TAX NEWS - DECEMber 2009
Middle East Tax: 2009 tax developments in Middle East
Qatar was widely reported to be in the process of introducing its own tax law reforms following the expiry of the tax exemption for companies incorporated in the Qatar Finance Center (QFC). On 17 November 2009, the Qatari government announced that a corporate income tax rate of 10% will be introduced in the State of Qatar and in the QFC as from 1 January 2010. The corporate income tax rate reduction – from a progressive rate of up to 35% – will allow for a welcome alignment of the statutory tax rate between the State of Qatar and the QFC.
Given that the announcement is so recent, it should be emphasized that there remain a number of clarifications outstanding in terms of understanding both the technical and practical application of the tax regime. However, at this time it appears that key changes will be the introduction of a withholding tax on interest and royalties arising in Qatar and received by non-Qatari companies, at a rate of 7% and 5% respectively. Additionally, the legislation seems to indicate that disposals of shareholdings in Qatari companies where the assets are based in the State of Qatar also will be subject to tax. As a result of the changes, it will be necessary for non-Qatari companies to understand the effect on the creation of a permanent establishment within the State of Qatar.
The reduction in the corporate income tax rate of Qatar comes shortly after the Omani government announcement that Oman is to introduce a new tax regime as from 1 January 2010. Under the new regime, the statutory tax rate is to be reduced from a progressive rate of up to 30% to 12% and will apply to both Omani and non-Omani investors.
In addition to the change in the tax rate, there are a number of other key changes and clarifications within the tax law. The most significant are the reforms to the permanent establishment rules. Currently, there is a "one-day rule" such that, in effect, the tax authorities can seek to tax income in Oman from contracts and businesses that only have a limited or an occasional presence in Oman. Under the new rules, it will be necessary to have a 90-day aggregate presence over a 12- month period to create a permanent establishment, thus providing additional certainty to companies. Also, it has been enshrined in legislation that Omani companies will, in line with existing practice, now be formally taxed on their worldwide income as opposed to income realized or arising in Oman.
As with all changes to the tax systems in the Middle East, it will be necessary to understand the practical application of the new laws, since it is possible that the tax authorities within the region may interpret the rules differently than tax advisers. The recent changes in Qatar and Oman are further evidence of the continued pace of tax reform in the Middle East, with these changes coming after recent reforms in other GCC countries. Kuwait introduced a new tax law in 2008 with the aim of encouraging foreign investment, through which the corporate income tax rate on profits for non-GCC investors was reduced from 55% to 15% and the tax compliance process was simplified. Further clarifications have been provided in respect of the regime during 2009; for example, it has been established that Kuwaiti-source interest is not to be taxed in Kuwait.
Saudi Arabia reformed its tax system in 2004, which resulted in a corporate income tax rate for foreign investors of 20%, which at the time was one of the lowest rates in the region. Further clarifications to the law were made during 2009. Despite some speculation to the contrary, no tax changes have been announced in the UAE or Bahrain and, therefore, those countries move into 2010 with no commitment to the introduction of either a corporate income tax or form of sales tax for companies engaged in activities other than certain oil and gas-related (in both UAE and Bahrain) or banking activities (in UAE).
Outlook for 2010
In light of the changes announced to the tax regimes in Qatar and Oman during 2009, speculation undoubtedly will continue as to whether the UAE and Bahrain will announce the introduction of taxes in 2010 or whether there may be some form of harmonization of indirect tax across the GCC, given that talks have previously taken place in this respect. In October 2009, the UAE Ministry of Finance publicly stated that the application of VAT within the UAE in 2010 would not be useful, following consultation by the Ministry, and that it would require the necessary infrastructure to be in place (e.g. setting up a federal authority for tax collection). Until further long-term announcements are made that would rule out the introduction of such taxes by individual countries or the wider GCC for a defined period, it can be expected that speculation will continue.
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