance Ministry highlighted on its website.

The UAE has so far concluded 115 double taxation agreements with its trade partners to help avoid similar tax imposition by two countries on the same taxpayer, and for facilitating the exchange of goods, services and capital. It was in 2020 October that the UAE officially announced that it had reached a deal with Israel on avoiding double taxation.

After the peace accord, several commercial agreements have been reached between the two countries and almost USD 280 million in trade treaties were signed within a couple of months. As per reports, the diplomatic and trade normalization between the two countries could give rise to more than USD 4 billion bilateral trade between the two countries.

The UAE also made a revelation saying that it was planning for a USD 10 billion investment fund for the strategic sectors in Israel besides the USD 3 billion joint investment fund established by the UAE, the US and Israel together after the accord.

Finance and economy experts welcomed the tax treaty in anticipation that it would enhance bilateral trade and investment relations in future and promote new company formation in Dubai by Israeli investors.

“Under the agreement, tax deductions, dividends and royalties are capped. The double taxation treaty would make the two countries more competitive and promote economic activity. It will make the two nations more attractive to international investors,” an expert remarked.

As per the experts, the tax treaties between the countries would help promote foreign investment flow between the two countries as investors only invest money after satisfactory earnings after deductible tax playing the most crucial role in foreign investments.

“Having a treaty in place, UAE entities will be able to repatriate returns on investment with a reduced rate of tax from Israel in form of dividend, interest or royalties whereas Israeli businesses will continue to enjoy tax exemptions on their investment in the UAE. This treaty not only will boost investment into the UAE from Israel but also from the global players having investments in Israel to route investment into UAE,” an Industry expert commented.

“We have a huge surge in investment into real estate from Israel whereas UAE outbound investment goes into Israel’s technology and defence sectors. It is a great initiative towards business harmonisation between both the countries, a high-level industry professional remarked.

“In countries that have worldwide taxation, a non-resident citizen who is working in UAE could be liable to pay tax on their income in their home country as well as in the country in which it is earned. UAE being part of an international tax framework, it provides important protection and benefits for UAE companies and expatriates,” emphasized an expert.

To avoid the same income being taxed twice, the UAE has signed double taxation treaties with many countries, as the Government has understood it as unfair and potentially discouraging for international trade and business that could adversely impact future business setup in Dubai and other emirates.

The DTAA however could be tricky and companies and individuals are advised to seek professional help from a reputed and professional accounting firm.

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The Growing Trend of Foundations in the UAE
  • Newsletter, U.A.E

The Growing Trend of Foundations in the UAE

What is a Foundation?

Foundation, a less familiar concept than trust is defined as a hybrid of trust and a company resembling a company in which it is a body corporate without any shareholder. It has a separate legal personality with its property like a company. A foundation is governed by a council following its charter and regulations (its constitutional documents) in much the same way that a company is managed by its board of directors following its constitutional documents.

Foundations have no beneficial owners and are, therefore ’ownerless’ structures even where the foundation property is held for the benefit of beneficiaries.


How is a Foundation formed in the UAE?

A Foundation is constituted by the below-mentioned components
  • A Founder, at least one founder as an individual or legal entity.
  • A Council constituted by the Founder with a minimum of two members to manage the foundation.
  • A Guardian as an individual or legal entity appointed by the Founder for mentoring.
  • An appointed Registered Agent Registered Agent only compulsory in RAK ICC with a necessary license from the regulatory authorities.
  • Beneficiaries appointed by the Founder as an individual, group or entity authorized to receive and make payments.
  • A Registered Office as the address of the Registered Agent.
 

What are the different types of Foundations?

Every Foundation has different government regulations and varies depending on the purpose of creating such an entity and include
  • Exclusively charitable.
  • Not charitable.
  • Benefits persons identified in its Charter or By-Laws.
  • A combination of the above three.
 

What are the reasons for the popularity of Foundations in the UAE?

A variety of foundation structures are being implemented to hold trading companies, real estate and liquid investments as investors are pouring in for business setup in Dubai and other six emirates. It is becoming a popular vehicle and offering many benefits including
  • Asset protection as assets are not readily accessible to creditors, governments or other family members.
  • Privacy as the beneficiary details are kept private ensuring the reduced risk of claims and legal actions from third parties against the founders and their families.
  • The flexibility of legal and beneficial ownership enabling families intergenerational legacy planning and wealth protection in different international jurisdictions.
  • Efficient succession planning based on the wishes of the founder under the terms of the foundation with no scope for probates.
  • Better governance of the family in line with a professionally managed corporate governance.
  • Facilitates charities depending on the wishes of the founder.
  • Maintenance of legacy.
 

Where in UAE are the Foundations flourishing?

Foundations have become a popular option for regional wealth structuring and succession planning in the UAE and a growing number of foundations are now available across UAE and are mostly similar with a few exceptions.
  • The Dubai International Financial Center (DIFC), under the governance of the Foundations Law, DIFC Law No. 3 of 2018.
  • The Abu Dhabi Global Market ( ADGM) under the Foundations Regulations 2017 and
  • The RAK International Corporate Centre (RAK ICC) following the RAK ICC Foundations Regulations 2019.

Initially foundations were formed in the DIFC and then followed by ADGM and RAK ICC.

 

How the Foundations in DIFC, ADGM and RAKICC differ?

 
DIFC

The DIFC is the sole regime that allows DIFC company formation to get transformed into a Foundation.

DIFC Foundations are allowed exclusively for charitable purposes where ADGM may not allow unless a Guardian is appointed mandatorily.

A DIFC Foundation can issue securities representing the value of the contributed assets from the contributor and their entitlement to the same and allows user arbitration for dispute resolution. USD 200 is required for registration and yearly renewal of foundations.

 

ADGM

While the identity of the Council Members is available in the DIFC, it is kept confidential from the public in the ADGM.

It is the only regime where foundations are not needed to file and audit accounts unless demanded by the Registrar. Records of accounts however must be prepared and maintained as in other regimes.

ADGM Foundations are not allowed only for charity without additional purposes. USD 200 is applicable as the fee towards registration and renewal every year.

 

RAK ICC

RAK ICC does not maintain a publicly accessible register of information about a Foundation.

Information related to the Foundation benefits from the applicable privacy laws in the UAE and will not be disclosed unless required by the relevant authorities.

Within RAK ICC however, a Registered agent is a mandatory requirement whereas with DIFC and ADGM it is only optional.

Fees: Registration Fee / Annual Renewal (fee as at 2021): AED 750 (approximately USD 200).


What is the essence of a Foundation?

A Foundation is an establishment that can consolidate property and assets under one legal entity and are normally used for the following purposes
  • Private wealth management and preservation.
  • Tax planning.
  • Asset and creditor protection.
  • Succession planning.
  • Financial planning.
 
 

Foundations are also used for charitable purposes

 

Foundations often need legal help for effective wealth preservation through appropriate structuring which can ensure safe and undisputed transfer of assets to the beneficiaries and successors. IMC with a team of legal professionals can render requisite support and help you achieve your goals in this regard.

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UAE Issues Amendments in VAT Executive Regulations Reducing Penalties for Tax Non-compliance
  • Newsletter, U.A.E

UAE Issues Amendments in VAT Executive Regulations Reducing Penalties for Tax Non-compliance

Cabinet Decision No. 49 of 2021 has announced amendments of certain provisions of the old cabinet decision No. 40 of 2017 regulating the Administrative Penalties for Violation of Tax Laws in the UAE. This has also been confirmed by the Federal Tax Authority (FTA) on 29th May 2021.

Before this newly issued cabinet decision 49 of 2021, heavy penalties often used to be imposed on taxpayers for non-compliance with the VAT and excise rules and regulations. Though the imposition of the high penalty was originally aimed for increased tax compliance, it often put the taxpayers in difficult and stressful situations.

The amendments brought in are designed to help tax registrants and support them in fulfilling their tax obligations. It is hoped that the relaxation of penalties passed by the government should enhance the competitiveness of UAE for conducting business.

“The new amendment will become effective on 28th June 2021 and will reduce many administrative penalties imposed for violating tax laws. This comes as part of the wise leadership’s directives to implement the tax system according to the best standards that ensure further growth for the national economy and help achieve transparency and economic momentum, providing an ideal and resilient tax legislative environment that encourages self-compliance and keeps pace with change through constant issuance of decisions in accordance with phased requirements,” highlighted Khalid Ali Al-Bustani, the Director-General of the FTA in a press release on Saturday.

The Director-General wanted the tax registrants to avail the benefits announced in the new amendment. The newly passed decision offers additional reliefs to the tax-paying business sectors and shall support them in meeting their tax obligations with ease effectively contributing towards the enhancement of UAE’s economic growth.

Al-Bustani also stated that 16 different types of administrative penalties under the old cabinet decision of 2017 have either been reduced or the earlier method of calculating penalties amended (TAXP001). He also explained that the reductions are primarily enacted for tax penalties including administrative violations on Tax Procedures, Federal Decree-Law on Excise Tax, and Federal Decree-Law on Value Added Tax (VAT).


Al-Bustani added

“The amendment includes fundamental amendments that provide more facilities to help taxable persons achieve self-compliance and encourage the speeding up of voluntary declaration. Under these amendments, a late payment penalty will not be imposed on voluntary disclosures if payment is settled within 20 business days of submitting the voluntary disclosure, and the sooner the taxable person declares and pays due tax according to periods specified by the decision, the lower the value of the penalties will be. This constitutes an incentive and a good opportunity for tax registrants who have errors in declarations, tax assessments, or requests for tax refunds, to speed up the implementation of voluntary declaration procedures and avoid increasing penalties.”

In a press briefing, FTA noted that the tax authority shall redetermine the administrative penalties (TAXP002) enforced on the taxpayers before the final rollout of the amendment scheduled on 28th June 2021 and will include the reassessment of the penalties which have not been fully paid, to be equal to 30% of the total of such unpaid penalties. It was emphasized that to take advantage of such a scheme, the taxpayers must settle their payable tax in full by no later than December 31st, 2021, and 30% of the total administrative penalties due and unpaid by 27th June 2021, by no later than December 31st, 2021. The detailed implementation procedure shall however be decided on a later date, the FTA remarked.

Two new detailed clarifications on this amendment have already been published by the FTA within the framework of the ‘public clarification service’ provided on the FTA’s official website and as a part of their ongoing awareness program.

The public clarifications hosted on FTA’s website are meant for making the existing and potential taxpayers more acquainted with tax aspects with easier and simpler explanations and help them put into effect the UAE’s tax principles effectively.

01

The first public clarification (TAXP001) includes some basic amendments made to the table of administrative violations and penalties related to the application of Federal Law on Tax Procedures (Cabinet decision No. 51 2021) for ensuring the right interpretation of these amended penalties and with added certainty.

02

The second public clarification (TAXP001) specifies the methods and procedures used for re-determining some of the administrative penalties imposed in the old cabinet decision that would come in force before the effective due date of the new amendment on 28th June 2021.

The Cabinet Decision No. 49 of 2021 however presents both opportunities and threats to businesses falling under VAT executive regulations.

Though an early voluntary disclosure of any tax fallout is encouraged with the enactment of nominal penalties, it would be quite a large amount for cases where non-compliance is not detected timely and not disclosed. It becomes of paramount importance to critically review records and audit findings for identification of non-compliance in VAT payment and preferably get their systems re-audited by an experienced and qualified third party.

It is also important for companies to identify the applicability of disclosure by reviewing VAT treatments in previous years.

It shall also be equally necessary to identify any unpaid tax penalties if the companies can benefit from the tax reliefs announced.


How IMC can help you?

IMC with its many years of extensive and proven experience in tax compliance, management and planning in the GCC region and especially in the UAE can support companies in identifying all taxation and planning aspects of businesses in light of the recent amendments.

Once a business is aware of any tax errors, it will need to consider which penalties may be applicable (e.g. penalties for the errors, late payment penalties, etc.) and the steps that should be taken to minimize the impact of the penalties.

The new amendments in VAT executive regulations are welcome and expected to address the requirement clarifications of the business community before rollout.

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Dubai-business Outlook for Startups and SMEs during Covid Pandemic
  • Newsletter, U.A.E

Dubai-business Outlook for Startups and SMEs during Covid Pandemic

Dubai is one of the most open economies in the world with a strategic location between Asia, Africa, and Europe. Even at a time when the pandemic gripped the world in 2020, Dubai witnessed USD 3.26 billion FDI  during the first half of 2020 and ranked fourth globally with several new business setups in Dubai.

To fuel entrepreneurship and grow the country’s SME sector, a special position of Minister of State for Entrepreneurship and SMEs was created during the July 2020 cabinet reshuffle. The Dubai government also initiated several support services to enhance the non-oil private sector’s contribution to economic growth and in line with the Dubai Vision 2021.

The Dubai government is leading from the front to mitigate the adverse effects of the covid pandemic and regulatory authorities are relentlessly striving to develop and ease regulatory and legal frameworks for Dubai company incorporation besides the identification of alternative funding routes and providing additional government support.

“We find a paradigm shift in the thought process of investors. The freedom to do business and safety are the key drivers of growth in the SME sector. The paperless e-governance added to the transparency and precision in administrative matters. Over the past decade, the UAE has evolved as the most sought-after destination for investors to set up their establishment so that they can cater to clients in MENA, and South Asia,” highlighted Syam Panayickal Prabhu, Founder and Managing Director, Aurion.

Dubai’s 50 free zones reverberate at the core of its startup ecosystem comprising some of the world’s leading free zones including Dubai Silicon Oasis (DSOA) or IFZA, Dubai International Financial Centre (DIFC), Jebel Ali Free Zone (JAFZA), and Dubai Multi Commodities Centre (DMCC) and offer numerous advantages to new businesses including 100% foreign ownership, zero corporate tax, nil import-export duties, 100 percent repatriation of revenues and profits, minimum documentation requirements and easier startup, easy recruitment and visa processes.

Saud Salim Al Mazrouei, Director, Hamriyah Free Zone Authority added, “Free zones are a driving force in the growth of the economy in the UAE. They help stimulate economic development, create jobs, boost and diversify exports, and expedite the industrialization process of an economy at lower costs for the government. Incidents like the Covid-19 pandemic with a sudden drop in oil price can serve as a catalyst for long-term sustainable economic reform.

There are also 6 business accelerators and 5 incubators in Dubai to support startups and SMEs including DIFC’s FinTech Hive and Dtec at DSOA providing support through startup incubation and venture capital funding. The Dubai Future Accelerators program facilitates partnerships between public and private sector organizations and startups in Dubai.

Dubai has long been eyeing a leading world position in innovation and technology, and financial technology acronymed as FinTech playing the most pivotal role in accelerating the business growth of Dubai startups during the covid pandemic. DIFC FinTech Hive is offering accelerator programs for FinTech startups with a total of USD 100 million funding support that has already benefited four companies.   

Most important for the growth of the SMEs and startups is the availability of funds and Dubai is continuing its efforts to look for additional and alternative funding for addressing economic diversification strategy. Venture capital and crowdfunding are being encouraged by the Dubai government for sustaining startups and SMEs even with lower assets and proven and credible track records. As per a survey conducted by Dubai SMEs, almost 9 percent of SMEs received additional funding through the venture capital route.

Dubai also offers abundant diverse and talented human capital and secured top global ranking in terms of employee training and workforce motivation.

Though the IMF and World Bank have lowered the economic recovery forecast for all major economies, Dubai expects a fast V-shaped recovery in 2021 facilitated by Dubai Expo 2020 which promises to add USD 33.4 billion to the UAE economy by 2031.

As the consequences of the Covid-19 pandemic becoming severe, the Dubai government has started firing its arsenals on all cylinders to boost the economic diversification program and focusing on some strategic sectors including commercial trade, tourism, renewable energy, manufacturing, media, financial services, aviation and healthcare, and all SMEs and startups in general.

The increased economic contribution of private sectors to the national GDP is at the top of Dubai’s agenda as per the UAE’s Vision 2021 which was 70% some two years ago and is now expected to reach 80 percent by 2021.

In Dubai, almost 99 percent of companies from the private sector belong to the SME and Startup category and are projected to contribute nearly 46 percent of Dubai’s GDP.

“As always, the UAE is doing a fantastic job at attracting international interest on all levels of business and lifestyle, and therefore, it remains a top-ranked international destination to do business and to live”, commented Karl Hougaard, Founder and Managing Partner, Trade License Zone in a recent interview.

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Saudi Arabia Surpasses SR 2 Trillion FDI Amidst Covid Pandemic
  • Newsletter, Saudi Arabia

Saudi Arabia Surpasses SR 2 Trillion FDI Amidst Covid Pandemic

Saudi Central Bank (SAMA) data reveals that 2020 witnessed the highest inflow of foreign investments in the Kingdom of Saudi Arabia (KSA) surpassing SR 2 trillion (USD 0.53 trillion) and rising 9 per cent YOY despite global economic turmoil caused by covid 19 pandemics. A USD 46.21 billion as new investment from overseas was generated by the KSA that promoted new foreign company formation in Saudi Arabia.

The whooping FDI was termed as significant by Fadhel Al- Buainain, a member of Shoura Council and positioned Saudi Arabia as one of the most attractive destinations for foreign investors because of diversified government investment programs and supportive legislative processes of the country’s investment ecosystem.

Al-Buainain also a director of Saudi Financial Association highlighted that SR173.3 billion investment at a time of global travel restrictions reinforced the fact that KSA effectively handled the challenges caused by the pandemic and successfully addressed the issue of the country’s reserve.

“Certainly, foreign capital is looking for opportunities in emerging markets . . . especially the Saudi market, which provides investment opportunities, safety and rewarding returns, in addition to important partnerships in major global pioneering projects,” Al-Buainain noted.

Partnerships were led by the sovereign wealth fund and the Public Investment Fund and opportunities were presented as a part of the Vision 2030 program, he added.

The increased FDI inflow was attributed to “the significant improvement in the investment environment in the Kingdom” and the up gradation of investment laws, remarked Talat Zaki Hafiz, an economist and financial analyst by profession. He also highlighted big government projects e.g. The Line and renewable energy projects as additional attractions for global investors.

Hafiz said, “The announcement of the SR27 trillions ($7 trillion) that will be spent by the government over the coming 10 years has attracted the attention of foreign investors.”

He also added, “I believe the decision of the government to diversify its economy away from oil has created huge investment opportunities to foreign and local investors.”

KSA issued 466 investment licenses to foreign investors for doing business in Saudi Arabia in the fourth quarter of 2020, a 60 per cent increase compared to the previous year and December adding 189 investment licenses. The overall FDI rose by more than 20 per cent during 2020 and increased 80 per cent to touch USD 1.9 billion with the economy growing to pre-pandemic levels. KSA also made remarkable improvement in the World Bank’s ‘ease of doing business ‘ index, advancing 30 points in the global ranking.

Issam Abousleiman, World Bank regional director for GCC said, “Saudi Arabia’s impressive reforms in doing business this year show its commitment to fulfilling the main pillar of its National Vision 2030 — a thriving economy.”

“Easing the business climate for local entrepreneurs to thrive as well as foreign investors to work in the Kingdom shows a forward path to creating more jobs for Saudi youth and women, and creating sustainable, inclusive growth,” he highlighted.

New businesses and startups witnessed the maximum surge with the cost of starting a new business dipping to an all-time low of 5.4 per cent of per capita income compared to 16.7 per cent in other parts of the MENA region.

“One of the most important factors that attracted foreign investors is the issuance of new legislation and amendments in some existing legislation,” noted Ayed Alblaihshi, a municipal investment specialist.

Access to the online construction permit, easy availability of electricity, enhanced access to credit, easy export and import laws including more transparent insolvency rules are some of the reforms that aided the country in achieving this feat, the World Bank reported.

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