In an increasingly globalized and digital economy, international tax systems are undergoing one of the most significant transformations in recent decades. Spearheaded by the Organisation for Economic Co-operation and Development (OECD) under the Base Erosion and Profit Shifting (BEPS) 2.0 project, the introduction of Pillar One and Pillar Two reforms aims to ensure that multinational enterprises (MNEs) pay a fair share of tax in jurisdictions where they operate. As a member of the OECD Inclusive Framework, the United Arab Emirates (UAE) is expected to adapt its tax policies to align with these global standards. This blog explores what Pillar One and Pillar Two are, and how these reforms will influence the UAE’s tax environment.
1. Background: Why OECD Introduced Pillar One and Pillar Two
The current international tax framework, built around physical presence and source-based taxation, has become outdated in the digital era. Tech giants and MNEs have been able to book profits in low or no-tax jurisdictions, leading to concerns over fair taxation and harmful tax competition.
The OECD’s two-pillar solution was developed to address these challenges and modernize global tax rules:
- Pillar One: Allocates taxing rights to market jurisdictions (where customers are located), regardless of physical presence.
- Pillar Two: Introduces a global minimum effective tax rate of 15% to combat base erosion and profit shifting.
Both pillars aim to reduce the incentive for profit shifting and tax base erosion, fostering a fairer and more stable international tax system.
2. Overview of Pillar One
Pillar One proposes a partial reallocation of taxing rights to market jurisdictions. It primarily targets highly profitable MNEs with consolidated revenues exceeding EUR 20 billion and profitability above 10% (known as Amount A). These companies will be required to allocate a portion of their profits to countries where they have users or consumers, even if they lack a physical presence there.
Key features include:
- Applies to approximately 100 global companies initially
- Revenue nexus threshold of EUR 1 million (EUR 250,000 for smaller jurisdictions)
- Profit reallocation of 25% of residual profit above 10% profitability
- Unilateral measures such as digital services taxes are expected to be rolled back
Pillar One will require significant coordination and data-sharing among tax authorities worldwide, including the UAE’s Federal Tax Authority (FTA).
3. Overview of Pillar Two
Pillar Two introduces the Global Anti-Base Erosion (GloBE) rules to ensure a minimum effective tax rate (ETR) of 15% for large MNEs, calculated on a jurisdictional basis. It applies to MNEs with consolidated revenues of EUR 750 million or more.
Main components of Pillar Two include:
- Income Inclusion Rule (IIR): Parent entity must pay top-up tax if subsidiaries are taxed below 15%
- Undertaxed Payments Rule (UTPR): Denies deductions or imposes taxes on low-taxed payments if IIR is not applied
- Subject to Tax Rule (STTR): Permits source countries to apply withholding tax on certain low-taxed intragroup payments
Pillar Two aims to reduce the advantage of shifting profits to low or zero-tax jurisdictions like the UAE and could lead to global minimum tax top-ups even if the UAE’s statutory rate is below 15%.
4. UAE’s Position on OECD Pillars
The UAE is a member of the OECD Inclusive Framework and has publicly committed to implementing both pillars. While the UAE currently has a competitive 9% Corporate Tax rate (effective from June 2023), it may need to introduce top-up mechanisms or allow foreign jurisdictions to impose additional tax under Pillar Two for large MNEs operating locally.
As of now:
- Pillar One is expected to be implemented via multilateral conventions coordinated by the OECD
- The UAE may introduce Domestic Minimum Top-Up Taxes (DMTT) to ensure revenues stay within the country
- Free zones and economic zones may need to adapt their incentives to remain competitive
For UAE businesses, particularly large international groups, these developments represent a major shift in tax exposure and compliance requirements.
5. PEAK Business Consultancy Services: Helping You Navigate Global Tax Changes
PEAK Business Consultancy Services is a leading VAT and Corporate Tax advisory firm in the UAE. As OECD reforms begin reshaping the global tax landscape, PEAK BCS offers strategic guidance and compliance support to UAE-based businesses and MNEs impacted by Pillar One and Pillar Two.
Our services include:
- Assessment of exposure to Pillar Two minimum tax
- Support for CbCR (Country-by-Country Reporting) and global ETR modeling
- Tax structure reviews for international operations
- Implementation of Domestic Minimum Top-Up Tax frameworks
- Transfer Pricing compliance and documentation
Visit https://www.peakbcs.com/ to learn how PEAK BCS can help future-proof your tax strategy.
6. Potential Impacts on UAE-Based Multinationals
Multinational companies headquartered or operating in the UAE that exceed the Pillar thresholds must consider:
- Whether their effective tax rate is below 15% in any jurisdiction
- Exposure to top-up tax in parent or intermediary jurisdictions
- The impact on free zone profits if not deemed “substantive” under OECD standards
- Increased compliance and reporting burdens for global operations
Although the UAE’s 9% rate is below the Pillar Two minimum, companies may prefer UAE to impose a domestic top-up to retain taxing rights locally rather than abroad.
7. Implications for Free Zones and Incentives
One of the major concerns for businesses in the UAE is whether tax holidays and zero-tax regimes in free zones will still be effective under the OECD reforms. Pillar Two may override these incentives for large MNEs.
Key considerations include:
- Whether free zone entities qualify as “Qualified Free Zone Persons” under UAE law
- How their income is treated under Pillar Two’s GloBE rules
- Implications of non-substantive activity or passive income on global ETR calculations
This could lead to a gradual shift in how incentive structures are designed, favoring substance-based benefits over blanket tax exemptions.
8. Compliance Requirements Under Pillar One and Pillar Two
Businesses impacted by the OECD reforms will face new reporting and documentation obligations, including:
- Global ETR calculations using GloBE accounting standards
- Disclosure of constituent entity data for each jurisdiction
- Detailed breakdown of intercompany transactions, taxes paid, and income earned
- Compliance with Pillar Two Information Return (expected annually)
Technology, data integration, and tax governance systems must be upgraded to support these requirements.
9. Preparing for Implementation in the UAE
Although full implementation timelines are still unfolding, MNEs in the UAE should begin preparations immediately. Key steps include:
- Assessing jurisdictional ETRs under Pillar Two rules
- Modeling the impact of top-up taxes
- Revising entity structures to optimize substance and tax efficiency
- Aligning with UAE’s Corporate Tax and Free Zone requirements
Proactive planning ensures compliance while retaining commercial competitiveness.
10. Conclusion
The OECD’s Pillar One and Pillar Two reforms mark a paradigm shift in how international businesses are taxed. For the UAE, known for its low-tax, pro-business environment, these reforms bring both challenges and opportunities. While the country seeks to maintain its attractiveness for foreign investors, it must also comply with global tax fairness standards.
Businesses operating in or through the UAE must now reassess their global tax strategies, especially those with revenues over EUR 750 million. Partnering with experienced advisors like PEAK Business Consultancy Services can help navigate this evolving terrain and ensure readiness for what’s ahead.
For expert advice tailored to your business needs, visit https://www.peakbcs.com/.
