Dubai – MENA Herald: UAE financial services firms must prepare for the changing tax landscape – KPMG has announced at a recently held industry seminar.

The UAE tax environment has been a very simple one so far, with limited enforcement of taxes on specified sectors, no personal income taxes, and no consumption taxes. However, developments in international tax, along with the economic situation brought about with the falling oil prices, has meant that the UAE has had to think hard about its policy on tax matters, and will also need to consider impact of international tax developments on businesses located in the UAE.

A number of international and local changes are proposed, including i) the Value Added Tax (VAT) proposals across the GCC, with planned implementation date of 1 January 2018 in the UAE; ii) new transfer pricing regulations stemming from the OECD’s BEPS initiative, which will impact UAE firms with international operations; and iii) updates to the global Automatic Exchange of Information (AEOI), which will result on greater transparency and sharing of tax payer related information with tax authorities in other countries.

“UAE financial services firms will be directly impacted, and must analyse the impact of these developments on their businesses” – says Emilio Pera, Head of Financial Services at KPMG in the UAE.

Numerous GCC countries have announced their intention to implement VAT as early as 1 January 2018 and companies must ensure they are preparing adequately. VAT will affect the financial services sector and a wide range of business operations and services may need to be addressed.

Rob Dalla Costa, VAT Leader at KPMG, said: “The introduction of any new tax regime like VAT is a major change and it is going to take some time for organisations to adapt. Businesses want to be compliant and will be looking to the government for guidance and support on the requirements.

Typically most financial services are treated as exempt under a VAT regime and this brings with it significant compliance costs and embedded VAT costs which are typically passed onto customers.”

At the same time, UAE financial services firms with international operations must prepare for the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, which makes international tax (including transfer pricing) more transparent and substantive.

Transfer pricing is the rate at which two related parties of the same group carry out transactions with each other. If a UAE-based company engages in intercompany transactions with related parties in jurisdictions with transfer pricing rules, the intercompany transactions will be subject to a new level of scrutiny under BEPS.

Transfer pricing gives a group with international operations the opportunity to strategically manage profits across jurisdictions. According to the OECD, revenue losses from BEPS are estimated at between US$100 billion and US$240 million annually.

To counter this loss in revenues, the BEPS proposals focus on mitigating tax strategies that exploit gaps and mismatches in tax rules to shift profits to low-tax or no-tax locations, especially when a company may have little or no economic activity there.

KPMG expects that there will be a need to help financial services organisations develop and implement economically supportable transfer prices, document policies and outcomes, and respond to tax authority challenges.

Shabana Begum, Transfer Pricing Leader at KPMG, said: “Some of the key areas we expect financial services companies will require assistance in are: a) Identifying potential BEPS risks and opportunities; b) Defining and implementing appropriate measures to address the potential risks arising from regulatory changes; and c) Complying with new tax and transfer pricing obligations.”

“Transfer pricing and BEPS regulations could drive up costs for firms across the financial services sector. However, for GCC banks, asset managers, and insurers, applying transfer pricing correctly could help cut tax burdens, increase returns to shareholders and reduce prices for consumers by simplifying cross-charging,” Shabana added.

Finally, while financial services firms are coming to grips with FATCA, the Common Reporting Standard (CRS), the global standard on AEOI initiated by the OECD, is expected to improve transparency and exchange of tax related information, with a view to helping tax authorities globally mitigate international tax avoidance. However, complying with AEOI requirements will impose additional obligations on banks and financial institutions.

“Over 100 countries have signed up for the OECD’s Common Reporting Standard (CRS) program and have committed to exchange account related information with tax authorities annually on a global basis. As such, UAE financial services firms with global operations, will need to assess the timelines for on boarding, remediation and reporting, and adapt their systems, policies and procedures to comply with these additional requirements” says Nilesh Ashar, Head of Tax for KPMG in the UAE.