UAE Ministry of Finance launches public consultation on R&D Tax Incentives
Background
On 19 April 2024, the UAE Ministry of Finance (MOF) initiated a digital public consultation on potential Research & Development (R&D) initiative for the purposes of Corporate Income Tax (CIT). The public consultation includes a questionnaire for stakeholders as well as a guidance paper.
According to the public consultation, the UAE government recognizes the importance of the wider benefits created by businesses engaged in R&D in driving innovation and growing its knowledge base as part of creating a vibrant and diverse economy. In order to maximize these benefits, the government is considering the potential introduction of a R&D incentive for CIT purposes. The consultation aims to gather views from all stakeholders on what an effective R&D tax incentive may look like. The UAE MOF has set the deadline for the public consultation on 14 May 2024.
Public consultation – Questionnaire
The digital public consultation provides background to the motivations of the UAE government to potentially introduce R&D tax incentives, but primarily it includes questions for stakeholders on specific aspects of R&D activities, R&D expenditures and different types of tax incentives, among others. The aim of the questions is to ensure that a potential R&D tax incentive will be appropriately designed to meet the needs of businesses in the UAE.
The public consultation emphasises that the definition of R&D activities eligible for the potential R&D tax incentive should be clear and robust. In alignment with internationally accepted R&D principles, the consultation document references to the OECD's Frascati Manual as the standard for collecting and reporting R&D statistics, and to the relevant R&D definitions included therein.
The public consultation states that a neutral tax incentive, available to all sectors and businesses regardless of the R&D intensity, ensures a broader reach of government support across the economy. At the same time, it also acknowledges that R&D may be more relevant to specific sectors compared to others and therefore it is likely that the former sectors may be bigger beneficiaries of any R&D tax incentive.
In line with other OECD tax related concepts, R&D tax incentives would generally only be offered for R&D projects that are wholly carried out domestically. However, the UAE government also recognizes there may be cases where R&D activities may be carried out partly in one country and partly in another country (e.g., due to the need to access specialised capability or technology in a foreign country).
In relation to the different types of R&D tax incentives, the public consultation refers to (i) tax credits, (ii) enhanced deductions, (iii) investment deductions, and (iv) accelerated depreciation. It also acknowledges that the OECD’s Pillar Two Global Anti-Base Erosion (GloBE) Rules may have an impact as to which types of R&D tax incentives would be effective for Multinational Enterprises in scope of the GloBE Rules.
By means of the questionnaire embedded in the digital public consultation, the UAE MOF aims to gather sufficient stakeholder feedback to determine and design an effective set of R&D tax incentives in the UAE. Alongside the business-friendly CIT regime introduced as per 1 June 2023, the introduction of R&D tax incentives as part of that regime would further boost the UAE’s attractiveness for businesses. The deadline for the public consultation is set on 14 May 2024.
Consultation paper
This consultation paper provides a comprehensive overview of R&D, defining it as a systematic and creative process aimed at increasing the stock of human, cultural, and societal knowledge and developing new applications from existing knowledge. R&D is categorized into three primary types:
- Basic Research
- Application-Oriented Research
- Experimental Research.
These categories span from theoretical exploration aimed purely at knowledge enhancement, to practical investigations directed towards specific objectives, and systematic experiments that build on existing studies to innovate or improve products and processes.
The paper details key characteristics of R&D activities, referencing the Frascati Manual for standards, which include novelty, creativity, uncertainty, systematic approach, and the potential for results to be transferable and reproducible. These criteria distinguish R&D from routine scientific and engineering tasks by emphasizing the creation of new knowledge and methods, the inherent unpredictability of outcomes, and the structured methodology that governs these investigations.
Additionally, the document clarifies activities that do not qualify as R&D, such as routine engineering and maintenance, quality control during production, and legal activities related to intellectual property. It emphasizes the importance of distinguishing these from true R&D activities, which are driven by the pursuit of new, challenging goals and involve a creative, methodical approach to overcoming uncertainty.
The paper also outlines methods for identifying genuine R&D projects, suggesting that these can typically be recognized by their innovative objectives, the novelty of the methods employed, and their contribution to broader scientific and technological advancement. This identification process is crucial for organizations aiming to classify and manage R&D effectively, ensuring that resources are allocated to endeavors that genuinely push the boundaries of current knowledge and capabilities.
In our view, the main purpose of the guidance paper is to educate and align stakeholders on what constitutes R&D activities in line with international standards. By encouraging a clear understanding of R&D activities, the guidance paper helps ensure that the incentives, once implemented, will effectively stimulate genuine R&D efforts that contribute to the UAE’s economic and technological advancement.
Conclusion
The UAE MOF initiated a public consultation on potential R&D tax incentives in the UAE. Through this public consultation, the UAE MOF aims to gather sufficient stakeholder feedback on what effective R&D tax incentives may look like. The deadline for the public consultation is set on 14 May 2024.
