The world of international tax is changing rapidly, mainly because of Organisation for Economic Cooperation and Development (OECD) initiatives to address base erosion and profit shifting.
The change is evident from the fact that the United Arab Emirates (UAE) is about to introduce a corporate tax for the first time in its history.
The tax rate is said to be 9% and will be effective from July next year.
It coincides with the introduction of the two-pillar solution agreed upon in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Beps). The solution aims to address the tax challenges arising from digitalisation.
The first pillar seeks to shift tax on large digital service providers into the countries in which their sales take place and the second pillar seeks to establish a minimum global tax rate. The effective global rate that has been agreed upon is 15%.
Hugo van Zyl, a cross border tax advisor, says the introduction of the 9% corporate income tax in Dubai aligns the emirate with the OECD’s global tax initiatives.
Dubai has established itself as a commercial hub for international companies, and has lured them with the promise of zero tax.
The multitude of economic free zones will remain tax-free but for the 5% value-added tax (Vat) on companies operating in the zones. The majority of the free zones currently offer a tax-free holiday of 50 years.
Most South African businesses have opted to set up in the free zones instead of operating in mainland Dubai, mainly because the latter required them to link up with a UAE business partner as fellow shareholder.
More recently companies have been going ‘onshore’, meaning they are doing business on mainland Dubai, as the Emirati shareholder requirement was removed. These companies will be affected by the new tax.
SA has a double tax agreement with the UAE, and companies that will fall into the Dubai tax net will be able to claim a credit on the tax they pay in SA.
“We can expect some aggressive tax collections from Sars [the South African Revenue Service] because the more tax a company pays in another jurisdiction, the less tax it collects,” says Van Zyl.
Major tax changes
Billy Joubert, senior associate director and transfer pricing and Beps specialist at Deloitte, says the tax world is currently experiencing a “shifting of tectonic plates”.
“That is not understating it. The entire global taxation system is being turned on its head with the Pillar One and Pillar Two concept. It will change the way international tax works.”
Joubert says enabling international conventions are being drafted by the OECD. Countries, including SA, will have to check whether their domestic laws will enable this to happen.
It may require legislative changes, for example to the source principle which is the basis on which SA taxes non-residents. “Sars and National Treasury are facing huge challenges in keeping up with these changes that are busy unfolding in real time,” says Joubert.
SA is traditionally an early adopter of these types of rules. The country was an early adopter of transfer pricing rules and has kept up with the shifts in the filing of country-by-country financial reports to enhance the exchange of information between revenue authorities.
“We have been very much focused on compliance to file and receive these reports until now, but we are going to see [a shift to] the mining of that data, as is globally the case. This will enable targeted audits and risk profiling of companies [by revenue authorities] in the different jurisdictions,” says Joubert.
Exchange of information
Van Zyl adds that transfer pricing has never been an issue in the UAE since SA companies only paid tax in SA. The UAE corporate tax will however change this as the Federal Tax Authority in the UAE and Sars will now compete for the best tax collection, forcing Sars to monitor transfer pricing policies applicable to controlled foreign companies.
If there are intercompany royalty or management fees, transfer pricing rules will be applied to ensure that profits are not shifted away from SA to Dubai (where the rate will be 9% instead of 28%).
Van Zyl also points out that SA companies that are dealing in crypto currencies in mainland Dubai should be aware of changes in the tax world. Many of these companies have been flying under the radar because they did not report their profits and the UAE government did not curtail their digital asset trade.
However, Dubai has recently entered into an international agreement allowing for company financial information to be exchanged.
Companies that have benefitted from a double non-tax position will soon start paying tax in Dubai and SA because of the exchange of financial information between revenue authorities, Van Zyl warns.