The UAE signed a Multilateral Convention under the OECD: Now what?

Eptalex — MEG LEGAL SERVICES looks at the latest developments in the UAE regulatory landscape.

The UAE announced its intention to comply with OECD’s Automatic Exchange of Tax Information (AEoI) in 2010 with the goal to begin reporting in 2018 for FY2017. Just over halfway through 2017, we are starting to see the pragmatic outcomes of the efforts of a country still officially in Phase II of implementation and a private sector worried about its competitive edge when becoming fully compliant with AEoI and moving toward a worldwide trend of transparency.

On April 21, 2017, the UAE signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Convention), a multinational instrument for international tax cooperation aimed at taxation transparency and combatting money laundering and other illicit flows of liquidity. The convention details various forms of administrative assistance in tax matters, including exchange of information on request, spontaneous exchange, automatic exchange, tax examinations abroad, simultaneous tax examinations, and assistance in tax collection. The UAE joins Kuwait and Lebanon in signing the Convention in 2017. However, the UAE has not signed the Multilateral Competent Authority Agreement, which works in conjunction with the Convention, though it committed to signing it at an earlier date. With proposed first exchanges set to occur in 2018, the regulatory system of the UAE is set for some potentially drastic changes when it comes to taxes and banking and company secrecy over the next few months if compliance occurs on schedule. At the time of writing, the UAE still has not deposited any instrument of ratification or approval with the OECD, so it is difficult to say whether exchanges will happen in 2018 or not.

The OECD touts the Convention as a simpler and more standardized way to get to automatic global information exchanges without each country having to negotiate a bilateral agreement with every other country. However, not every country has been willing to jump on board with the OECD’s mission, typically citing conflicts with preexisting national law, banking secrecy, concerns for beneficial owners, and so on. The UAE has taken numerous steps over the past 20 years to bring international disclosure standards to corporate governance and taxation in the UAE, like requiring companies to operate in compliance with International Accounting Standards. OECD compliance is simply the next step in the UAE continuing down this path and ensuring that more sustainable and genuinely profitable companies choose to make the UAE their home.

Financial institutions in the UAE were already reporting information on bank accounts held by tax residents of the US and certain entities controlled by such tax residents on account of signing a Model 1 intergovernmental agreement with the US, instigating FATCA in 2015. Fully applying the Convention means those reporting requirements will expand to every country that has signed the Convention. However, the Convention only has reporting requirements rather than the broader requirements within FATCA to actually withhold certain taxes, so although the reporting requirements are broader due to the increased number of jurisdictions involved, the numerated obligations are fewer for financial institutions.

Prior to the Convention, exchanging financial information on residents was typically an on-request procedure, leaving the decision to release information as a sovereign matter. Under the Convention, that information is automatically exchanged at the end of a fiscal year, absent a few exceptions meaning persons with tax residencies differing from their physical residences will typically have any tax information shared with both countries of residence. Some of those persons will need to reevaluate where assets are located and in what amounts in order to ensure they are not unnecessarily doubling their tax burden.

Fortunately for those in this situation, historically whenever a country joined the Convention or some similar automatic exchange, they typically set up a period of time for a process called voluntary disclosure. Voluntary disclosure means that non-compliant persons can inform the government of the taxes they haven’t paid and pay them with little to no penalty. It decreases the cost of noncompliance for a taxpayer and encourages transparency with the tax resident country so the country of residence can properly track what amounts it should be receiving taxes on and all countries involved can help stem the flow of illicit funds through otherwise opaque systems. While countries have yet to specifically list the requirements for disclosing information about amounts in the UAE, it would be logical to expect that with the large amount of assets in the UAE, others will create or extend current voluntary disclosure options to encourage citizens and residents to comply.
These new reporting requirements will be in addition to any controlled foreign company (CFC) rules that may apply to any given person. With taxes in the UAE so low compared to most other jurisdictions, the UAE is regularly labeled as a tax haven or blacklisted, a condition that typically sets off CFC rules in other jurisdictions. CFC rules are aimed at preventing the erosion of the domestic tax base and discouraging residents from shifting income to low or no tax jurisdictions like the UAE. While these rules vary from country to country, generally they look at whether a domestic taxpayer controls the CFC, if the jurisdiction the CFC is located in imposes a tax rate substantially lower than the rate in the shareholder’s country or if the CFC is located in a grey or black listed country. We can expect to see income earned in the UAE and received by those outside to be subject to much higher reporting requirements as the UAE exchanges more information and the recipient jurisdictions become more aware of how much they are not collecting. This will likely result in the amounts being taxed in both countries until the UAE is no longer blacklisted or the countries renegotiate tax treaties to remove this exception to double taxation treaties.

With such a complex network of ever expanding signatories to the OECD’s agreements, new and limited voluntary disclosure periods, and developing CFC rules, companies and individuals whose assets are spread across borders will need to avail themselves of every opportunity to become knowledgeable about the compliance landscape and to comply with their tax liabilities in all countries that may have a claim to their income.