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The Institute of Chartered Accountants in England and Wales (ICAEW) recently organized a panel discussion on corporate tax, with experts stressing that companies are adjusting their legal and accounting structures before the UAE implements its new corporate tax system, which comes into effect next June. , family businesses may need to reconsider. Consider its traditional methods of managing and running its business. Transfer pricing, an essential part of any corporate tax policy, will see increased scrutiny of companies providing financial support to each other, a practice typically associated with family businesses.
The UAE’s implementation of a 9% corporate tax is in line with the OECD’s comprehensive Pillar II framework and recent global minimum corporate tax requirements, which subject large multinationals to a minimum tax rate of 15%. Within this framework, members of the Organization for Economic Co-operation and Development, including the UAE, are obliged to include transfer pricing regulations to prevent multinational companies from using tax loopholes.
This summer, the UAE government will announce its corporate tax policy framework, which will include a transfer pricing regime.
ICAEW has assembled a panel of experts to provide an in-depth look at the new corporate tax regime and how business can prepare for the changes.
Expert Speakers: Estina Delevingne, Director, Transfer Pricing, KPMG and Chris Siring, Associate Director, Corporate Tax and International Business, KPMG and Ankit Mathur, Corporate Tax and International Business, KPMG.
In line with the OECD Transfer Pricing Policy Framework, the UAE will introduce its own transfer pricing system, which will come into effect as part of its corporate tax system. Transfer pricing is a tax planning strategy in which companies operating in different tax jurisdictions pay higher fees to a subsidiary or related company in another lower tax jurisdiction, subject to lower tax rates, to appear less profitable.
Speakers explained that while actual transactions can be easily recorded and tracked against normal market prices, intangible transactions such as loans are difficult to identify. Consequently, the UAE’s transfer pricing policy will include the principle of “neutral pricing” for all transactions. This means that business transactions between related parties must be on the same terms as those between unrelated parties and must be documented within approved reports.
Family businesses, which are highly significant in the region and comprise the majority of private sector firms, were highlighted as a group that would need to adapt some of their practices to comply with the transfer pricing system. Traditionally, regional family businesses are interconnected and work to support each other, improving their relationships within the community to foster a favorable business environment. Even if family businesses do not use these strategies under the new corporate tax system, experts argue that giving preferential treatment to a related company could be interpreted as an attempt to reduce the tax base or shift taxable profits to a portion. Low tax rates..
ICAEW International Managing Director Mark Billington says: “As part of its corporate tax system, the UAE should establish a transfer pricing policy. Implementation of this system is essential to create a fair and transparent business environment and prevent exploitation through tax planning techniques. Interestingly, free zone companies are expected to adhere to the “neutral pricing” principle even if they are not taxed.
Overall, the corporate tax system is a positive step for the UAE. While there will certainly be challenges in implementation, with the UAE having 40 free zones and family businesses playing an important role in the market, the surrounding issues show that the policy’s thoughtful application is leading its implementation. All stakeholders are committed to creating a business-friendly environment that benefits the people.
Speakers also discussed the foundation’s desire to form a tax group, so that subsidiaries can be treated as a single taxable entity. However, the UAE government insisted that regional companies with little experience in corporate tax systems maintain standard accounting practices to avoid compliance issues.
While corporate tax reshapes business operations from a legal and accounting perspective, its implementation is believed to be used to support the business environment. These include continuing the tax exemptions granted to free zone companies and allowing the formation of tax groups.
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