[World Tax News] Federal Tax Authority of the UAE Releases a Guide on Transfer Pricing and More

Editorial Team – [2023] 156 taxmann.com 71 (Article)

World Tax News provides a weekly snippet of tax news from around the globe. Here is a glimpse of the tax happening in the world this week.

1. Federal Tax Authority of the UAE Releases a Guide on Transfer Pricing

On October 23, 2023, the UAE Federal Tax Authority (FTA) released the Corporate Tax Guide focusing on Transfer Pricing. This guide aims to offer comprehensive guidance regarding the Transfer Pricing framework in the UAE, aiming to simplify the Transfer Pricing regulations for readers. It equips readers with:

(i) Insight into the Transfer Pricing regulations and processes, encompassing the identification of Related Party transactions, the assessment of transactions for compliance with the Arm’s Length principle, and other associated compliance obligations such as Transfer Pricing documentation and

(ii) guidance on addressing common queries that businesses may encounter, aimed at minimizing uncertainties for Taxable Persons when applying the Transfer Pricing provisions of the Corporate Tax Law.

(a) For whom is this guide intended?

This guide is meant for individuals and entities, whether legal or natural persons, seeking to gain a better understanding of the Transfer Pricing system in the UAE. It is recommended to be perused in tandem with the Corporate Tax Law, its implementing decisions, and any additional pertinent directives released by the FTA.

Source: Corporate Tax Guide on Transfer Pricing

2. UAE Releases a Corporate Tax Handbook Regarding Exempted Income, Covering Dividends and Participation Exemptions

The UAE Federal Tax Authority (FTA) released the Corporate Tax Guide, focusing on Exempt Income, specifically Dividends and Participation Exemption. The guide’s objective and intended audience can be outlined as follows:

(a) Objectives of the guide

This guide has been crafted to offer Taxable Persons comprehensive assistance in comprehending the exemptions outlined in the Corporate Tax Law concerning Dividends and various forms of profit distributions, including the Participation Exemption.
The Participation Exemption excludes particular income streams, such as Dividends and capital gains, from Corporate Tax obligations, provided that a Taxable Person maintains a substantial and enduring ownership stake in a legal entity. Within this guide, explanations of specific terminologies and provisions within the Corporate Tax Law have been dealt with, encompassing the following areas:

(i) The precise definitions of Dividends and other forms of profit distributions.

(ii) The scope of income (and its associated expenses) that qualifies for exemption within a Participation.

(iii) Eligibility criteria for individuals or entities seeking this exemption.

(iv) A comprehensive explanation of the mechanics governing the Participation Exemption.

(v) Implications tied to Tax Groups and their relevance in this context

(b) For whom is this guide intended?

This guide is intended for individuals and entities subject to taxation who receive Dividends from a Resident legal entity and income or gains arising from a Participating Interest. Taxable Persons encompass legal entities and natural individuals, provided that the income does not fall under the category of Personal Investment income. It is essential to read this guide alongside the Corporate Tax Law, implementing decisions, and any additional pertinent directives issued by the FTA.

Source: Corporate Tax Guide on Exempt Income: Dividends and Participation Exemption

3. U.S. introduces new measures to ensure Large Corporations Pay Taxes Owed

The United States Internal Revenue Service (IRS) is working to ensure large corporations and high-income individual filers pay the taxes they owe. Before the Inflation Reduction Act, over a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.

(a) Large foreign-owned corporations transfer pricing initiative

The IRS is increasing compliance efforts on the U.S. subsidiaries of foreign companies that distribute goods in the U.S. and do not pay their fair share of tax on the profit they earn from their U.S. activity. These foreign companies report losses or exceedingly low margins year after year through improper transfer pricing to avoid reporting an appropriate amount of U.S. profits. To crack down on this strategy, the IRS is sending compliance alerts to approximately 150 subsidiaries of large foreign corporations to reiterate their U.S. tax obligations and incentivize self-correction.

(b) Expansion of the Large Corporate Compliance program

The IRS’ Large Business & International Division’s (LB&I) Large Corporate Compliance (LCC) program focuses on noncompliance by using data analytics to identify large corporate taxpayers for audit. LCC includes the largest and most complex corporate taxpayers with average assets of more than $24 billion and average taxable income of approximately $526 million per year. As new accountants come on board in early 2024, LB&I is expanding the program by starting an additional 60 audits of the largest corporate taxpayers selected using a combination of artificial intelligence and subject matter expertise in cross-border issues and corporate planning and transactions.

(c) Cracking down on abuse of repealed corporate tax break:

Following the 2017 repeal of a provision of the code that provided a deduction for producing goods in the U.S., the IRS received hundreds of claims collectively seeking more than $6 billion in refunds, with a significant portion of filers claiming the deduction for the first time. The IRS launched a campaign to address noncompliance and review high-risk claims in this area. IRS efforts have been incredibly successful in ensuring revenue is collected. The efforts have recently been supported by a significant win in the Tenth Circuit Court of Appeals, which sided with the Tax Court and IRS in denying a refund claim based on a $1.8 billion deduction. This will have far-reaching benefits to the IRS’ ongoing efforts.

(d) Prioritization of high-income cases

The IRS has been ramping up efforts to pursue high-income, high-wealth individuals who have either not filed their taxes or failed to pay recognized tax debt. These efforts are concentrated among taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, dozens of revenue officers focus on these high-end collection cases in the coming fiscal year. As announced in September, the IRS has begun contacting about 1,600 new taxpayers in this category who owe hundreds of millions of dollars in taxes.

Source: Release by U.S. Internal Revenue Service (IRS)