Double Tax Avoidance Agreements (DTAA’s) allow companies who conduct business internationally to minimise their overall tax burden.
DTAA’s were initially agreed for the purposes of avoiding double taxation on the same tax-payer, on the same tax-base. However, they have been used by some multinational organisations to avoid tax in a way that undermines the integrity and purpose of the treaties.
In order to counteract this, the OECD, as part of its Base Erosion and Profit Shifting (BEPS) project, developed the Multilateral Instrument (MLI), which enables member jurisdictions to implement agreed minimum standards within applicable DTAA’s – referred to as ‘covered tax agreements’ – to counter treaty abuse in an efficient and consistent manner.
The UAE signed the Multilateral Instrument (MLI) on June 27th, 2018 and this was ratified on May 29th, 2019. The UAE and the UK have both ratified the MLI, bringing it into force on September 1st, this year. As such, the UAE-UK DTAA has been modified, to include the minimum standards contained within the MLI.
On October 21st, 2019, the UK HM Revenue and Customs published the text of the UAE-UK DTAA, which includes the following changes:
- Additional emphasis that the DTAA is not to be used for the avoidance of taxes;
- Inclusion of a Principal Purpose Test (PPT) whereby tax benefits would be denied if it is found that the main purpose, or one of the main purposes, of any transaction or arrangement is to obtain a tax benefit; and
- Additional wording regarding the ‘Mutual Agreement Procedures’, to improve the dispute resolution process between the tax authorities of each country.
The most important change to the UAE-UK DTAA is the PPT, which aims to make sure that DTAA benefits will not be granted where the ‘main purpose, or one of the main purposes’ of the arrangement or transaction is to access the benefits of the DTAA.
The purpose of the PPT is to prevent treaty benefits from being granted in unintended circumstances, and all UAE Covered Tax Agreements will be required to implement this minimum standard.
So, UAE companies transacting with the UK and benefiting from the DTAA will now have to analyse the aims and objectives of any arrangement or transaction with the UK to determine whether it is reasonable to conclude that one of the principal purposes of that transaction was not to obtain a tax benefit, such as a reduction in tax or profit shifting, for example.
This analysis would involve identifying the tax and non-tax reasons for undertaking the transaction, and critically evaluating these reasons to determine whether the arrangement or transaction is principally tax driven.
Where this is the case, the DTAA benefits can be denied.
UAE Economic Substance Issues
If obtaining the DTAA benefit could be considered a principal purpose of the transaction, but the granting of the DTAA benefit is in accordance with the DTAA’s objectives, then companies may have to show that there is economic substance in the jurisdiction obtaining the benefit.
On this basis, it would be necessary to consider the UAE’s economic substance regulations issued April 30th, 2019, and the supporting guidance notes.
Overall, with the introduction of the MLI standards, the UAE is striving to counter harmful tax practices and comply with international tax standards, which will help strengthen the UAE’s reputation globally.
Consequently, these changes require businesses operating in the UAE to consider very carefully their operating models and analyse transactions with treaty jurisdictions adopting the MLI.
If you have any questions, please contact us.