Value-added tax and excise tax in Qatar

The international tax environment has been evolving rapidly in the last two years, with a number of changes affecting the GCC states. With increased budgetary requirements, sustained lower oil prices and heightened government spending requirements, the pursuit of new income sources in the region was widely anticipated.

In early May 2017 the Qatar cabinet approved draft VAT and excise laws, including their Executive Regulations. The new laws are expected to be based on the wider GCC VAT and excise tax frameworks. Although the text of the laws was not yet available for public review in mid-2017, high-level guidance and information on both taxes have been released and communicated from relevant authorities in Qatar, and a formal notification is expected to be made in the Official Gazette during 2017.

Vat

On May 3, 2017 the Cabinet of Qatar approved a draft law on VAT and its Executive Regulations as put forth by the Qatar Ministry of Finance. Although no official statement was made by mid-2017 regarding the introduction of VAT in Qatar, this news confirms the State of Qatar’s commitment to introduce the tax as per the GCC Unified Agreement for VAT which was signed by the GCC member states earlier in 2017. The GCC Unified Agreement for VAT includes the following key features:

• VAT will apply to goods and services at the standard rate of 5%;

• VAT registration is mandatory for businesses with an annual turnover of 375,000 Saudi Riyals ($100,000) or its equivalent in any other GCC member state currency. Nevertheless, businesses that generate 50% of this threshold annually can voluntarily register for VAT;

• Most VAT compliance requirements and procedures are left to the discretion of each member state under its local legislation. For example, i) the modalities and conditions to treat a group as one taxpayer, known as VAT grouping, ii) the tax period, which should not be less than one month, and iii) the content of the VAT invoice and the deadline for its issuance;

• Taxable persons will be allowed to deduct input VAT that is incurred for making taxable supplies of goods and services;

• Input tax credit at the end of each tax period may be allowed as a refund or carried forward, depending on each member state’s modalities;

• The VAT treatment of some sectors, namely education, health care, real estate and local transport is left to the discretion of each member state (i.e. whether these sectors are subject to tax at standard rate, zero rate or exempt);

• The standard rule stipulated in the treaty is to exempt financial services from VAT with a right to reclaim the input tax credit according to specific rates determined by each member state. However, each member state may opt for a different VAT treatment for financial services;

• Food products shall be subject to the standard rate of VAT, however, each member state will have the right to apply a zero rate to food as per the unified list of commodities (like for bread and milk);

• Medical equipment and medicines will be subject to a zero rate;

• Oil and gas, including the oil derivatives sector, may be subject to VAT at a standard rate or zero rate at the discretion of each member state and in accordance with the modalities and conditions they each set out.

• The transport of goods and passengers, either intraGCC or international, and associated ancillary services will be subject to VAT at a zero rate;

• The export of goods beyond the GCC region will be zero rated;

• The supply of goods placed under suspension arrangements referred to in the GCC Common Customs Law (temporary import, re-export and so forth) shall be subject to a zero rate;

• A reverse charge mechanism will apply to the acquisition of services from abroad. The taxable customer in the destination state shall be the person liable for the tax due;

• Specific place of supply rules apply for intra-GCC transactions to ensure VAT is levied at place of consumption and to avoid double taxation or no taxation; and

• VAT due on the import of goods shall be paid at the first point of entry in the GCC Region. The approval of the draft VAT legislation by the Cabinet of Qatar is another government milestone to VAT implementation and raises expectations that VAT will be introduced in Qatar in 2018. While the exact details of the draft national legislation have yet to be made available, businesses operating in Qatar and the wider GCC region should start planning for VAT if such plans are not already under way.

VAT is seen as an effective tool in raising revenue to achieve government objectives while preserving the neutrality for businesses. If designed and operated correctly and efficiently, it can provide significant revenues with limited administrative costs and impact on businesses. While VAT is charged and collected by businesses on behalf of the government and, as such, should not be considered as a cost, there will be an additional burden in terms of administration and compliance with the new legislation. Businesses will need to amend systems, processes and procedures, and will need to ensure they comply with the new requirements There is a relatively short time to consider the implications of the introduction of VAT and to make the necessary changes. The amount of work required will depend on the size and complexity of the relevant business, and companies should consider the impact of the impending VAT now and determine how best to handle it. It is not unforeseeable that there will be a penalty regime applicable in cases of errors made and it will be key to have the right systems and procedures in place to limit such exposure.

Excise Tax

Excise tax is typically seen as an effective tool in raising revenue while achieving broader government objectives. In early May 2017, the Cabinet of Qatar also concurrently approved the Excise Tax Law and its Executive Regulations. While the exact date of implementation of the law was not yet known by mid-2017, it is expected to be introduced during the course of the year.

As a consumption tax, excise tax is ultimately borne by the final consumers but collected earlier in the supply chain. Importers, manufacturers and, in certain cases, other agents in the supply chain are liable to register for excise tax, submit periodical returns, pay the tax due to the local authorities and maintain specific excise tax records. The list of goods subject to excise tax has not been officially announced, but is expected to be levied on the goods “harmful to human health and environment” and some luxury goods, with an expected tax rate that ranges between 50% and 100%. Generally, the following goods are expected to be excisable:

• Tobacco products;

• Carbonated soft drinks and energy drinks; and

• Special purpose goods.

Qatar Financial Centre (Qfc) Tax Law

In its constant pursuit of attracting more prominent businesses and investments to Qatar and to establish itself as a genuine alternative to its regional competitors, the QFC has recently amended the QFC tax regulations and tax rules following a public consultation. The amended QFC rules and regulations were enacted on June 12, 2017 and the QFC is expected to issue further guidance on the application of the amended legislation in the near future.

The key amendment was made via the introduction of article 10(1A) of the Tax Regulations VER 3 – June 2017, which deemed income derived by QFC entities from the provision of services for use or consumption outside Qatar as non-local source profits (subject to the conditions below), and consequently not subject to QFC corporation tax. The conditions which must be met before the relevant income can benefit from the above treatment are outlined in new Rule 1A of the QFC’s Tax Rules VER 3 – June 2017, and are as follows:

• The QFC entity’s accounts must be audited by an external auditor;

• At least 30% of the QFC entity’s income can be attributed to activities undertaken by the QFC entity in Qatar;

• The QFC entity employs at least three full-time employees; and

• The Tax Department does not consider that the services are rendered under an arrangement whose sole or main purpose is the avoidance of tax under the regulations. While the QFC’s primary objective of introducing the above-mentioned amendment is to increase the attractiveness of the QFC as a framework of choice for existing QFC entities and future investors, it has simultaneously strived to ensure that the amendment is introduced into the QFC law in a manner that is aligned with international tax developments, specifically the OECD’s Base Erosion and Profit Shifting initiative.

Summary

In the climate of sustained low oil and gas prices, Qatar and other GCC states are on the lookout for new sources of income and are scaling back subsidies; difficult but necessary budgetary actions are being taken. Qatar is reacting to this changing economic and tax environment. On one hand, it is enacting new regulation, improving the enforcement of existing regulation and considering new taxes. On the other hand, it is providing new opportunities for foreign investors through the QFC, the Qatar Science and Technology Park and new economic zones to be run by Manateq. It is also providing opportunities for diversification of Qatari-owned businesses through initiatives by the Qatar Development Bank. We suspect that after analysing the impact these new taxes will have, companies and regulators will need to strengthen their in-house tax functions and VAT professionals will be in demand.