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UAE Freezones Biz News Updates
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Sweet deserts - How the United Arab Emirates became an oasis for tax
evaders
Set up a company, shield your income from prying eyes
THE war on cross-border tax evasion, declared by America over a decade ago
and since joined by other governments, has made life a lot more
uncomfortable for anyone looking to squirrel away undeclared income. More
than 100 countries have signed up to the Common Reporting Standard (CRS),
which requires them to swap information on account-holders that may be
relevant for tax purposes. But the enterprising and tax-shy can still
exploit loopholes in the system. A popular one is to procure residence in
the United Arab Emirates (UAE), set up a company there and use the tax
residence that comes with it to block the flow of information to tax
authorities elsewhere.
According to experts with knowledge of the scheme, it works as follows. A
foreigner sets up a company in one of the UAE’s free-trade zones and rents
office space. In return he gets a residence visa with a minimum-stay
requirement of just one day every six months. Both the individual and the
company, through which he may hold bank accounts, may then claim tax
residence in the UAE, a country that levies no income tax.
Under the CRS, banks must share information with the country where an
account-holder is tax-resident. If the account holder is an entity, then the
bank must look through it to the “controlling person” and report on that
individual. In the UAE, since both the individual and the company have local
tax residence, neither need fear having any information passed on to other
countries, regardless of whether their money is held in a bank account, a
trust or an investment fund. And, of course, there is no local tax to pay.
No other haven works quite like this. Others, even Caribbean islands which
have held out against the CRS, say foreign-owned enterprises and the people
who control them cannot be tax-resident there. Under CRS rules, the firms
are deemed to be resident where they are managed from. In the UAE, however,
foreign-owned entities are permitted to be tax-resident, even though the
owner would normally be tax-resident elsewhere.
The UAE’s documentation system also makes it easier for people to avoid tax
inspectors. When dealing with banks, clients need to produce a Tax
Identification Number (TIN). This number is particularly important for any
company that holds an account because it serves as an identifier for
tax-information exchange between governments. Since the UAE levies no income
tax, it does not issue TINs. Instead, the experts say, it hands out
registration numbers for value-added tax, which it does levy. Clients then
try to pass these off as genuine TINs to bolster the claim that they are
tax-resident in the UAE. The ruse appears to be working. Whether because
they cannot tell the difference or are turning a blind eye, many banks in
other countries, when presented with the VAT-linked substitute TINs, accept
that the client’s tax affairs are a matter for the UAE and therefore do not
pass information on to other countries.
Compared with most offshore tax-minimising schemes, this one is cheap. In
the UAE, companies can be formed, office space rented and residence acquired
for “the price of a decent suit and pair of shoes”, says an adviser. Unlike
in most other countries that sell residence rights, a donation or property
investment in the hundreds of thousands or millions of dollars is not a
prerequisite for a visa.
The country’s first free-trade zone was established in the mid-1980s. It now
has more than 40, with tens, perhaps hundreds, of thousands of companies
between them. Ras al-Khaimah, one of the country’s seven emirates, has over
14,000. The number of UAE firms being used as vehicles to dodge tax is
impossible to determine. “Judging by the talk among tax and wealth advisers,
it’s many thousands,” says a tax expert.
The Organisation for Economic Co-operation and Development (OECD), which
oversees the CRS, is worried about the tax-dodging possibilities of
residence-for-sale schemes. Pascal Saint-Amans, head of the OECD’s tax
group, says the UAE is a concern and argues that the country has not been
“proactive” in curbing abuse. The UAE finance ministry replies that it is
“committed to implementing international economic standards to the highest
levels of [tax] transparency” and is “actively working with the
international community” on data exchange. Asked to comment, the Ras al-Khaimah
free-trade zone did not reply.
The OECD will unveil some new policies this year, says Mr Saint-Amans. These
could include making banks ask tougher questions of anyone claiming to be
tax-resident in a haven. Banks could be required, for example, to run
through a list of questions to establish where a client’s personal and
economic links are strongest: where he spends most of his time, where his
children go to school, where his doctor is and so forth. In cases where
banks see evidence of discrepancy, they could be required to send account
information to all countries with a possible claim on the client’s tax
domicile. Until then, the Gulf state will remain a tax-dodgers’ oasis.
Sep 27, 2018 |
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Courtesy The Economist
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