Exploring the Fate of Pillar 2 in the Gulf

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The discussions around GCC and Pillar 2 are currently buzzing, especially as the UAE takes the lead by initiating the first public consultation in the GCC on this matter. Understanding the situation in the GCC regarding the applicability and implementation of Pillar 2 is crucial, particularly considering its focus on establishing a global minimum tax rate of 15%.  

Firstly, it's important to note that all GCC countries have agreed to participate in the BEPS inclusive framework. Pillar 2 primarily revolves around the concept of a global minimum tax rate, which is set at 15%.  

The UAE's proactive approach stems from its recent implementation of corporate tax, effective for most entities from January 1st, 2024. It allows the UAE to align its tax laws with Pillar 2 early on, leveraging the newness of its legislation. Moreover, the region has witnessed significant foreign investments, with an increasing number of listed companies likely to meet the threshold of 750 million euros. However, the Ministry of Finance, UAE has announced that Pillar 2 will not apply in the UAE in 2024. 

Regarding other GCC nations, Saudi Arabia offers tax exemptions for GCC entities, while imposing taxes such as Zakat on others and it will have to re-align its taxation regime for Pillar 2. Generally, non-Saudi investors are liable for income tax in Saudi Arabia. In most cases, Saudi citizen investors (and citizens of the GCC countries, who are considered to be Saudi citizens for Saudi tax purposes) are liable for Zakat, an Islamic assessment. Where a company is owned by both Saudi and non-Saudi interests, the portion of taxable income attributable to the non-Saudi interest is subject to income tax, and the Saudi share goes into the basis on which Zakat is assessed. 

Oman already has a 15% tax rate in place but may await UAE and Saudi Arabia's implementation before making its move, especially considering its fewer listed entities. Bahrain faces a similar situation due to its lower number of listed entities. 

Kuwait, with its unique taxation regime, does not impose corporate tax on companies wholly owned by the nationals of Kuwait or other Gulf Cooperation Council (GCC) countries (Bahrain, Oman, Qatar, Saudi Arabia, and the United Arab Emirates). However, GCC companies with foreign ownership are subject to taxation to the extent of the foreign ownership in Kuwait. Thus, it will need to adapt its tax policies accordingly. Meanwhile, Qatar, with a tax rate of 10%, will need to assess and potentially adjust its policies in response to Pillar 2, taking into account the number of entities falling under its purview. 

 As the global community shifts towards the implementation of Pillar 2 regulations like most of the European countries have already got Pillar 2 in force from 1st January 2024, the Gulf region faces its own unique set of challenges and considerations. The delay could be expected because of the wait-and-watch policy which can be adopted by Oman, Kuwait, and Qatar but also by the approach adopted by key players such as the UK, European countries, and the US. 

One notable aspect of the Pillar 2 regime is the presence of exemptions for specific entities. These exemptions encompass government entities primarily engaged in non-commercial activities, international and non-profit organizations, pension and investment funds, as well as certain real estate investment entities. Additionally, income derived from qualifying international shipping activities also enjoy exclusion under the Pillar 2 framework. 

A significant area for GCC countries is the potential adoption of a "Qualifying Domestic Minimum Top-up Tax" (QDMTT), similar to the model currently in place in the UK. This measure aims to ensure that any additional tax liabilities under Pillar 2 are payable within the jurisdiction where an entity is based. Hence, the taxation revenue remains in the local jurisdiction and does not flow out of the country. In the context of the UAE, this could have implications for qualifying free zone entities currently benefiting from a 0% corporate tax rate, subject to specific conditions outlined in the UAE Corporate Tax Law (CT Law).  

Under the proposed QDMTT framework, qualifying free zone entities would be required to pay a 15% tax rate, with certain carve-outs based on substance, particularly about payroll and tangible assets. This adjustment serves to safeguard the UAE's tax revenue share while aligning with global tax standards. Consequently, multinational corporations operating within the UAE, including qualifying free zone entities, would eventually fall under the purview of Pillar 2 regulations upon their implementation.  

Until the adoption of Pillar 2 rules by the UAE, multinationals operating within the country remain subject to a 9% corporate tax rate under the prevailing UAE Corporate Tax regime, with exceptions of 0% tax continued to qualifying free zone entities and exempt persons as per the UAE CT Law. 

In summary, the fate of Pillar 2 in the GCC hinges on various factors, including international developments and domestic policy adjustments. While delays may persist, proactive measures such as the public consultation document released by the UAE signal the region's commitment to aligning with evolving global tax frameworks. 

The views expressed above are presented in a personal capacity and reflect the prevailing circumstances as of April 2024. It is essential to recognize that the landscape surrounding the adoption and implementation of Pillar 2 regulations is subject to ongoing developments and is likely to evolve. Consequently, updates and revisions may be necessary as the understanding and implications of Pillar 2 adoption within the GCC region become clearer. 

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.