Qatar’s tax policies and impact on business and investments

Opening the event was Jeffrey Owens, the previous director of tax policy at the Organisation for Economic Cooperation and Development (OECD) held in Doha recently. In the opening remarks, he discussed the role of the financial and economic crisis that he says is driving a lot of what is being seen in the tax world both in terms of tax legislation and tax enforcement.

When it comes to tax competition, Owens explained the world has changed. “All of our tax bases whether you are talking about capital, individuals or consumption, have been eroded,” he said. And because of this companies have become very sensitive to tax differentials, an issue that the governments need to resolve efficiently to stay competitive and attract investment. While nobody will invest in a country just because of tax, you certainly may decide not to invest in a country because of the tax system, he pointed out. “Bad tax policy can damaging,” furthered Ian Anderson, chief financial officer (CFO) and director of taxation of Qatar Financial Centre (QFC). “You need to make sure that you do not do anything that scares people away. For a company making a decision to invest in a country, tax is one part of that calculation. It affects the overall net profit, cost of capital, so having the right tax environment is pretty important. I think that is fundamentally why they [the government] have worked very hard recently at modernising the tax rules.”

Declan Mordaunt, partner at PwC Qatar who gave a presentation on tax treaty issues in the GCC added, “The importance of the Middle East is growing more and more…we are working together to try and make this an attractive destination for foreign investors, equally we try to work with locals who are trying to invest in overseas markets and make it work.”

DOUBLE TAX TREATIES

The principle driver behind double tax treaties (DTT) is to ultimately avoid repeat taxation, said Anderson. “It is of mutual benefit for Qatar and the countries we are negotiating the treaty with. Anderson noted that DTT’s are particularly important for Qatar “it is partly to assist in inward investment,” he said, “but also Qatar is in a situation where it is not only investing in its own economy…it is obviously capital rich so it is looking to invest overseas.” This mitigates the overall risk of suffering double tax, major issues like withholding taxes on the distribution of profit and interest are covered in the treaties. Qatar has significantly expanded its treaty network over the last
few years.

However, there is a need for clarification and transparency with regards to tax treaties, commented PwC’s Mordaunt, “I have a list of treaties but cannot get access to them. That is not a great situation to be in if you are trying to create certainty for tax payers,” he explained, “We need a lot more guidance on how treaties are going to be applied in the region. We need a place as practitioners to give certainty to companies.”
Another issue with regards to treaties is their enforcement said Mordaunt, “to get the benefit of the treaty, firms are having to make a claim, that is not helping businesses, I mean is that the way the treaty should apply? That just seems contrary to the spirit in which the agreements of that nature have been made. This leads to an issue for investors.”

Sajid Khan, director of international tax at PwC Qatar also part of the presentation team pointed out that double tax treaties play an important role in cross border investment flow. “At the high level the benefits are not just increase in foreign direct investment (FDI) but also very good foreign portfolio investment,” which he says is very important from an outbound perspective.
The Gulf Cooperation Council (GCC) also has in place a parity agreement that is intended to spur growth in the region, and help outbound investors come in and structure themselves tax efficiently within the GCC explained Khan.

The parity agreement in essence, said Khan is an attempt to level the playing field for how nationals in one country are treated in another. “The spirit is that an Emirati should be treated the same way in Qatar as a Qatari or Qatari company would be treated.”
A good example where this would be working well is the GCC Customs Union, noted Khan, “You pay custom duty at the point of entry (five percent more or less) and then any further movement within the GCC is not subject to any custom duty.” Sovereign states do have the right to tweak these for certain purposes,” he furthered, “for example if they want to spur construction they might want to produce a zero rate for a particular period
of time.”

VALUE ADDED TAX, COMING TO QATAR?

According to Owens, there is a big shift in the structure of taxation occurring, countries are beginning to move away from direct taxes towards indirect taxation and value added taxes.
To get approval on tax reform, Owens remarked, “You reduce your income tax, reduce corporate income tax and put more emphasis on consumption taxes, environmental taxes and taxes on property, because they have the least harmful affect on growth perspectives.”
The value added tax (VAT) is one tax programme that is in its pilot stages in many GCC countries. Ian Anderson from the QFC said he does not know when VAT will be introduced. However, he explained that it is a huge undertaking, “There is a desire to make it coordinated throughout the GCC. It is not only agreeing with people internally, it is agreeing with other countries in the GCC, and that adds an extra layer of complication.”

Anderson believed that this is a positive move, as it will potentially cover every single transaction a company does, forcing them to keep proper records. “I think it will force companies to improve their accounting systems and recording systems,” he commented. “Moreover,” said Anderson, “it will provide data to the government about what is going on in the economy… and in some areas it is quite difficult to identify that in Qatar at the moment.”
There has been a revolution on the VAT noted Owens, “we have gone from a situation where in the mid 1950s there were six countries that had a VAT system to a situation today where there are 160, and every year you see more.” VAT in the OECD countries accounts for about 20 percent of all tax revenue and is the single most important source of revenue for many countries, points out Owens.

CHANGING TAX LAWS

At the start of January 2010 Qatar issued a revised set of tax regulations; which coincided with the QFC issuing their own regulation, says Anderson. “Regulations in Qatar were more than 30 years old,” he explained, “so they needed to be updated to really deal with the nature of the Qatari economy today.”
The government is looking for clarity with regards to their tax policies said Anderson, and that is what they have looked to do at the QFC. “In addition we offer a tax advance ruling service,” explained Anderson, “whereby if there is any uncertainty on the interpretation of tax law you can apply for an advance ruling, which will give you certainty with your tax affairs going forward. We think this is really important, particularly when we are trying to attract firms into Qatar, and the service has been well used to date”.