BEPS no. 6 & the U.A.E .

1. BEPS no. 6 & the U.A.E. CharteredInstitute of Taxation Prof. dr. J.W. Bellingwout 28 April 2014

2. BEPS & UAE • The UAE: OECD/BEPS is about ‘base erosion and profitshifting’As a zero taxjurisdiction – no ‘base erosion’ in the UAEitselfDoes the UAEplay a role in eroding the tax base of otherjurisdictions? • BEPS no 6:About ‘taxtreatyabuse’Main focus on low WHTratesondividends, interest and royaltiesBut much broader scope of proposed anti-avoidance measures • Will BEPS no. 6 do any harm to the UAE’s tax treaty network? • Is the UAE’s position as a zero (corporate) tax jurisdiction at stake, in light of BEPS? • Impact analysis:- inbound investments into the UAE- outbound investments out of the UAE- flow-through activities into/out of the UAE

3. Corporate incometax as a starting point • Why do countrieslevy a corporateincometax (CT)?- Arguments, Old & New • Complementaryfunction- vis-à-vis personalincometax (PT) leviedfromindividuals- CT as a whole: ananti-avoidancemeasure to safeguard PT leviedfrom entrepreneurs- this argument is more validforfamilyownedcompaniesthanforlistedMNEs • Fiscal budget - the simpleneed of taxcollections to finance the country’sexpenses- CTcollections are relativelysmall: 3% of GDP in OECD (NL: < 2%)- NL: CT<10% of totaltaxcollections (PT and VAT account for 66%) • Psychologicalreasons: ‘integrity of the tax system as a whole’, feelingsabout ‘fairness’- “whywould I paytax, if big multinationals don’t?”- the role of NGOs, someMPs, internet and the media • International (G8/20, OECD, EU) TaxStandards: - implicitpressureonjurisdictions to levy a CT?

4. CT & Some Old UnsolvedProblems • Who pays for the CT: the company or its customers?- Milton Friedman knows the answer • And if CT is passed on by the company to its customers- does that include CT on all profits- or only CT on predictable profits from routine functions, and not CT on residual profits? • In other words, would it not make theoretical sense - to exempt routine profits from CT- to only tax residual profits, i.e. in excess of a remuneration for routine functions? • In practice it is the other way around:- jurisdictions tend to be successful in taxing routine functions- MNE’s have been successful in avoiding/ deferring tax on residual profits • Pragmatic view on OECD/BEPS policy:- BEPS is mainly about avoiding tax on residual profts- but perhaps the OECD needs to be more pragmatic, and focus on taxing routine profits only- Dutch example of ‘box 3’ taxation (PIT)

5. CT & Some Old UnsolvedProblems (continued) • Legal reality, form over substance- a company as a body corporate is a conceptualthing- itexistsbecause we believeitexists- itcanownassets, enter intocontracts, assumerisks, earn profits • Thislegalrealitycanbemanipulated- ‘letterbox’ companies, special purposevehicles- IP companies, Financecompanies, Holding companies,Securitizationvehicles, InvestmentFunds, etc.- country of taxresidence, functionality, level of entrepreneurial risk, allocation of profits- it all startedwithlooking at the legalrealityonly- slowlyon the way back byimposingsubstancerequirements and imposing more economicTP parameters (significant peoplefunctions – whichcanalsobemanipulated) • Transfer Pricing(TP) as anexample of how the opposite has been achieved- US to increaseitstax base byapplying the a.a.l. principle- butinsteadotherjurisdictionssufferfromincreasedexpenseserodingtheirtax bases- the correspondingincomebeingallocated to entities in low taxjurisdictions • BEPStries to defend a Western World regime that is disfunctional and outdated

6. CT & Some Old UnsolvedProblems (continued) • International distortionsdue to lack of harmonization- double taxation / double non-taxation- mismatches in entityclassification (transparent/non-transparent)- mismatches in financial instrument classification (debt/equity)- mismatches in permanent establishment thresholds and allocation of assets/income- mismatches in timing of realization of profits/lossess- mismatches in transfer pricing / at arm’slength criteria- etc. etc. • TaxCompetitionbetweenjurisdictions- taxrates, taxincentives- deliberate mismatches to achieve double non-taxation- in order to attractforeignbusinesses/ business functions • Are the corporatetaxpayers to blame?Cancompaniesthat benefit from international mismatches and companiesthat benefit fromjurisdictionsthatactively invite these businesses to makeuse of incentives and deliberate mismatches, beaccusedfromimmoralbehaviour / agressivetax planning (ATP)?- this is whyBEPS and the EU action plan against ATP notonly focus ontaxpayersbutalsoonjurisdictionswithharmfultax regimes

7. Dividend vs. Interest & Royalties Country R I Country R II ParentCo GroupCo + Interest Royalties WHT Dividend WHT Country S Country S OpCo OpCo -/- Profit Profit

8. TreatyShopping Country R Country R Top Co Top Co DividendWHT (0, 5, 10%) Interest Royalties No WHT NL Co Dividend InterestRoyaltiesWHT (20, 25, 30%) NL No taxtreatyor Sub optimaltaxtreaty Dividend Interest RoyaltiesWHT (0, 5, 10%) Op Co Op Co Tax treaties: “Resident”, “Beneficial owner”, LOB (US), MPT Country S Country S

9. Treaty shopping & UAE ? • What has the UAE to do with this? • Zero tax jurisdiction – but not a tax haven • Tax treaties: to avoid double taxation- in case of UAE: no double taxation- inbound: Capital Import Neutrality: level playing field - foreign and local investors- outbound: why would a UAE investor pay higher WHT in Germany than a Japanese investor? • UAE: a rapidly increasing tax treaty network- more than 70 tax treaties (not all in force yet)- beneficial for inbound (FDI) & outbound investments - a ‘must have’ in terms of economic infrastructure- reputation and respect as a jurisdiction- level playing field, non-discrimination- a basis for exchange of information- provides certainty in case of future developments

10. BEPS no. 6 – Tax Treaty Abuse • “Preventing the granting of treaty benefits in inappropriate circumstances”BEPS no. 6, 14 March 2014 • Consultation document- drafted at working party level- not reviewed/blessed by CFA- i.e. far from final version- 78 responses received- with a lot of criticism • Tax Policy Considerations- advising countries whether they should enter into tax treaties with certain jurisdictions • New preamble of OECD Model Convention (OMC)- not only to avoid double taxation - but also to avoid double non-taxation (including tax avoidance / treaty shopping) • Draconic measures to be included in OMC and existing tax treaties to prevent treaty shopping- Limitation on Benefits (LOB) provision- General Anti Avoidance Rules (GAAR) / Main Purpose Test- Specific Anti Avoidance Rules (SAAR)- other measures (e.g. to abolish tie-breaker rule of Art. 4(3) OMC)

11. BEPS no. 6 - measures against treaty shopping - LOB Country R • Limitation on Benefits (LOB)- ownership test, or- active trade or business test • Ownership test / extremely difficult to satisfy:- HQ of listed companies + subsidiaries located in the same country as the HQ- other companies if owned by qualifying persons resident in the same country • Active trade or business (TB) test:- only income in connection with TB- investment funds: no active TB- volume of TB should be substantial in relation to TB in country S • Specific persons that always qualify:- government, charitable, religious, scientific, cultural, etc. bodies • ‘Escape’: access to treaty benefits was not one of the main purposes • No ‘equivalent beneficiary’ escape . Top Co DividendWHT (0, 5, 10%) Interest Royalties No WHT NL Co NL Dividend Interest RoyaltiesWHT (0, 5, 10%) Op Co Country S

12. BEPS no. 6 - measures against treaty shopping - MPT Country R . • In addition to LOB: MPT • This main purpose test applies if:“one of the main purposes of any arrangement or transaction”is to obtain a treaty benefit for an item of income resulting from such arrangement or transaction • Example: bank & dividendstripping for non-resident clients • Huge level of uncertaintyEvery transaction to be monitoredHuge administrative burdenCombination with LOB is too much Top Co Dividend InterestRoyaltiesWHT (20, 25, 30%) No taxtreatyor Sub optimaltaxtreaty Op Co Country S

13. BEPS no. 6 - Impact on UAE Outbound • UAE based investors- investing in a source country- without a tax treaty - currently route this investment via another country –> treaty shopping • BEPS no. 6 - if adopted - will make this impossible • This will increase foreign tax burdens on UAE based investors • Clearly the message is: to invest directly out of the UAE in the source country • Therefore, the UAE will become more dependent on its own tax treaty network with relevant source countries Inbound • Foreign based investors- investing into the UAE- without a tax treaty - currently route this investment via another country -> treaty shopping • BEPS no. 6 - if adopted - will make this impossible • This will increase foreign tax burdens on foreign based investors • Clearly the message is: to invest directly into the UAE out of the investor’s country • Therefore, the UAE will become more dependent on its own tax treaty network with relevant investors’ countries

14. BEPS no. 6 - Tax Policy Considerations • “Policy considerations that countries should consider before deciding to enter into a tax treaty with another country” • “...whether a tax treaty should be concluded with a State, but also (...) whether a State should seek to modify (...) or even (...) terminate a treaty...” • “Where a State levies no or low income taxes, the other States should consider whether there are risks of double taxation that would justify (...) a tax treaty.” • “States should also consider (...) their prospective treaty partners (...) the ability to exchange tax information, this being a key aspect that should be taken into account when deciding whether or not to enter into a tax treaty.” • The UAE’s profile in light of these policy considerations? - no income taxes (other than foreign banks)- exchange of tax information (OECD Peer Review Phase 1: 24 April 2014 Supplementary Report; Phase II to come)

15. BEPS no. 6 - a further impact on UAE • Conclusion: increased importance of UAE’s own tax treaty network • Strength: - more than 70 tax treaties, which is good - more tax treaties (with important jurisdictions) would even be better • Weakness:- the current tax treaties are often limited in scope in terms of beneficiaries- absent a CT, many countries are not willing to grant full benefits to all UAE residents under a tax treaty • Threats:- the policy considerations in BEPS no. 6 advise countries not to conclude or even terminate tax treaties with zero tax jurisdictions- is the UAE in danger here? • What would be the most logical step to turn this into an opportunity?

16. Thankyouforyour time!