Middle East Conflict Means Multiple Challenges for Tax Teams

The conflict in the Middle East involving Iran has affected businesses and tax teams in the region and they need to act immediately to minimize its impact.

Israel and the US launched Operation Epic Fury—a coordinated aerial campaign against Iran—on Feb. 28, prompting Iran to retaliate by launching hundreds of drones and missiles against countries in the Gulf Cooperation Council, as well as other nations.

The Institute of Chartered Accountants in England and Wales identified higher energy costs, supply-chain disruptions and staff-related challenges as issues for businesses in the region, according to a March 12 poll of its members in the UK, Middle East and other affected areas. Almost a third of respondents recommended that if the conflict is prolonged, governments should be ready to provide the financing which businesses need.

Meanwhile, tax professionals in the region are grappling with tax deadlines, supply chain problems, transfer pricing concerns, and relocation challenges with employees and management.

Looming Deadlines

Most companies with operations in the GCC follow the calendar year, and tax-return filing deadlines are fast approaching—annual corporate tax returns need to be filed by April 15 in Kuwait and April 30 in Oman, Qatar, and Saudi Arabia.

Tax authorities in these countries haven’t announced any extensions to these deadlines at the time of writing; in fact, the Oman Tax Authority reminded taxpayers earlier this month of the April 30 deadline.

Tax teams in the region are working on meeting these deadlines, but many of them are finding that the heightened uncertainty has resulted in a liquidity crunch. They should proactively forecast upcoming corporate tax payments at the earliest possible time.

If companies have necessary funds available, their tax teams should set aside adequate amounts to meet these payments whenever possible. If the funds aren’t available, tax teams should examine all available options to reduce penalties, which may include:

• Paying in installments where this is permitted, such as in Kuwait
• Applying for permission to pay in installments, where the possibility exists, such as in Oman, Qatar and Saudi Arabia
• Filing the tax return now and paying the tax later, where possible, such as in Kuwait
• Borrowing the funds where necessary, since interest rates should be far lower than the penalties which would otherwise apply

The liquidity crunch also is likely to affect payment of other taxes and levies, such as customs duties, value-added taxes and withholding taxes. Tax teams should examine the options described above in relation to these taxes and levies, model and compare potential penalties, and work closely with their treasury departments.

Regional tax teams in large multinational enterprises that are subject to the 15% global minimum tax known as Pillar Two also may be grappling with registration and tax filing deadlines outside the region, with the first Pillar Two returns in many countries due by June 30.

Tax teams should remain focused on those deadlines, since penalties for noncompliance may be significant.

Regional Permanent Establishments

GCC countries rely on an expatriate workforce to varying degrees. In many cases, specialized managerial and technical employees have left the region temporarily and returned to their countries of origin—one-third of UK nationals in the Middle East had returned to the UK by March 17.

The near closure of the Strait of Hormuz has also severely curtailed the inflow of machinery and equipment to the Middle East. Both these factors may significantly extend the time required to complete ongoing construction, installation and assembly projects.

As a result, projects that were expected to be completed without giving rise to permanent establishments under applicable double tax treaties may now be delayed and new PEs may arise in countries where they hadn’t previously existed.

Tax teams should monitor these developments, especially if the conflict is prolonged and plan for the compliance requirements these new PEs may give rise to, including any Pillar Two-related notifications and registrations.

Potential Permanent Establishments

In addition to these new project-related PEs within the region, employees who relocate outside the region may create new PEs for companies in the countries to which they relocate.

This would be based on the length of time which they spend and the activities they perform in those countries. Tax teams should monitor these risks together with their human resources departments or with the assistance of external advisers and take any possible corrective action.

New Tax Residence

When the directors and senior management of companies that are tax residents in the Middle East relocate outside the region, there is a possibility that they may shift the place of effective management of the company outside the region.

This may alter the country in which the company is tax resident and cause the company to become taxable on its worldwide income in the country where the new place of effective management is located.

Tax teams should monitor and mitigate this risk to the extent possible.

Transfer Pricing Implications

The sudden spike in energy prices, transportation and insurance costs has shaken up the economic environment for companies.

Tax teams should start considering how these developments, the disruption of supply chains, and any consequent near-shoring or re-shoring of supply chains, affects the assumptions on which their transfer pricing documentation is based, inter-company agreements, risks, compensations, and transfer prices, and take the necessary corrective action.

UAE Tax Residence

While GCC countries don’t have personal income taxes, several wealthy individuals recently have moved to the region, and in particular to the United Arab Emirates. The UAE’s rules require individuals to be present in the country for a minimum number of days in a calendar year to be considered tax resident in the country.

The UAE’s tax authorities have indicated that these rules will be relaxed on a case-by-case basis, to allow those who have left the UAE since the start of the conflict to retain their UAE tax residency

Going Forward

The situation is evolving rapidly. While some tax professionals are hopeful that tax authorities may postpone imminent deadlines, others anticipate significant additional challenges, especially if the conflict is prolonged.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Tuhin Chaturvedi is a tax partner at RSM in Kuwait.

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