Tax Dichotomy Faced by New Age Technology

The recent developments on agreement on Global minimum Tax @15% on new age technology companies and the most recent levy of hefty VAT penalties by UAE Supreme court decision on VAT evasion, and by KSA tax authority ZATCA on two leading gig economy companies engaged in e-commerce (courier and logistics) and world leading cab sharing companies have shaken all the stake holders to the core and got them thinking, of what follows next.

Tax ground realities and some key learnings need to be recognized by stakeholders to change aggressive and delinquent behavior

Governments ( UAE, KSA, other GCC, other developed and developing ) are under increasing pressure to raise additional revenues to cover for higher spending on social infrastructure, provide for ever increasing higher debt service burden as a % GDP, food security, climate change, reduce ecological impact, ESG initiatives, continuing economic bailout packages, and the ongoing vaccination programs being implemented. This is a direct result of ongoing COVID 19 pandemic response and while also aim to diversify these economies away from oil, especially in the GCC and other oil-based economies(OPEC+).

Higher degree of Tax compliance has thus become the new paradigm in ‘’CSR’’ and ESG compliance, as large corporates, and individuals (UHNIs) cannot ignore their obligations to society ( hiding behind technicalities) to pay a fair share of taxes on higher incomes and wealth being created by them.

There is no direct or indirect way of paying and ensuring higher degree of tax compliance and its integrity must be restored and maintained by all.

Please do not politicize taxes as it’s a double-edged sword and if you are riding a tiger, or being arrogant of your success, one should know when to dismount or face the consequences.

Ignorance is not bliss, a casual and an ostrich approach to ignore the issue and a widespread tendency to avoid paying tax, and its challenges must be discarded before it’s too late.

Tax avoidance arrangements or profit shifting to tax havens is no longer a viable option as the tax authorities are closely watching non-compliant behavior ( especially in case of large MNE’s and UHNI’s ) and they have increasing access to multi jurisdiction tax information and technology. Media is also playing a very active role in highlighting and exposing delinquent practices by individuals and companies( e.g., Panama and Pandora papers).

The tax legislations(GCC VAT / Corporate tax/ Transfer Pricing/ DTA rules enactments and changes especially by emerging economies in Africa, GCC and South Asian countries ) and the new regulatory compliance(ESR, UBO, CBCR, AML etc.,) regulations are still evolving and adapting to current times.

E-invoicing regulations in KSA is another prime example that tax authorities are alert and being pro-active in modernizing their tax monitoring systems. Authorities across jurisdictions( OECD, USA, Europe, and other emerging group of nations) are actively cooperating in exchanging relevant tax information in a much better manner to change and challenge the ‘’status quo’’.

Key take ways and the way ahead:

PE related tax risks associated with cross border technology trading/ non-resident rules/ online businesses / e-commerce transactions must be closely assessed and managed properly.

Taxes ( Direct and Indirect) are just like ‘’other risks’’ and costs of doing business. Individuals and companies should endeavor to take an independent consult or even second opinion, if needed.

It should be a conscious decision ‘to provide for tax risks’’ in your financials and it is not an option anymore, but a hard reality. We need to identify, manage our personal and corporate tax risks properly, as otherwise throughput risks are way too high, that can affect the going concern and jeopardize the very existence of an entity and its reputation including of their management and investors alike.

Some hard decisions need to be taken: It is imperative that all stake holders i.e., governments( including active judiciary and media) make conscious efforts to support economic growth, create a conducive environment to promote higher cross border trade and encourage higher foreign investments, especially by developing nations.  They should be willing to simplify compliance procedures, understand business concerns, and recognize changes to archaic laws that need to be made, to ensure ease of and reduce cost of doing business especially for SME’s which are the backbone of the economy.

This requires setting up new compliance rules and a just framework that encourages higher degree of transparency, integrity, spreading awareness, and  a higher degree of compliance.

A collaborative approach should be welcomed by all, that should ensure a more honest and compliant behavior by all companies, investors, and the individuals alike for ensuring a better and a sustainable future for next generations, and especially for ensuring a better life for the weaker and under privileged sections of society.

The writing is on the wall, and we all need to change our behavior(s) and be part of solution and ‘not be the problem’’ in these troubled times. It’s the new normal and we owe it to ourselves.