Local officials were taken aback when the UAE was included by the EU in a list of non-compliant tax jurisdictions.
It has long been internationally suspected that the UAE was a quasi tax haven or off-shore financial center, in which thousands of companies could register in the country’s free zones.
An offshore financial center is a territory, country or state, in which specific taxes are imposed on individuals and corporations at lower rates than those in their country of residence or not at all.
The Finance Minister defended the country saying that it worked to meet the European Union’s requirements in terms of exchanging tax-related information, while adding that the ministry committed to a reform process, which would be finalised by October 2018.
“We remain fully committed to maintaining the highest international standards of financial oversight and tax regulation, and will continue to work with our international partners to deliver this,” said Finance Minister, Younis Haji Al-Khouri, in a recent statement.
“We are absolutely confident this will ensure the UAE is swiftly removed from the list.”
But why was the UAE blacklisted and what’s allowing such practices to take place?
The Financial Times quotes officials late last year as saying that Dubai and the smaller emirates have thrived as tax havens.
“Thousands of companies are registered in the UAE’s free zones, benefiting from extensive tax breaks and lax residency rules that make it easier to escape international financial scrutiny,” it said.
The British publication quoted Jason Collins, Head of Tax at Pinsent Masons, an international law firm, as saying: “There is a risk that money will move to places like Dubai. This has been the fear since Switzerland began to clean up its act.”
It clarified that Dubai offered an increasingly complex array of offshore facilities, including free trade zones, a low-tax environment, multiple secrecy facilities and lax enforcement, according to the Tax Justice Network.
Meanwhile, EU Ambassador Patrizio Fondi said in an email to Reuters on December 6, 2017 that the UAE “does not apply the BEPS (Base Erosion and Profit Sharing) minimum standards and did not commit to addressing these issues by Dec. 31, 2018.”
“BEPS refers to an agreement signed by some OECD member countries to tackle tax avoidance strategies that allow multinational companies to shift profits artificially to low or no-tax locations,” as defined by Reuters.
The recent statement issued by the finance minister said that the sole outstanding issue was the implementation of the BEPS Minimum Standard, which the government has committed to finalise by October 2018 and ratify by March 2019 – giving the federal structure in the country sufficient time to allow ratification across the seven Emirates.
“We stand by this realistic timeline,” Al-Khouri said.
Businesses can also very easily and illegally escape paying taxes by creating shell companies. How?
Five steps to creating a shell company
A large number of shell companies are used as a vehicle for illegal activities, like tax avoidance, and usually exist on paper only.
Griffith University Professor, Jason Sharman, the author of books on international money laundering and global tax regulation, explains five easy processes of creating a shell company.
The first step is to search for “offshore company” on Google and select one of many shell company providers.
Step two is to type a proposed company name into the dialogue box and choose from a list of a dozen tax havens, such as the Cayman Islands, Panama, Samoa, the Seychelles or Belize, while nominating a director who will appear on company paperwork.
Step three is to simply scan an authenticated copy of the passport.
Step four is when the owner of the shell company can then be offered a bank or trust account.
Step five is processing the paperwork, which can take up to 48 hours, after which the shell company is created.