Tax accounting considerations for Corporate Tax in the UAE and BEPS Pillar Two

8 December 2022 - The tax landscape is changing more than ever, especially in the Middle East (ME) region. To highlight two key topics, we refer to the United Arab Emirates (UAE) announcing the introduction of Corporate Tax (CT) from fiscal year 2024 (FY24), including Transfer Pricing rules. In this connection, the UAE Ministry of Finance (MoF) released FAQs in January 2022, and a Public Consultation in April 2022 with the expectation that the CT law will be published later this year. 

And secondly, we refer to the OECD announcing BEPS Pillar Two Global Minimum Tax (BEPS), which will establish a global minimum tax regime applying to both public and privately held multinational groups, with a consolidated annual revenue over €750m. This will impact organizations in the ME with a global presence and is expected to be implemented in FY24. As the BEPS minimum tax rate is currently set at 15%, the impact could be more significant for businesses, due to the headline CT rates in the region being below the minimum 15% (e.g., UAE, 0% in Free Zones (subject to specific requirements) or 9% in the Mainland, and Qatar 10%). This potentially will result in additional taxes (so called ‘top up tax’).

Both CT and BEPS will significantly increase the compliance and reporting burden that the tax function will need to consider and incorporate accordingly. A robust tax accounting process will be critical to facilitate this, to ensure accurate and reliable data is shared (internally or externally) for decision making purposes.

Challenges for the tax function

The latest developments will require an in-depth knowledge of tax accounting and technical expertise to comply with all the regulations and reporting in FY24. For example, the BEPS initiative has roughly 180 data points that will need to be assessed and collected to calculate the effective tax rate (per jurisdiction).

We have highlighted some key considerations that the Head of Tax and CFOs should be discussing with stakeholders, which are as follows: 

  • Is the current level of data (flow) and quality (integrity) fit for purpose to accommodate the reporting requirements? 
  • What changes to the tax function will be required to facilitate the tax accounting process going forward (different models to be considered - outsourcing, co-sourcing, etc.)?
  • Who will be accountable for the accounting of income taxes (tax or finance team)?
  • How is stakeholder management being addressed to ensure awareness and impact on the organization? 

The above questions are some key discussion points to help understand the current maturity level of the tax function and to develop a road map to be day one ready for reporting and compliance purposes. 

Next steps
  • Ensure that tax accounting (process) is appropriately covered during the impact assessments to support and understand the current and desired tax function. This will support in preparing a roadmap to provide clear milestones and objectives to be ready from day one. Important elements should be considered in respect to the tax provisioning process to facilitate the financial audit (including respective disclosure requirements under IAS 12), including management reporting on current and deferred tax for budgeting and forecasting. 
  • Internal and external stakeholder management should be addressed to create awareness and manage expectations (short and long term). This will support in decision making, ensure that a smooth transition will take place upon full implementation and that all relevant implications have been captured in time to mitigate any risks. 
  • The financial statements do not require any disclosures for laws that are not substantively enacted under the International Financial Reporting Standards. However, there is an overarching requirement to assess the necessity of information relevant to the user of the financial statements to understand the impact of certain events that would impact the future financial position and performance. We recommend assessing the relevance and impact (qualitative and/or quantitative) for disclosures at year-end FY22 and FY23 in respect to both CT and BEPS.
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