Download Aurifer’s reply to the Public Consultation initiated by the UAE Ministry of Finance in regard to the implementation of Corporate Income Tax in the UAE as of June 2023.

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

• The Contractors themselves in Qatar,
• The Contractors, with the possibility of re-exporting the goods,
• The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

• FIFA,
• FIFA’s affiliates,
• Continental or National Football Associations,
• Event broadcasters,
• Suppliers of goods,
• Works contractors and
• Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

 Claiming The Exemptions - Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees.  Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments. 

There may be some interesting questions on the applicability of the Ministerial Decision, including:

• To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
• Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
• Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC - Tax Exemption Regime for the World Cup 

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

• FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
• FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

• Such QFC entities have genuine economic substance in Qatar,
• The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
• An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
• The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
• The sole or main purpose of such QFC entity is not avoidance of tax,
• The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.

Almost 5 years down the line for VAT in the GCC  – what’s next?

As we approach 31 December 2022, the UAE and KSA will be celebrating 5 years of applying VAT. A rollercoaster ride for many in the region, authorities, advisers and in house tax managers.

We wrote in 2017 about the challenges of drafting VAT legislation in the GCC before its implementation (https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=21).

We pondered whether the GCC was potentially going to be far ahead of other jurisdictions because of the Electronic Services System (“ESS”) the GCC VAT Agreement was going to implement, foreseen in article 71 of the Agreement (https://aurifer.tax/news/future-of-vat-in-the-eu/?lid=482&p=22). The GCC however never implemented the ESS. It is therefore missing an important instrument to integrate all GCC members under a single comprehensive regional VAT framework.

After almost 5 years, it’s worth taking a step back and looking at what occurred.

6 countries to implement, only 4 did

The GCC consists of six countries, Saudi Arabia, the UAE, Bahrain, Oman, Kuwait and Qatar. All countries were supposed to introduce VAT in a short span of time. The UAE and KSA did so on 1 January 2018, Bahrain on 1 January 2019, and Oman on 16 April 2021. For Qatar, rumours ebb and flow on an implementation of VAT after the World Cup, but officials are tight lipped. In terms of Kuwait, a new government is not likely to put this on the table – at least, in the near future.

The intention to implement almost simultaneously was taken with the idea of avoiding arbitrage – considering the geographical proximity between the states - and potential issues with fraud.

5% was supposed to be the rate

All 4 countries kicked off with 5% VAT, as it is foreseen in the GCC VAT Agreement as well (article 25). Saudi Arabia was the first one to hike the rate to 15% on 1 July 2020. Bahrain increased to 10% on 1 January 2022.

The increases were implemented for the same reason, as the tax was implemented for in the first place, i.e. fiscal stability. The implementation came off the back of a protracted period of running deficits for many Gulf countries. There is currently a bounce back, but how long it will take is unclear, and therefore hard to predict whether it will impact fiscal policy in the short run.

Saudi Arabia, by way of its Finance Minister, had already stated in 2021 that it would consider revising the VAT rate downwards after the pandemic. If it will happen, it will happen soon.

It’s safe to say the other GCC countries could still revise the rate upwards or downwards, depending on their specific fiscal situation.

Interestingly, the increase of the VAT rate to 15% also spawned a new tax in KSA, the Real Estate Transfer Tax (“RETT”). This new tax in KSA aimed to solve the issue of unregistered sellers, and reduce the taxes on real estate sales. Since its introduction, the RETT legislation has been amended multiple times.

The GCC countries were supposed to have numerical VAT numbers, Oman didn’t follow

In the framework of the GCC, the idea was floated to have numbers as VAT numbers. Hence, the UAE has a 1 before the number, Bahrain a 2 and Saudi a 3. Oman however choose letters and put “OM” before the number.

In the EU, VAT numbers are also composed of letters and numbers. Two letters make up the first two symbols of the VAT number and refer to a country, e.g. “LU” refers to Luxembourg (see https://taxation-customs.ec.europa.eu/vat-identification-numbers_en).

Zero rates for services are perceived a complication

5 years in, the application to zero-rate VAT on exported services, i.e., services provided to recipients outside of the GCC, remains complicated for businesses to apply and inconsistent between the GCC member states.

Although the GCC VAT Agreement for place of supply purposes looks like the EU VAT directive, from the outset, each GCC member state chose different approaches towards the place of supply of services.

B2B services were not simply located in the country of the recipient, as they are in the EU since 2010, and as is recommended by the OECD in its VAT/GST Guidelines on B2B services.

Based on an interpretation of article 34(1)(c) of the GCC VAT Agreement as laying down the rule, and including a benefit test, GCC countries have embarked on a conservative and selective interpretation of the zero rate on supplies made from a GCC country to abroad.

That conservative interpretation is not necessarily mirrored when those services are received, as there is no benefit test required there.

The rule is therefore applied unequal, and as shown by both the UAE and KSA, they felt the rule required amendments to the provision itself (https://www.linkedin.com/pulse/uae-considerably-restricts-application-vat-zero-rate-services-vanhee/). Those amendments, and ensuing clarifications have not necessarily led to more clarity.

Unfortunately, Bahrain and Oman went down the same road. A too conservative view of zero rates, can put a strain on foreign investments, as it is not easy to obtain refunds for foreign businesses (as amongst others the Saudi example shows).

As a matter of fact, disputes are common among businesses in the GCC over the VAT treatment of cross-border services due to the difference in the domestic legislation between the GCC member states and in the absence of the ESS.

Divergent policy options

The GCC VAT Framework Agreement allowed for broad policy options in the education sector, health sector, real estate sector and local transport sector. In addition, for the oil & gas sector zero rates were allowed to be implemented as well, and the financial sector could benefit from a deviating regime as well. Depending on the individual requirements and policies, the GCC Member States have implemented substantially different regimes.

None of the GCC countries so far have amended those policies in the aforementioned sectors. The UAE did move from a system where the B2B sales of diamonds was taxed, to a system where it is subject to a reverse charge as from 1 June 2018.

Tax Authority approaches

So far, in the region ZATCA has shown the most grit in terms of audits, and has lengths ahead of the other countries in terms of tax audits and disputes. KSA also had the best equipped tax authority in 2018 when VAT was introduced, although it did have to go through an organizational revamp. The UAE comes second, which is remarkable for a tax authority which only kicked off in 2017. It has been very much a rules and process based organization, which has a lot of positive effects, such as tax payers feeling treated in the same way. UAE auditors now often also give the opportunity to tax payers to voluntarily disclose their liabilities before closing the audit, which is a novely approach in the region.

The Bahraini and Omani tax authority, have been taking a more relaxed approach towards audits and disputes.

Having said the above, it's all not all 'sticks' with the tax authorities. We have also observed in this 5 years, how the tax authorities, especially in KSA and the UAE, played a their role to alleviate tax from being a burden to businesses and encouraging tax compliance - a fairly new culture of this scale. The amnesty programmes, first introduced by the KSA in 2020 and again, recently paved the way on encouraging tax compliance for businesses. The UAE also introduced their amnesty programme this year with the same intention. Perhaps, this could be a temporary solution to gear the economy back on track post pandemic. On whether it will be the norm, is yet to be seen in the next coming years.

What the future will bring

An old-fashioned system was put in place, yet one that has proven its use in revenue collection. It also worked, given the substantial revenues gained from VAT.

The GCC did not opted to immediately adopt more modern, electronic systems as these exist elsewhere (e.g. since a long time in Brazil, but also China).  

However, it was identified that E-invoicing was the way to go in the medium run. This is again trodding down a proven path. As often in the GCC, the UAE and KSA show the way. KSA has made E-invoicing mandatory. The UAE and Bahrain have already suggested they will do the same very soon.

No GCC countries have yet announced they will adopt real-time reporting. KSA may be the closest to a potential adoption, given that once phase 2 enters into force in 2023, ZATCA, the KSA tax authority will have access to substantial transactional data. It will allow it to pre-fill the VAT return, and potentially even in real time calculate the VAT.

We'll see what the future will bring, and for sure in another five years matters will have evolved again drastically, given the pace of changes in the region.

Safe to say that the next 5 years will be equally exciting.

The Ministry of Finance (MoF) of the United Arab Emirates (UAE) recently announced that the draft Corporate Tax (CT) law is going to be released soon, and likely within the month of September. This is impactful news for businesses in the UAE. Many businesses are already in the process of taking steps to plan their affairs in such a way that their operations are tax compliant and tax optimized at the same time.

The UAE’s international position will change after the implementation of corporate tax. Some jurisdictions may no longer view the UAE as a tax haven (although the Free Zone businesses may still benefit from a 0% rate). Other tax authorities may therefore change their perspective on the UAE and be more inclined to grant the benefits under the double tax treaties.

Businesses on the other hand, will no longer view the UAE as a conduit jurisdiction with an extensive treaty network, through which they can avail tax treaty benefits. While the 9% headline rate is still comparatively low, the implementation of CT may also discourage taxpayers seeking out the UAE solely for tax purposes.

A recurring point of dispute between the tax authority and businesses in almost every country having a CT regime has been drawing the line between tax planning, tax avoidance and tax evasion. Once the UAE CT regime settles, the Federal Tax Authority (FTA) of the UAE may indeed pay more attention towards countering tax avoidance and tax evasion arrangements or transactions.

In this article, we will revisit the evergreen discussion of tax planning, tax avoidance and tax evasion, with an emphasis on the Gulf Cooperation Council (GCC). To begin, let us examine the meaning of the terms tax avoidance and tax evasion and the differences between the two terms.

Tax avoidance has traditionally been considered as lawful. It can be described as planning for the purposes of minimizing the tax burden within the legal framework. Tax evasion on the other hand is considered unlawful, and often requires an intentional and a potential fraudulent element.

In the GCC, tax authorities resort rather quickly to suggesting a taxpayer has committed tax evasion, even when the situation concerns simple non-compliance.

While not considered unlawful, tax avoidance has been considered harmful. This is why countries around the world, including the GCC Member States, are implementing domestic rules to counter aggressive or harmful tax planning in line with international standards.

The OECD tried to address this point by way of the ‘Main Purpose Test’ (MPT). The MPT was included in the OECD’s Model Tax Convention in its 2003 version. We are paraphrasing, but the principle stated that benefits under a double tax treaty should not be granted where the main purpose of setting up a structure was for tax purposes as the tax benefits resulting from that structure would go counter the object and purpose of those treaties.

Another common mechanism proposed in tax treaties to avoid the improper use of tax treaties, is the ‘Beneficial Ownership’ (BO) requirement. It mainly applies to passive income (e.g., dividends, interests, and royalties). The BO concept provides that where an item of income is paid to a resident of a Contracting State acting in the capacity of an agent or a nominee, it would be inconsistent with the object and purpose of the source state to grant an exemption or relief, merely because the direct recipient is a resident of the other Contracting State. In such a case, the direct recipient, on account of being merely an agent, nominee, conduit, fiduciary, or administrator, would not be able to obtain the benefits of the treaty. This is especially evident if such recipient is legally or contractually bound to pass on the payment received to another person. BO disputes often end up before the courts, because the burden of proof for the taxpayer is not easily met. 

The 2008 Financial Crisis put the discussion on tax avoidance and aggressive tax planning firmly on governments’ agenda. Following the Financial Crisis, public opinion shifted towards ensuring that big corporations pay their fair share of taxes and pressured countries to implement rules to discourage such behaviors.

As a result, the OECD established what is known as the ‘Inclusive Framework’ (IF), which was open to both OECD and non-OECD members (currently at 141 members) to engage in discussions and create rules for countering Base Erosion and Profit Shifting (BEPS). It is formally known as the OECD/G20 BEPS Project (BEPS Project 1.0) which identified 15 Action Points in 2015.

Out of the 15 Action Points, one of the most important action plans was BEPS Action 6 - Prevention of Tax Treaty Abuse, which also formed one of the four minimum standards. BEPS Action 6 addresses treaty shopping activities that would be viewed as avoidance.

BEPS Action 6 requires IF members, amongst others, to include an express statement in their treaties that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.

Anti-avoidance rules aim amongst others to avoid conduit arrangements. For example, State A has a domestic withholding tax rate for dividends of 25%. State A and State B have negotiated a tax treaty where the source withholding tax rate for dividends is reduced to 5%. A resident in State B receives dividends from State A and claims the reduced treaty rate of 5% source withholding.

However, the resident in State B has an obligation to redistribute the dividend income to a resident in State C. State A and State C do not have a tax treaty in place. It can be observed that there is no BO in State B due to its obligation to pass the payment onto another party. Clearly, such payment is not made for the benefit of any resident in State B nor for enhancing economic cooperation between States A and B. Instead, the benefit would be received by the resident of a third State (i.e., State C). This clearly shows that the treaty has been misused or abused by the resident of State B, against the intention, object, and purpose of the treaty between States A and B.  

To combat misuse of the treaty like the case described above, BEPS Action 6 seeks IF members to implement a ‘minimum standard’ in all its treaties. The minimum standard can be either of the following:

1. The combined approach of a Limitation of Benefits (LOB) and a Principal Purpose Test (PPT) rule,
2. The PPT rule alone, or
3. The LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties.

As a consequence, many IF members’ tax treaties have been updated to include, at least, a PPT rule. This is done by way of signing and ratifying the Multilateral Instrument (MLI) as it allows IF members to update multiple bilateral tax treaties simultaneously. The PPT rule looks a lot like the MPT. True to its name, if one of the principal purposes of an arrangement is to obtain a benefit, the PPT rule may be triggered. This clear intention has also been expressed in the wordings of the preamble incorporated in the OECD Model Tax Convention 2017.

Due to the lack of case law, the impact of the PPT rule is rather uncertain for now and the interpretation of the PPT rule may vary across jurisdictions. It may be possible that the cases that were successfully tested before the courts of law earlier may not survive the PPT rule if they were to be presented before the courts today, provided that the PPT rule was applicable at the time of the transaction or arrangement.

What is certain is that taxpayers ought to be very careful in tax planning so that the structures do not fall foul of the PPT rule. When deciding on the country to make an investment in or the structure of a transaction or arrangement, taxpayers ought to clearly record the non-tax reasons (main/principal purposes) for selecting a certain jurisdiction over another. Evidence can be maintained through internal emails, memos, and minutes outlining the reasons for selecting a country. For example:

• A country is preferred due to a favourable corporate law regime.
• A country is preferred due to the presence of multilingual or highly qualified employees.
• A country is preferred as it is politically and socially stable.
• A country is preferred as it has a strong banking infrastructure where it is easy to obtain credit.

Despite the above safeguards, if the tax authority does reasonably conclude that one of the principal purposes of invoking the treaty was to obtain a tax benefit, the taxpayer ought to ensure that it can establish (i.e., prove) that the benefit obtained was indeed within the object and purpose of the tax treaty.

Finally, as mentioned before, public opinion against tax avoidance is stronger than ever. The relevance of the PPT to future transactions cannot be overstated. Arrangements that may have been successfully litigated before the courts of law until a few years ago, may not be as successful from now on. Therefore, taxpayers may find advance rulings to be attractive as it is important to avoid future issues.

It will be interesting to see how the UAE and the other GCC countries will approach such abusive arrangements and its possible disputes. In the meantime, it is apparent that either through the MLI or through bilateral double tax treaties, the PPT continues to be important. It is vital to consider such anti-avoidance provisions now in order to create future proof structures.

Download Aurifer’s reply to the Public Consultation initiated by the UAE Ministry of Finance in regard to the implementation of Corporate Income Tax in the UAE as of June 2023.

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

• The Contractors themselves in Qatar,
• The Contractors, with the possibility of re-exporting the goods,
• The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

• FIFA,
• FIFA’s affiliates,
• Continental or National Football Associations,
• Event broadcasters,
• Suppliers of goods,
• Works contractors and
• Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

 Claiming The Exemptions - Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees.  Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments. 

There may be some interesting questions on the applicability of the Ministerial Decision, including:

• To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
• Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
• Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC - Tax Exemption Regime for the World Cup 

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

• FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
• FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

• Such QFC entities have genuine economic substance in Qatar,
• The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
• An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
• The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
• The sole or main purpose of such QFC entity is not avoidance of tax,
• The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.

Almost 5 years down the line for VAT in the GCC  – what’s next?

As we approach 31 December 2022, the UAE and KSA will be celebrating 5 years of applying VAT. A rollercoaster ride for many in the region, authorities, advisers and in house tax managers.

We wrote in 2017 about the challenges of drafting VAT legislation in the GCC before its implementation (https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=21).

We pondered whether the GCC was potentially going to be far ahead of other jurisdictions because of the Electronic Services System (“ESS”) the GCC VAT Agreement was going to implement, foreseen in article 71 of the Agreement (https://aurifer.tax/news/future-of-vat-in-the-eu/?lid=482&p=22). The GCC however never implemented the ESS. It is therefore missing an important instrument to integrate all GCC members under a single comprehensive regional VAT framework.

After almost 5 years, it’s worth taking a step back and looking at what occurred.

6 countries to implement, only 4 did

The GCC consists of six countries, Saudi Arabia, the UAE, Bahrain, Oman, Kuwait and Qatar. All countries were supposed to introduce VAT in a short span of time. The UAE and KSA did so on 1 January 2018, Bahrain on 1 January 2019, and Oman on 16 April 2021. For Qatar, rumours ebb and flow on an implementation of VAT after the World Cup, but officials are tight lipped. In terms of Kuwait, a new government is not likely to put this on the table – at least, in the near future.

The intention to implement almost simultaneously was taken with the idea of avoiding arbitrage – considering the geographical proximity between the states - and potential issues with fraud.

5% was supposed to be the rate

All 4 countries kicked off with 5% VAT, as it is foreseen in the GCC VAT Agreement as well (article 25). Saudi Arabia was the first one to hike the rate to 15% on 1 July 2020. Bahrain increased to 10% on 1 January 2022.

The increases were implemented for the same reason, as the tax was implemented for in the first place, i.e. fiscal stability. The implementation came off the back of a protracted period of running deficits for many Gulf countries. There is currently a bounce back, but how long it will take is unclear, and therefore hard to predict whether it will impact fiscal policy in the short run.

Saudi Arabia, by way of its Finance Minister, had already stated in 2021 that it would consider revising the VAT rate downwards after the pandemic. If it will happen, it will happen soon.

It’s safe to say the other GCC countries could still revise the rate upwards or downwards, depending on their specific fiscal situation.

Interestingly, the increase of the VAT rate to 15% also spawned a new tax in KSA, the Real Estate Transfer Tax (“RETT”). This new tax in KSA aimed to solve the issue of unregistered sellers, and reduce the taxes on real estate sales. Since its introduction, the RETT legislation has been amended multiple times.

The GCC countries were supposed to have numerical VAT numbers, Oman didn’t follow

In the framework of the GCC, the idea was floated to have numbers as VAT numbers. Hence, the UAE has a 1 before the number, Bahrain a 2 and Saudi a 3. Oman however choose letters and put “OM” before the number.

In the EU, VAT numbers are also composed of letters and numbers. Two letters make up the first two symbols of the VAT number and refer to a country, e.g. “LU” refers to Luxembourg (see https://taxation-customs.ec.europa.eu/vat-identification-numbers_en).

Zero rates for services are perceived a complication

5 years in, the application to zero-rate VAT on exported services, i.e., services provided to recipients outside of the GCC, remains complicated for businesses to apply and inconsistent between the GCC member states.

Although the GCC VAT Agreement for place of supply purposes looks like the EU VAT directive, from the outset, each GCC member state chose different approaches towards the place of supply of services.

B2B services were not simply located in the country of the recipient, as they are in the EU since 2010, and as is recommended by the OECD in its VAT/GST Guidelines on B2B services.

Based on an interpretation of article 34(1)(c) of the GCC VAT Agreement as laying down the rule, and including a benefit test, GCC countries have embarked on a conservative and selective interpretation of the zero rate on supplies made from a GCC country to abroad.

That conservative interpretation is not necessarily mirrored when those services are received, as there is no benefit test required there.

The rule is therefore applied unequal, and as shown by both the UAE and KSA, they felt the rule required amendments to the provision itself (https://www.linkedin.com/pulse/uae-considerably-restricts-application-vat-zero-rate-services-vanhee/). Those amendments, and ensuing clarifications have not necessarily led to more clarity.

Unfortunately, Bahrain and Oman went down the same road. A too conservative view of zero rates, can put a strain on foreign investments, as it is not easy to obtain refunds for foreign businesses (as amongst others the Saudi example shows).

As a matter of fact, disputes are common among businesses in the GCC over the VAT treatment of cross-border services due to the difference in the domestic legislation between the GCC member states and in the absence of the ESS.

Divergent policy options

The GCC VAT Framework Agreement allowed for broad policy options in the education sector, health sector, real estate sector and local transport sector. In addition, for the oil & gas sector zero rates were allowed to be implemented as well, and the financial sector could benefit from a deviating regime as well. Depending on the individual requirements and policies, the GCC Member States have implemented substantially different regimes.

None of the GCC countries so far have amended those policies in the aforementioned sectors. The UAE did move from a system where the B2B sales of diamonds was taxed, to a system where it is subject to a reverse charge as from 1 June 2018.

Tax Authority approaches

So far, in the region ZATCA has shown the most grit in terms of audits, and has lengths ahead of the other countries in terms of tax audits and disputes. KSA also had the best equipped tax authority in 2018 when VAT was introduced, although it did have to go through an organizational revamp. The UAE comes second, which is remarkable for a tax authority which only kicked off in 2017. It has been very much a rules and process based organization, which has a lot of positive effects, such as tax payers feeling treated in the same way. UAE auditors now often also give the opportunity to tax payers to voluntarily disclose their liabilities before closing the audit, which is a novely approach in the region.

The Bahraini and Omani tax authority, have been taking a more relaxed approach towards audits and disputes.

Having said the above, it's all not all 'sticks' with the tax authorities. We have also observed in this 5 years, how the tax authorities, especially in KSA and the UAE, played a their role to alleviate tax from being a burden to businesses and encouraging tax compliance - a fairly new culture of this scale. The amnesty programmes, first introduced by the KSA in 2020 and again, recently paved the way on encouraging tax compliance for businesses. The UAE also introduced their amnesty programme this year with the same intention. Perhaps, this could be a temporary solution to gear the economy back on track post pandemic. On whether it will be the norm, is yet to be seen in the next coming years.

What the future will bring

An old-fashioned system was put in place, yet one that has proven its use in revenue collection. It also worked, given the substantial revenues gained from VAT.

The GCC did not opted to immediately adopt more modern, electronic systems as these exist elsewhere (e.g. since a long time in Brazil, but also China).  

However, it was identified that E-invoicing was the way to go in the medium run. This is again trodding down a proven path. As often in the GCC, the UAE and KSA show the way. KSA has made E-invoicing mandatory. The UAE and Bahrain have already suggested they will do the same very soon.

No GCC countries have yet announced they will adopt real-time reporting. KSA may be the closest to a potential adoption, given that once phase 2 enters into force in 2023, ZATCA, the KSA tax authority will have access to substantial transactional data. It will allow it to pre-fill the VAT return, and potentially even in real time calculate the VAT.

We'll see what the future will bring, and for sure in another five years matters will have evolved again drastically, given the pace of changes in the region.

Safe to say that the next 5 years will be equally exciting.

The Ministry of Finance (MoF) of the United Arab Emirates (UAE) recently announced that the draft Corporate Tax (CT) law is going to be released soon, and likely within the month of September. This is impactful news for businesses in the UAE. Many businesses are already in the process of taking steps to plan their affairs in such a way that their operations are tax compliant and tax optimized at the same time.

The UAE’s international position will change after the implementation of corporate tax. Some jurisdictions may no longer view the UAE as a tax haven (although the Free Zone businesses may still benefit from a 0% rate). Other tax authorities may therefore change their perspective on the UAE and be more inclined to grant the benefits under the double tax treaties.

Businesses on the other hand, will no longer view the UAE as a conduit jurisdiction with an extensive treaty network, through which they can avail tax treaty benefits. While the 9% headline rate is still comparatively low, the implementation of CT may also discourage taxpayers seeking out the UAE solely for tax purposes.

A recurring point of dispute between the tax authority and businesses in almost every country having a CT regime has been drawing the line between tax planning, tax avoidance and tax evasion. Once the UAE CT regime settles, the Federal Tax Authority (FTA) of the UAE may indeed pay more attention towards countering tax avoidance and tax evasion arrangements or transactions.

In this article, we will revisit the evergreen discussion of tax planning, tax avoidance and tax evasion, with an emphasis on the Gulf Cooperation Council (GCC). To begin, let us examine the meaning of the terms tax avoidance and tax evasion and the differences between the two terms.

Tax avoidance has traditionally been considered as lawful. It can be described as planning for the purposes of minimizing the tax burden within the legal framework. Tax evasion on the other hand is considered unlawful, and often requires an intentional and a potential fraudulent element.

In the GCC, tax authorities resort rather quickly to suggesting a taxpayer has committed tax evasion, even when the situation concerns simple non-compliance.

While not considered unlawful, tax avoidance has been considered harmful. This is why countries around the world, including the GCC Member States, are implementing domestic rules to counter aggressive or harmful tax planning in line with international standards.

The OECD tried to address this point by way of the ‘Main Purpose Test’ (MPT). The MPT was included in the OECD’s Model Tax Convention in its 2003 version. We are paraphrasing, but the principle stated that benefits under a double tax treaty should not be granted where the main purpose of setting up a structure was for tax purposes as the tax benefits resulting from that structure would go counter the object and purpose of those treaties.

Another common mechanism proposed in tax treaties to avoid the improper use of tax treaties, is the ‘Beneficial Ownership’ (BO) requirement. It mainly applies to passive income (e.g., dividends, interests, and royalties). The BO concept provides that where an item of income is paid to a resident of a Contracting State acting in the capacity of an agent or a nominee, it would be inconsistent with the object and purpose of the source state to grant an exemption or relief, merely because the direct recipient is a resident of the other Contracting State. In such a case, the direct recipient, on account of being merely an agent, nominee, conduit, fiduciary, or administrator, would not be able to obtain the benefits of the treaty. This is especially evident if such recipient is legally or contractually bound to pass on the payment received to another person. BO disputes often end up before the courts, because the burden of proof for the taxpayer is not easily met. 

The 2008 Financial Crisis put the discussion on tax avoidance and aggressive tax planning firmly on governments’ agenda. Following the Financial Crisis, public opinion shifted towards ensuring that big corporations pay their fair share of taxes and pressured countries to implement rules to discourage such behaviors.

As a result, the OECD established what is known as the ‘Inclusive Framework’ (IF), which was open to both OECD and non-OECD members (currently at 141 members) to engage in discussions and create rules for countering Base Erosion and Profit Shifting (BEPS). It is formally known as the OECD/G20 BEPS Project (BEPS Project 1.0) which identified 15 Action Points in 2015.

Out of the 15 Action Points, one of the most important action plans was BEPS Action 6 - Prevention of Tax Treaty Abuse, which also formed one of the four minimum standards. BEPS Action 6 addresses treaty shopping activities that would be viewed as avoidance.

BEPS Action 6 requires IF members, amongst others, to include an express statement in their treaties that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.

Anti-avoidance rules aim amongst others to avoid conduit arrangements. For example, State A has a domestic withholding tax rate for dividends of 25%. State A and State B have negotiated a tax treaty where the source withholding tax rate for dividends is reduced to 5%. A resident in State B receives dividends from State A and claims the reduced treaty rate of 5% source withholding.

However, the resident in State B has an obligation to redistribute the dividend income to a resident in State C. State A and State C do not have a tax treaty in place. It can be observed that there is no BO in State B due to its obligation to pass the payment onto another party. Clearly, such payment is not made for the benefit of any resident in State B nor for enhancing economic cooperation between States A and B. Instead, the benefit would be received by the resident of a third State (i.e., State C). This clearly shows that the treaty has been misused or abused by the resident of State B, against the intention, object, and purpose of the treaty between States A and B.  

To combat misuse of the treaty like the case described above, BEPS Action 6 seeks IF members to implement a ‘minimum standard’ in all its treaties. The minimum standard can be either of the following:

1. The combined approach of a Limitation of Benefits (LOB) and a Principal Purpose Test (PPT) rule,
2. The PPT rule alone, or
3. The LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties.

As a consequence, many IF members’ tax treaties have been updated to include, at least, a PPT rule. This is done by way of signing and ratifying the Multilateral Instrument (MLI) as it allows IF members to update multiple bilateral tax treaties simultaneously. The PPT rule looks a lot like the MPT. True to its name, if one of the principal purposes of an arrangement is to obtain a benefit, the PPT rule may be triggered. This clear intention has also been expressed in the wordings of the preamble incorporated in the OECD Model Tax Convention 2017.

Due to the lack of case law, the impact of the PPT rule is rather uncertain for now and the interpretation of the PPT rule may vary across jurisdictions. It may be possible that the cases that were successfully tested before the courts of law earlier may not survive the PPT rule if they were to be presented before the courts today, provided that the PPT rule was applicable at the time of the transaction or arrangement.

What is certain is that taxpayers ought to be very careful in tax planning so that the structures do not fall foul of the PPT rule. When deciding on the country to make an investment in or the structure of a transaction or arrangement, taxpayers ought to clearly record the non-tax reasons (main/principal purposes) for selecting a certain jurisdiction over another. Evidence can be maintained through internal emails, memos, and minutes outlining the reasons for selecting a country. For example:

• A country is preferred due to a favourable corporate law regime.
• A country is preferred due to the presence of multilingual or highly qualified employees.
• A country is preferred as it is politically and socially stable.
• A country is preferred as it has a strong banking infrastructure where it is easy to obtain credit.

Despite the above safeguards, if the tax authority does reasonably conclude that one of the principal purposes of invoking the treaty was to obtain a tax benefit, the taxpayer ought to ensure that it can establish (i.e., prove) that the benefit obtained was indeed within the object and purpose of the tax treaty.

Finally, as mentioned before, public opinion against tax avoidance is stronger than ever. The relevance of the PPT to future transactions cannot be overstated. Arrangements that may have been successfully litigated before the courts of law until a few years ago, may not be as successful from now on. Therefore, taxpayers may find advance rulings to be attractive as it is important to avoid future issues.

It will be interesting to see how the UAE and the other GCC countries will approach such abusive arrangements and its possible disputes. In the meantime, it is apparent that either through the MLI or through bilateral double tax treaties, the PPT continues to be important. It is vital to consider such anti-avoidance provisions now in order to create future proof structures.

Download Aurifer’s reply to the Public Consultation initiated by the UAE Ministry of Finance in regard to the implementation of Corporate Income Tax in the UAE as of June 2023.

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

• The Contractors themselves in Qatar,
• The Contractors, with the possibility of re-exporting the goods,
• The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

• FIFA,
• FIFA’s affiliates,
• Continental or National Football Associations,
• Event broadcasters,
• Suppliers of goods,
• Works contractors and
• Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

 Claiming The Exemptions - Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees.  Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments. 

There may be some interesting questions on the applicability of the Ministerial Decision, including:

• To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
• Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
• Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC - Tax Exemption Regime for the World Cup 

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

• FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
• FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

• Such QFC entities have genuine economic substance in Qatar,
• The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
• An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
• The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
• The sole or main purpose of such QFC entity is not avoidance of tax,
• The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.

Almost 5 years down the line for VAT in the GCC  – what’s next?

As we approach 31 December 2022, the UAE and KSA will be celebrating 5 years of applying VAT. A rollercoaster ride for many in the region, authorities, advisers and in house tax managers.

We wrote in 2017 about the challenges of drafting VAT legislation in the GCC before its implementation (https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=21).

We pondered whether the GCC was potentially going to be far ahead of other jurisdictions because of the Electronic Services System (“ESS”) the GCC VAT Agreement was going to implement, foreseen in article 71 of the Agreement (https://aurifer.tax/news/future-of-vat-in-the-eu/?lid=482&p=22). The GCC however never implemented the ESS. It is therefore missing an important instrument to integrate all GCC members under a single comprehensive regional VAT framework.

After almost 5 years, it’s worth taking a step back and looking at what occurred.

6 countries to implement, only 4 did

The GCC consists of six countries, Saudi Arabia, the UAE, Bahrain, Oman, Kuwait and Qatar. All countries were supposed to introduce VAT in a short span of time. The UAE and KSA did so on 1 January 2018, Bahrain on 1 January 2019, and Oman on 16 April 2021. For Qatar, rumours ebb and flow on an implementation of VAT after the World Cup, but officials are tight lipped. In terms of Kuwait, a new government is not likely to put this on the table – at least, in the near future.

The intention to implement almost simultaneously was taken with the idea of avoiding arbitrage – considering the geographical proximity between the states - and potential issues with fraud.

5% was supposed to be the rate

All 4 countries kicked off with 5% VAT, as it is foreseen in the GCC VAT Agreement as well (article 25). Saudi Arabia was the first one to hike the rate to 15% on 1 July 2020. Bahrain increased to 10% on 1 January 2022.

The increases were implemented for the same reason, as the tax was implemented for in the first place, i.e. fiscal stability. The implementation came off the back of a protracted period of running deficits for many Gulf countries. There is currently a bounce back, but how long it will take is unclear, and therefore hard to predict whether it will impact fiscal policy in the short run.

Saudi Arabia, by way of its Finance Minister, had already stated in 2021 that it would consider revising the VAT rate downwards after the pandemic. If it will happen, it will happen soon.

It’s safe to say the other GCC countries could still revise the rate upwards or downwards, depending on their specific fiscal situation.

Interestingly, the increase of the VAT rate to 15% also spawned a new tax in KSA, the Real Estate Transfer Tax (“RETT”). This new tax in KSA aimed to solve the issue of unregistered sellers, and reduce the taxes on real estate sales. Since its introduction, the RETT legislation has been amended multiple times.

The GCC countries were supposed to have numerical VAT numbers, Oman didn’t follow

In the framework of the GCC, the idea was floated to have numbers as VAT numbers. Hence, the UAE has a 1 before the number, Bahrain a 2 and Saudi a 3. Oman however choose letters and put “OM” before the number.

In the EU, VAT numbers are also composed of letters and numbers. Two letters make up the first two symbols of the VAT number and refer to a country, e.g. “LU” refers to Luxembourg (see https://taxation-customs.ec.europa.eu/vat-identification-numbers_en).

Zero rates for services are perceived a complication

5 years in, the application to zero-rate VAT on exported services, i.e., services provided to recipients outside of the GCC, remains complicated for businesses to apply and inconsistent between the GCC member states.

Although the GCC VAT Agreement for place of supply purposes looks like the EU VAT directive, from the outset, each GCC member state chose different approaches towards the place of supply of services.

B2B services were not simply located in the country of the recipient, as they are in the EU since 2010, and as is recommended by the OECD in its VAT/GST Guidelines on B2B services.

Based on an interpretation of article 34(1)(c) of the GCC VAT Agreement as laying down the rule, and including a benefit test, GCC countries have embarked on a conservative and selective interpretation of the zero rate on supplies made from a GCC country to abroad.

That conservative interpretation is not necessarily mirrored when those services are received, as there is no benefit test required there.

The rule is therefore applied unequal, and as shown by both the UAE and KSA, they felt the rule required amendments to the provision itself (https://www.linkedin.com/pulse/uae-considerably-restricts-application-vat-zero-rate-services-vanhee/). Those amendments, and ensuing clarifications have not necessarily led to more clarity.

Unfortunately, Bahrain and Oman went down the same road. A too conservative view of zero rates, can put a strain on foreign investments, as it is not easy to obtain refunds for foreign businesses (as amongst others the Saudi example shows).

As a matter of fact, disputes are common among businesses in the GCC over the VAT treatment of cross-border services due to the difference in the domestic legislation between the GCC member states and in the absence of the ESS.

Divergent policy options

The GCC VAT Framework Agreement allowed for broad policy options in the education sector, health sector, real estate sector and local transport sector. In addition, for the oil & gas sector zero rates were allowed to be implemented as well, and the financial sector could benefit from a deviating regime as well. Depending on the individual requirements and policies, the GCC Member States have implemented substantially different regimes.

None of the GCC countries so far have amended those policies in the aforementioned sectors. The UAE did move from a system where the B2B sales of diamonds was taxed, to a system where it is subject to a reverse charge as from 1 June 2018.

Tax Authority approaches

So far, in the region ZATCA has shown the most grit in terms of audits, and has lengths ahead of the other countries in terms of tax audits and disputes. KSA also had the best equipped tax authority in 2018 when VAT was introduced, although it did have to go through an organizational revamp. The UAE comes second, which is remarkable for a tax authority which only kicked off in 2017. It has been very much a rules and process based organization, which has a lot of positive effects, such as tax payers feeling treated in the same way. UAE auditors now often also give the opportunity to tax payers to voluntarily disclose their liabilities before closing the audit, which is a novely approach in the region.

The Bahraini and Omani tax authority, have been taking a more relaxed approach towards audits and disputes.

Having said the above, it's all not all 'sticks' with the tax authorities. We have also observed in this 5 years, how the tax authorities, especially in KSA and the UAE, played a their role to alleviate tax from being a burden to businesses and encouraging tax compliance - a fairly new culture of this scale. The amnesty programmes, first introduced by the KSA in 2020 and again, recently paved the way on encouraging tax compliance for businesses. The UAE also introduced their amnesty programme this year with the same intention. Perhaps, this could be a temporary solution to gear the economy back on track post pandemic. On whether it will be the norm, is yet to be seen in the next coming years.

What the future will bring

An old-fashioned system was put in place, yet one that has proven its use in revenue collection. It also worked, given the substantial revenues gained from VAT.

The GCC did not opted to immediately adopt more modern, electronic systems as these exist elsewhere (e.g. since a long time in Brazil, but also China).  

However, it was identified that E-invoicing was the way to go in the medium run. This is again trodding down a proven path. As often in the GCC, the UAE and KSA show the way. KSA has made E-invoicing mandatory. The UAE and Bahrain have already suggested they will do the same very soon.

No GCC countries have yet announced they will adopt real-time reporting. KSA may be the closest to a potential adoption, given that once phase 2 enters into force in 2023, ZATCA, the KSA tax authority will have access to substantial transactional data. It will allow it to pre-fill the VAT return, and potentially even in real time calculate the VAT.

We'll see what the future will bring, and for sure in another five years matters will have evolved again drastically, given the pace of changes in the region.

Safe to say that the next 5 years will be equally exciting.

The Ministry of Finance (MoF) of the United Arab Emirates (UAE) recently announced that the draft Corporate Tax (CT) law is going to be released soon, and likely within the month of September. This is impactful news for businesses in the UAE. Many businesses are already in the process of taking steps to plan their affairs in such a way that their operations are tax compliant and tax optimized at the same time.

The UAE’s international position will change after the implementation of corporate tax. Some jurisdictions may no longer view the UAE as a tax haven (although the Free Zone businesses may still benefit from a 0% rate). Other tax authorities may therefore change their perspective on the UAE and be more inclined to grant the benefits under the double tax treaties.

Businesses on the other hand, will no longer view the UAE as a conduit jurisdiction with an extensive treaty network, through which they can avail tax treaty benefits. While the 9% headline rate is still comparatively low, the implementation of CT may also discourage taxpayers seeking out the UAE solely for tax purposes.

A recurring point of dispute between the tax authority and businesses in almost every country having a CT regime has been drawing the line between tax planning, tax avoidance and tax evasion. Once the UAE CT regime settles, the Federal Tax Authority (FTA) of the UAE may indeed pay more attention towards countering tax avoidance and tax evasion arrangements or transactions.

In this article, we will revisit the evergreen discussion of tax planning, tax avoidance and tax evasion, with an emphasis on the Gulf Cooperation Council (GCC). To begin, let us examine the meaning of the terms tax avoidance and tax evasion and the differences between the two terms.

Tax avoidance has traditionally been considered as lawful. It can be described as planning for the purposes of minimizing the tax burden within the legal framework. Tax evasion on the other hand is considered unlawful, and often requires an intentional and a potential fraudulent element.

In the GCC, tax authorities resort rather quickly to suggesting a taxpayer has committed tax evasion, even when the situation concerns simple non-compliance.

While not considered unlawful, tax avoidance has been considered harmful. This is why countries around the world, including the GCC Member States, are implementing domestic rules to counter aggressive or harmful tax planning in line with international standards.

The OECD tried to address this point by way of the ‘Main Purpose Test’ (MPT). The MPT was included in the OECD’s Model Tax Convention in its 2003 version. We are paraphrasing, but the principle stated that benefits under a double tax treaty should not be granted where the main purpose of setting up a structure was for tax purposes as the tax benefits resulting from that structure would go counter the object and purpose of those treaties.

Another common mechanism proposed in tax treaties to avoid the improper use of tax treaties, is the ‘Beneficial Ownership’ (BO) requirement. It mainly applies to passive income (e.g., dividends, interests, and royalties). The BO concept provides that where an item of income is paid to a resident of a Contracting State acting in the capacity of an agent or a nominee, it would be inconsistent with the object and purpose of the source state to grant an exemption or relief, merely because the direct recipient is a resident of the other Contracting State. In such a case, the direct recipient, on account of being merely an agent, nominee, conduit, fiduciary, or administrator, would not be able to obtain the benefits of the treaty. This is especially evident if such recipient is legally or contractually bound to pass on the payment received to another person. BO disputes often end up before the courts, because the burden of proof for the taxpayer is not easily met. 

The 2008 Financial Crisis put the discussion on tax avoidance and aggressive tax planning firmly on governments’ agenda. Following the Financial Crisis, public opinion shifted towards ensuring that big corporations pay their fair share of taxes and pressured countries to implement rules to discourage such behaviors.

As a result, the OECD established what is known as the ‘Inclusive Framework’ (IF), which was open to both OECD and non-OECD members (currently at 141 members) to engage in discussions and create rules for countering Base Erosion and Profit Shifting (BEPS). It is formally known as the OECD/G20 BEPS Project (BEPS Project 1.0) which identified 15 Action Points in 2015.

Out of the 15 Action Points, one of the most important action plans was BEPS Action 6 - Prevention of Tax Treaty Abuse, which also formed one of the four minimum standards. BEPS Action 6 addresses treaty shopping activities that would be viewed as avoidance.

BEPS Action 6 requires IF members, amongst others, to include an express statement in their treaties that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.

Anti-avoidance rules aim amongst others to avoid conduit arrangements. For example, State A has a domestic withholding tax rate for dividends of 25%. State A and State B have negotiated a tax treaty where the source withholding tax rate for dividends is reduced to 5%. A resident in State B receives dividends from State A and claims the reduced treaty rate of 5% source withholding.

However, the resident in State B has an obligation to redistribute the dividend income to a resident in State C. State A and State C do not have a tax treaty in place. It can be observed that there is no BO in State B due to its obligation to pass the payment onto another party. Clearly, such payment is not made for the benefit of any resident in State B nor for enhancing economic cooperation between States A and B. Instead, the benefit would be received by the resident of a third State (i.e., State C). This clearly shows that the treaty has been misused or abused by the resident of State B, against the intention, object, and purpose of the treaty between States A and B.  

To combat misuse of the treaty like the case described above, BEPS Action 6 seeks IF members to implement a ‘minimum standard’ in all its treaties. The minimum standard can be either of the following:

1. The combined approach of a Limitation of Benefits (LOB) and a Principal Purpose Test (PPT) rule,
2. The PPT rule alone, or
3. The LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties.

As a consequence, many IF members’ tax treaties have been updated to include, at least, a PPT rule. This is done by way of signing and ratifying the Multilateral Instrument (MLI) as it allows IF members to update multiple bilateral tax treaties simultaneously. The PPT rule looks a lot like the MPT. True to its name, if one of the principal purposes of an arrangement is to obtain a benefit, the PPT rule may be triggered. This clear intention has also been expressed in the wordings of the preamble incorporated in the OECD Model Tax Convention 2017.

Due to the lack of case law, the impact of the PPT rule is rather uncertain for now and the interpretation of the PPT rule may vary across jurisdictions. It may be possible that the cases that were successfully tested before the courts of law earlier may not survive the PPT rule if they were to be presented before the courts today, provided that the PPT rule was applicable at the time of the transaction or arrangement.

What is certain is that taxpayers ought to be very careful in tax planning so that the structures do not fall foul of the PPT rule. When deciding on the country to make an investment in or the structure of a transaction or arrangement, taxpayers ought to clearly record the non-tax reasons (main/principal purposes) for selecting a certain jurisdiction over another. Evidence can be maintained through internal emails, memos, and minutes outlining the reasons for selecting a country. For example:

• A country is preferred due to a favourable corporate law regime.
• A country is preferred due to the presence of multilingual or highly qualified employees.
• A country is preferred as it is politically and socially stable.
• A country is preferred as it has a strong banking infrastructure where it is easy to obtain credit.

Despite the above safeguards, if the tax authority does reasonably conclude that one of the principal purposes of invoking the treaty was to obtain a tax benefit, the taxpayer ought to ensure that it can establish (i.e., prove) that the benefit obtained was indeed within the object and purpose of the tax treaty.

Finally, as mentioned before, public opinion against tax avoidance is stronger than ever. The relevance of the PPT to future transactions cannot be overstated. Arrangements that may have been successfully litigated before the courts of law until a few years ago, may not be as successful from now on. Therefore, taxpayers may find advance rulings to be attractive as it is important to avoid future issues.

It will be interesting to see how the UAE and the other GCC countries will approach such abusive arrangements and its possible disputes. In the meantime, it is apparent that either through the MLI or through bilateral double tax treaties, the PPT continues to be important. It is vital to consider such anti-avoidance provisions now in order to create future proof structures.

With the Corporate Income Tax (CIT) regime planned to be introduced in the United Arab Emirates (UAE) next year (2023), many businesses are examining the impact of the reforms on their existing business structures. 

Free Zones have played a large part in the economic development of the UAE, attracting foreign businesses with relaxed requirements and tax benefits. The tax regime applicable to Free Zone businesses has evolved greatly in the last years, with the introduction of VAT in 2018 and CIT planned to be introduced in 2023 respectively.

What is the applicable regime? We provide you with a recap in this article.

Highlights of the proposed UAE CIT system

The CIT system will be implemented with effect from June 2023. The headline rate will be 9% for taxable income earned in an year exceeding AED 375,000 (slightly above $100,000). This is globally a very competitive rate, and even within the Gulf states, it is the lowest among states that have a CIT regime. 

The Public Consultation Document issued by the Ministry of Finance states that the CIT regime will apply to the following persons

• UAE companies and other legal persons incorporated in the UAE.
• Foreign legal entities that have a Permanent Establishment (PE) in the UAE. 
• Individuals (natural persons) engaged in a business or a commercial activity in the UAE. 

The calculation of taxable income would be aligned with the international accounting standards. Like most tax systems, the taxpayer would be able to deduct most expenses that are incurred in the process of generating revenue, subject to expense deduction limitations. Likewise, losses can also be generally carried forward from one year to the next and setoff against future profits. 

UAE resident companies will generally be subject to CIT on their worldwide income, including capital gains. There are certain exceptions to this rule. 

To retain and further develop the UAE’s status as an international financial and regional hub, the UAE has proposed many reliefs intending to reduce the effective tax rate or simplify matters administratively for businesses.

Amongst others, it has envisaged adopting a so-called ‘participation exemption’ which is relatively common. Here, a UAE Corporate shareholder would generally be exempt from CIT on dividends received and capital gains earned from the sale of shares of a subsidiary company, subject to fulfillment of both of the following two conditions:

• The UAE Corporate shareholder owns at least 5% of the shares in the subsidiary company.
• The (foreign) subsidiary is subject to CIT at least 9%. 

Finally, we come to grouping options available under the proposed regime. Such grouping may reduce the effective tax rate of a group containing several businesses. The objectives of providing the grouping facility are:

• To allow one group member's loss to be setoff against another group member's profits.  
• To treat the whole tax group as a single taxable person, with the parent company responsible for the administration and payment of CIT on behalf of the tax group. 
• To ignore the transactions between the members of the tax group. 

A UAE resident group of companies can elect to form a tax group if the parent company holds at least 95% of the share capital and voting rights of the subsidiaries. 

Where the parent company does not meet the 95% criteria and instead holds 75% of the ownership of the subsidiaries, it can still seek to transfer losses from a loss-making group company to a profit-making group company, as long as both the following conditions are met:

• The company transferring losses is neither exempt nor benefits from the 0% Free Zone regime. 
• The total tax loss offset ought not to exceed 75% of the taxable income of the company receiving the tax losses for the relevant period. 

In addition to the above-mentioned facilities, the proposed UAE CT regime will also allow for an exemption or deferral of CT in respect of the transfer of assets or liabilities between members of a group, to avoid triggering an unnecessary tax charge when businesses reorganize themselves. The CT regime would also allow some corporate reorganization transactions (e.g., mergers) to be undertaken on a tax-neutral basis.  

What about the Free Zone tax exemption and Corporate Income Tax?

Companies and branches that are registered in a Free Zone (Free Zone Persons) are within the scope of the CIT regime and subject to filing requirements. 

The UAE Government has committed, however, that the tax exemptions will continue to apply to Free Zone Persons provided they (i) maintain adequate substance, (ii) comply with all other regulatory requirements, and (iii) income is earned from transactions with businesses located outside the UAE, or from trading businesses located in the (same or any other) Free Zone.

The complications start when Free Zone businesses interact with businesses located in Mainland UAE (Mainland Persons). Let’s consider a few scenarios here:

• A Free Zone business (that does not have a branch in the Mainland) transacting with a Mainland business: 

- If the income is passive (like interest, royalties, dividends, and capital gains from owning shares in Mainland Persons) – 0% CIT.

• A Free Zone business (that has a branch in the mainland): 

- Taxed on the Mainland Sourced income. 

- Not taxed on its other income. 

• A Free Zone business transacting with a (group company) Mainland business: 

- 0% CIT, but 

- Payments made by the Mainland business to its group company in Free Zone will not be deductible. 

• A Free Zone business located in a Designated Zone for VAT purposes earning income from the sale of goods to a Mainland business: 

- 0% CIT, if 

- The Free Zone business is the importer of record of those goods. 

• A Free Zone business earning income by transacting with a Mainland Person (not covered in any of the above four scenarios): 

- Such Free Zone Person will have its 0% CIT privilege disqualified for all of its Income. 

Fair to say, that there are a number of complexities involving Free Zones. 

UAE VAT 

VAT was introduced in the UAE on 1 January 2018 at a standard rate of 5% on the supply of goods and services. 

VAT is a broad-based consumption tax levied on almost all supplies of goods and services in the UAE, including deemed supplies, as well as the importation of goods into the UAE.

Like most VAT systems, VAT in the UAE avoids a cascading effect on tax (tax on tax) by allowing the Input tax to be subtracted from the output tax liability. Generally, Input tax can be recovered (subtracted from output tax) when goods or services are (intended to be) used for making taxable supplies in the UAE or supplies outside the UAE. 

The term ‘goods’ here refers to all types of physical property. Any supply that does not constitute a supply of goods, is a supply of services.   

The provisions relating to place of supply and valuation of supply are mostly in line with international standards. Some benefits are offered to supplies made in certain Free Zones (referred to as Designated Zones) discussed in the next headline. 

UAE VAT and Free Zones 

When the UAE Government introduced the concept of Free Zones, it did not envisage the requirement of a VAT system at that time. Accordingly, to ensure that the UAE continues to remain a competitive trading and investment destination even after the introduction of the VAT law, some relief is available for the sale of goods. For the supply of services, however, there are no exceptions made to the regular VAT system, except for the shipping of goods from a Designated Zone, if supplied by the same supplier of the goods.

Some businesses in some Free Zones benefit from an exception. These Zones are referred to as ‘Designated Zones’. The list of Designated Zones that are effective as of date is provided in Appendix 1. 

Designated Zones are defined as a specific fenced geographic area and has security measures and Customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area. 

Designated Zones are treated as being outside the State for VAT purposes for certain supplies of goods. This means that a supply of goods within a Designated Zone is treated as made outside the UAE, and therefore, outside the scope of VAT in the UAE. 

Even though Designated Zones are considered to be outside the State, a sale from Mainland UAE to the Designated Zone is taxable at the standard rate of 5%.  

The situations involving a Designated Zone where VAT liability generally become due (treated to be imported into the UAE) are either of the following:

• Goods are consumed within the Designated Zone.
• Goods are rendered unaccounted for. 
• Goods are taken out of a Designated Zone and into Mainland UAE (including Free Zones not considered as Designated Zones). 

In short, the VAT implications of transactions with entities in the Designated Zones can be summarized below: 

• Domestic sale from the UAE to a Designated Zone – 5%.
• Domestic sale from Designated Zones to the UAE Mainland – Import taxable at 5%.
• Domestic sales from Designated Zones to Designated Zones – VAT is not applicable.
• Domestic sales within the same Designated Zone – VAT is not applicable (except for retail sales).
• Export from Designated Zones to GCC countries/non-GCC countries – VAT is not applicable (outside the scope of VAT).

APPENDIX 1

List of Designated Zones in the UAE

Abu Dhabi

• Free Trade Zone of Khalifa Port
• Abu Dhabi Airport Free Zone
• Khalifa Industrial Zone
• Al Ain International Airport Free Zone 
• Al Butain International Airport Free Zone

Dubai

• Jebel Ali Free Zone (North-South)
• Dubai Cars and Automotive Zone (DUCAMZ)
• DAFZA Industrial Park Free Zone – Al Qusais
• Dubai Aviation City
• Dubai Airport Free Zone
• International Humanitarian City – Jebel Ali
• Dubai CommerCity

Sharjah

• Hamriyah Free Zone
• Sharjah Airport International Free Zone

Umm Al Quwain

• Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port 
• Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road

Ras Al Khaimah

• Ras Al Khaimah Port Free Zone
• RAK Maritime City Free Zone
• Al Hamra Industrial Zone – Free Zone
• Al Ghail Industrial Zone – Free Zone
• Al Hulaila Industrial Zone – Free Zone

Fujairah

• Fujairah Free Zone
• FOIZ (Fujairah Oil Industry Zone)

Designated Zones - Ajman

• Ajman Free Zone

Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Non-Fungible Tokens (“NFTs”) have been hot, although the market seems to be cooling down as of late. According to a recent Bloomberg article though, there are still monthly NFT sales for an approximate value of 1bn USD. As trade value reduces, The Bored Ape seems to be boring its potential customers now. With the drop in the value of cryptocurrencies this may also affect the value of NFT’s.

Different countries have taken different tax positions on income derived from their supply, and on supply of NFTs (and some countries are yet to take a position).

When an NFT is sold, it is a digital representation on the blockchain of an artistic work or other object (e.g. trading cards, images, music, gold bars, diamonds etc.). The NFT grants the purchaser certain rights of use, although a precise legal framework is lacking in many jurisdictions. It is said that the blockchain ensures a digital title deed or proof of digital ownership.

When transferring an NFT, the underlying asset is not transferred. The NFT is a unique, non-interchangeable item. By way of an example, an NFT could be a digital representation of a painting featuring a monkey, but not the painting featuring a monkey itself.

In this article, we discuss the (possible) treatment of NFTs in different jurisdictions and the potential application of existing VAT and Corporate Income Tax (“CIT / CT”) laws on NFTs. Our article builds on an earlier analysis of the VAT treatment for cryptocurrencies, which you can find here).

VAT – between electronic services and regular taxable services.

As far as NFTs are concerned, the fact that these are usually paid with cryptocurrencies is not relevant. A sale of an NFT will raise the same questions on whether it is taxable, regardless of the mode of payment, whether the payment is made in regular (fiat) currency, crypto currency or in kind.

Currently, the most debated question is whether the sale of an NFT is subject to VAT or not? To answer this question, we examine the positions taken by some countries.

Firstly, it is important to note that NFTs are treated as services for VAT purposes under EU VAT law, as they do not constitute a supply of tangible assets.

In Spain, the Tax Authority (Dirección General de Tributos, the “STA”) issued an interesting ruling (V0482-22 of March 10, 2022). Fernando Matesanz discusses in his article the scenario of a natural person transforming photographs to produce unique pieces using photoshop-transformed illustrations. He then auctioned them on the internet through digital platforms that were not authorised to provide the real identity of the buyers (nicknames were adopted).

The STA held that the sale of an NFT is a supply of service, more specifically an Electronically Supplied Service (“ESS”), based on the fulfillment of the following tests: (i) automated and require minimal human intervention and (ii) are not feasible without information technology.

One major concern raised by many Spanish suppliers of NFT’s was that the identity of the acquirers was not disclosed to the supplier, given the nature of the transaction on the blockchain. Therefore, the difficulty was that the seller would not have been certain if Spanish VAT ought to be accounted for or not. If the buyer of the NFT would be abroad, no Spanish VAT would apply.

In our view, the qualification by the STA as an ESS is at least debatable. One school of thought can be that there is nothing automated about a digital representation of a(n artistic) work. It is a mere representation of an underlying asset. An NFT is a far cry from the traditional electronically supplied services, such as streamed music or movies. The ESS definition also does not refer to the requirement, or absence thereof, of a legal entitlement to an underlying asset.

At the same time, another school of thought can also exist, especially considering the facts of the Ruling, that while the act of using the photoshop software certainly requires human intervention and skills, the overarching representation (being the subject matter of the sale in question) which is generated via the blockchain itself does not require any human intervention. This latter view is supported by a Spanish tax expert, Rubén Bashandeh.

Fernando Martesanz’ article equally highlights the issues in determining the location of the supplier. Additionally, it flags the issues around the interpretation of the Use and Enjoyment rule which may localize the service in Spain, even if the regular place of supply rules determines these services outside the EU.

The UAE mandates the Use and Enjoyment rule (special place of supply rule), as a base rule for ESS and not as an exception to the normal rule to avoid double or non-taxation. It locates the service in the jurisdiction where services are used and enjoyed. The practical issues with this type of identification are well known.

Even if somehow, it can be established that the purchaser, say in the UAE, can be verified to have used and enjoyed the NFT in the UAE itself, or if a UAE supplier would adopt a conservative position on the matter, then the UAE would certainly be considered an attractive jurisdiction, given that the VAT rate is only 5% as compared to as high as 27% in some European countries or other jurisdictions.

A view similar to the Spanish Ruling was shared by the Belgian Minister of Finance, who recently stated in Parliament that he considers such a sale of an NFT akin to any other sale and therefore, in the view of the Finance Minister, an ESS.

In Switzerland too, as per the opinion of Cyrill Diefenbacher and Ollin Söllnerm in their article, the sale of NFTs would also qualify as ESS as Swiss VAT law is relatively aligned with the EU VAT laws. The authors also rightfully refer to the VAT exemption for creators of artwork which may apply, and which are common across multiple jurisdictions (but not the GCC).

The experiences that the UAE, or the broader Gulf Cooperation Council (“GCC”), can borrow from Europe are rather limited. NFT’s also do not seem to be as relevant in the other GCC countries.

Given their continued importance, other jurisdictions are bound to take position on the matter. With the VAT systems in the UAE and GCC being relatively new, an opportunity presents itself to align the tax framework with technological developments.

Income Tax – speculative income or regular income?

In the GCC countries, the sale of NFTs by a private person would not be subject to any form of taxation, given the absence of personal income tax. If the sale is made by a corporate (or an establishment), this may be different.

NFTs are taxed and regarded as property in most countries. There exists a distinction between (i) a taxpayer who creates NFTs and (ii) merely purchases or sells NFTs. The creation does not usually trigger any income tax. However, once the NFT is sold or otherwise transferred, the gain from the sale or transfer may be subject to tax.

In Switzerland, the tax treatment of NFTs depends on whether NFTs are considered private assets (not subject to tax) or business assets (subject to income tax). According to the Swiss definition of business asset, any individual participating in a “self-employed activity” and making a profit would be subject to income tax on the purchase and sale of NFTs. The same above cited article states that the key criteria to consider in establishing such an activity would be the transaction volume and potential use of debt to finance the transaction.

In our view, the above criteria would hardly apply to the UAE because the trigger of CIT in the UAE will be based on whether the individual is (required to) have a license or a permit to conduct the trade in the UAE.

With the UAE bringing in business tax (perhaps a more appropriate word for a corporate tax that taxes individuals), that legislative framework needs to be considered too. There is no difference made between speculative income and regular income, although the UAE does distinguish between passive and active income, stating its intention to tax only active income of natural persons.

In the US, the Internal Revenue Service (“IRS”) guidance on taxation of digital assets is sparse. Yet some authors referred to below have opined on how the taxability of NFTs would be played out. Section 197 of the Internal Revenue Code potentially allows taxpayers to amortize their adjusted basis in their NFTs over 15 years, as NFTs are considered intangible assets. However, this section can only apply to taxpayers other than creators. In the opinion of these authors, ”Amortization deductions would be allowed, and any potential losses such deductions generate would also be allowed as long as the taxpayer meets all of the loss limitation rules.” It remains to be seen what tax payers will actually hold NFT’s for 15 years.

In the US, a dealer (one who buys and sells NFTs as a business) seems to be taxed on the sale of NFTs as ordinary income. Both dealers and creators could deduct business expenses relating to the sale of the NFTs (this includes the cost of the acquisition of the NFTs) and where the sale amounts to a loss, US regulations would allow for a deduction against other ordinary income for the dealers (see here). Lastly, regarding depreciation, it seems that NFTs would not be subject to depreciation due to the fact that their useful life is hardly determinable.

In India, the tax law was recently amended to introduce a charging section for income earned from Virtual Digital Assets (“VDA”) (which includes NFTs). It is a separate provision separate from provisions on business profits or capital gains. Given the intention of the Government of the UAE to have a relatively simple and business friendly tax system, it is unlikely that the UAE would follow the Indian route. The separate charge is heavily criticized as detrimental for the NFT trade in India.

In Denmark, the Tax Assessment Council in Denmark (Skatterådet – the highest administrative tax assessment authority), has taken the position that the gains derived from the sale of NFTs would be considered ‘business income’, at least in the particular case at hand.

In this case, a software engineer earned substantially higher income than his salary by selling NFTs (crypto art). The Tax Council in Denmark held that given his intention and professional abilities, the activity is more appropriately considered to be business income.

We can imagine that if a similar scenario would be considered in the UAE, a similar outcome would ensue, despite the fact that the revenue would be earned by an unlicensed person. A one-off gain on account of sale of an NFT may receive a different treatment though.

VARA - Virtual Asset Regulatory Authority.

Government entities and regulatory authorities have also jumped on the NFT bandwagon. In March 2022, the Emirate of Dubai enacted the first legislation relating to virtual assets (Law No. 4 of 2022 on the Regulation of Virtual Assets) creating a new regulatory authority, i.e., Virtual Asset Regulatory Authority (“VARA”) which would provide the legal framework for regulating the trading of virtual assets such as cryptocurrencies and NFTs.

The creation of VARA marks an important step in the Emirate’s journey in becoming the leading hub for Virtual Assets. However, this first step toward virtual asset regulation in the UAE has not yet addressed taxation issues. As for tax purposes, the recent law does not provide clear information on the taxation of such assets but simply states that a person engaging in “services related to offering, and trading in, Virtual Tokens” will require a permit from VARA (Art 16 (a) 7).

Uncertain Space – Uncertain Times!

In conclusion, we will have to wait and see the position that the Government of the UAE, and insofar as relevant, the other GCC governments will take on the VAT and CIT implications of NFTs.

As discussed above, each scenario would require a case-by-case analysis and there is no straitjacket formula available on the CIT issues. As for VAT, it seems considering NFT’s as services is a sensible approach.

We will need to keep a close eye on other countries’ positions and determine the position that fits most appropriately within the tax system of the UAE, and the GCC. Uncertain and equally exciting times are ahead of us. 

What is Tax Insurance and why use it?

Planning and protecting for tax risks identified during the due diligence process through the purchase of a specific insurance product has become increasingly commonplace in the last five years. Indeed, the tax insurance market has grown significantly year-over-year, and it is estimated that over $100 billion of specific tax risk was insured globally in 2021. This, of course, is in addition to those unknown and unquantifiable tax risks that are covered by warranty and indemnity (W&I) policies that are now standard in most transactions and, notably, in private equity, real estate, and infrastructure mergers and acquisitions (M&A).

Despite the booming market globally, there are still several regions where the tax insurance market has yet to take off, including the Middle East, even though M&A activity in the region is buoyant, with more than 650 transactions completed in 2021 and a combined deal value of close to $90 billion. Admittedly, there are several contributing factors, with the most significant being the fact that, historically, the tax regimes in the region have been extremely limited or non-existent and unpredictable. However, this position has been evolving steadily in the last 48 months with the introduction of value-added tax (VAT) and excise tax and is now accelerating following the announcement of the BEPS 2.0 implementation, and the ensuing implementation of Pillar 1 and 2. Most recently, we have seen the United Arab Emirates (UAE) announce that they intend to introduce corporate tax at a rate of 9 percent from June 2023.

While there is every intention for the newly introduced corporate tax regime in the UAE to be simplistic and straightforward, the continued presence of free trade zones, in which corporation tax will not be levied, and other issues add uncertainty and opportunities for abuse. As a result, the expectation is that the legislation and supporting guidance will quickly grow and the level of complexity will increase. In the context of M&A transactions, this will likely increase those instances in which significant tax risks may be identified and need to be handled.

Why Is Specific Tax Insurance on the Rise?

Specific tax insurance is especially popular in a competitive auction process as it allows a potential purchaser to protect themselves from the risk identified, in the event it unwinds to a cash tax liability, while ensuring their bid remains competitive as they will not need to request a price adjustment or contractual protection such as a warranty or indemnity. Such price adjustments or contractual protection may make a bid less attractive.

Vendors are also in favour of it as it mitigates value lost through purchase price adjustments for risks that may never materialise and/or lowers the risk of having funds tied up for long periods in escrow or set aside to cover potential indemnities should they be triggered in the future.

There are other strategies to manage risks, such as:

• one party accepts the risk (and there is a corresponding adjustment in the deal value),
• eliminating the risk, e.g., by disclosing the risk it materialises, and the uncertainty is removed,
• pre-deal planning in which the tainted structure is removed or structured in a way that risks are mitigated e.g., deferring the deal until a holding period is met.

What is the Purpose of W&I Insurance? The purpose of a W&I policy is to protect against risks that are unknown at the time a deal is complete. In doing so, the seller is able to access the sale proceeds immediately rather than, as stated above, have any amount placed in escrow or price-chipped. Meanwhile, the buyer is protected as it can recover any unknown tax-related loss directly from the insurer. In return for providing the W&I policy, the insurer will expect a premium to be paid in return for the risk they are taking on. The size of this policy will depend on a number of factors such as the jurisdictions in which the relevant company operates and the level of due diligence carried out in relation to it.

Typically, the insuring party will want sight of the tax due diligence report and will raise a number of questions with the report preparer to clarify any points of uncertainty and understand the level of work that has been carried out, together with any limitations to the scope. Following this process, they will indicate the expected premium to insure the warranties and indemnities package. The process can be quite extensive, especially when large risks are insured.

Who Needs Specific Tax Insurance? In a tax due diligence process, especially given the ever-increasing level of anti-abuse or anti-avoidance legislation, it is not uncommon for a tax risk to be discovered that, while low in terms of likelihood of crystallisation, is significant in terms of quantum.

Naturally, a buyer would not want to be exposed to this amount should it crystallise, but attempting to protect against it through a purchase price adjustment or specific indemnity is likely to make their bid uncompetitive. Alternatively, a buyer may reach out to an insurance broker who will look to find an insurer to underwrite the risk. The underwriter would typically want a piece of work to be undertaken by a reputable advisor to analyse the risk, quantify it and set out the likelihood of it crystallising. Thus, they would look to price the premium for insuring it accordingly. It should be noted that most insurers will cover the cost of defending the risk and interest and penalties arising, as well as the tax liability itself.

Outside of the deal process, a common use of specific tax insurance is to protect against withholding tax risks of repatriating funds from subsidiaries back to parent companies. As a result of landmark case law, tax authorities (in particular those in Europe) are increasingly scrutinising and disallowing double tax treaty benefits of reducing withholding tax if the relevant tax authorities do not believe that the recipient of the repatriated funds has the sufficient “substance” to benefit from the double tax treaty, or it is not the true ultimate beneficial owner of such repatriated funds (the “beneficial owner” test.) The premium for insuring withholding tax risks will ultimately depend on the facts and circumstances, but premiums can range from two percent to eight percent of the potential tax exposure. For those Middle Eastern focused businesses that are aware of tax insurance, it is most likely that they have encountered it in this context.

How Can We Help?

While this market has yet to fully take off in the Middle East, a number of international insurance brokers and underwriters are increasing their presence in the region. As the tax regime in the region develops and, as we predicted, increases in both complexity and scope, we would expect to see tax insurance increase in relevance in the context of M&A transactions.

Aurifer will be co-hosting a webinar with one of our strategic partners in the region, Alvarez & Marsal, to talk our Middle Eastern clients through tax insurance in further detail and discuss how it may apply to M&A transactions in the region going forward. We look forward to seeing you all there. Registrations will open soon. If you wish to already register, drop an E-mail to lovely@aurifer.tax

In the text of the public consultation, published by the UAE Ministry of Finance, it discusses its proposed regime for Free Zone Companies.

While the Corporate Income Tax concepts are thus far fairly straightforward, they are much less so for Free Zones.

Contrary to perhaps more simple exemptions for Free Zone companies in the Philippines or India, the UAE is implementing a fairly complex regime, trying to balance a number of interests.

Free Zones have been one of the success stories of the UAE, but incorporating there comes with limitations too, as e.g. the prohibition to trade with the mainland. In mainland, foreign businesses needed a local sponsor or shareholder.

In recent times, those lines have blurred, with more legal possibilities for foreign businesses to fully own a mainland businesses. In addition, free zones businesses were sometimes awarded a "dual license", allowing them to operate in the mainland, and sometimes were even awarded importer codes.

The principle under the Corporate Income Tax Law which will be implemented with effect from June 2023, is that the UAE will honour the tax incentives currently being offered to Free Zone businesses that maintain adequate substance and comply with all regulatory requirements.

Presumably the reference to substance is a reference to the Economic Substance Regulations introduced in 2019 by way of Cabinet Decision No. 57 of 2020. It would be helpful if it is clarified whether for example a free zone business with a mainland branch can count its mainland substance towards the substance required for ESR purposes.

In addition, it is assumed that when a Free Zone business loses its tax exemption, the substance requirements are no longer applicable.

The CT exemption only continues to apply if the business solely transacts with other Free zone businesses (in the same free zone or another) or with third countries. This offers substantial possibilities, as JAFZA alone, according to its own claims, in 2019 contributed 23.8% to Dubai’s GDP (1).

There are some interesting considerations as regarding what constitutes transacting with the mainland. If a Free Zone business does so, without having incorporated a branch subject to CT, then the income of the Free Zone business is fully subject to CT. In other words, there is no more blanket exemption available.

What constitutes transacting with the mainland is interesting to note, as:

• Free zone businesses in a Designated Zone for VAT purposes are not considered transacting with the mainland, if the buyer is the importer of record.
• Conversely, assumed, though not made explicit, services rendered to the mainland are considered, and therefore such FZ businesses involved in these services will loose their tax exemption.

As regarding goods, there are a number of situations to be considered:

• Free Zone businesses do not control the status of the Free Zone as a Designated Zone. Such a status needs to be applied for by the Free Zone Authority, and is subject to approval. Moreover, Free Zones can loose or gain Designated Zone status with retroactive effect. This has an adverse impact on legal certainty in regard to the application of the tax exemption.
• There is a stark contrast with traders in a free zone (e.g. commodity traders), who may buy in mainland to sell in mainland, or to bring those goods into a free zone. Those seem to be excluded from the tax exemption, whereas they are conducting the same trade, just in the opposite direction.
• Retail sales in the Designated Zone look to be at an advantage. For VAT purposes, they are subject to VAT, but when conducted by a Free Zone business with mainland and free zone branches, the mainland branches’ income is subject to CT, and the free zone branches in a designated zone are not.

Certain transactions are further allowed to be conducted with the mainland, such as situations where a free zone business earns passive income, i.e. interest, royalties, dividends and capital gains from mainland companies. This is good news for holding companies in free zones.

Transactions from a Free zone to a group company in mainland are also allowed without losing the benefit of the 0% CT. However, payments made to a Free zone business will not constitute a deductible expense for CT purposes.

So far, we have not identified an anti-abuse rule preventing a free zone company to make the charge to a business abroad, for that business to subsequently charge the mainland business, this nonetheless creating a deductible expense.

Group Treasury Centres or HQs often established in Free Zones may considered the non-deductibility on a group level a disadvantage. This may tempt groups to reconsider their structure, and put their regional headquarter in a different country with a low level of taxation (e.g. Bahrain or a gree zone abroad), and where payments would nonetheless be deductible. Additionally, the non deductibility looks limited to UAE Free Zones.

A business who relocates their Group Treasury Centre for example to a KSA Free zone, or a HQ, may continue to benefit from tax exempt income on the one hand, and deductibility on the other hand.

From a policy perspective, the UAE may consider an anti-abuse rule considering this situation, which may for example consist of defining a Free Zone in a broad enough manner in order for it to encompass foreign free zones as well, as no or only nominal tax jurisdictions in which activities may be relocated.

It is fair to say that due to the complexities, compliance will need to be closely monitored.

(1) https://www.dpworld.com/en/uae/parks-and-economic-zones/jebel-ali-free-zone, consulted on 4 May 2022.