Qatar increasingly impacted by international tax developments and wider economic trends

A new tax law was introduced in Qatar with effect from January 1, 2010. Since then, we have seen significant changes by the Qatar Tax Department (QTD) in its interpretation of specific provisions of the law and developments in the way it is implemented. There has been some official written guidance on this, in particular the issuance of circulars, but trends have also been observed through our practical experience interacting with the QTD. The international tax environment has also been evolving rapidly, most notably in the last two years. This is expected to continue and to increasingly impact Qatar, raising the prospect of future changes in the state’s tax legislation.

Drivers Of Change

Significant current and prospective drivers of change in Qatar include budgetary pressures, moves to diversify the economy and the global attitude to international taxation. In the current climate of sustained low oil and gas prices, Qatar and other GCC states are looking for new sources of income and are scaling back subsidies. New tax regulations are being drafted in some countries and necessary budgetary actions are being taken. The reduced revenues from oil and gas has also given greater impetus to the plans Qatar already had in place to diversify its economy to reduce its reliance on hydrocarbons.

One of the most noted developments in international tax in recent years is the 15 Actions of Base Erosion and Profit Shifting (BEPS) agreed upon by the OECD/G20. The 15 BEPS Actions address tax avoidance and aim to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. Though BEPS is an international initiative, it is creating ripples in local tax environments, and countries all over the world are starting to adopt and implement BEPS recommendations. Another important driver of change has been the increasing pressure by the IMF on the GCC states to take action to widen the tax base and find new sources of income, most notably the increasingly likely introduction of value-added tax (VAT) across the GCC.

Qatar is reacting to this changing economic and tax environment. On one hand, it is bringing in new regulation, improving enforcement of existing regulation and considering new taxes. On the other hand, it is providing new opportunities for foreign investors through the Qatar Financial Centre (QFC), Qatar Science and Technology Park (QSTP) and special economic zones to be run by Manateq. It is also providing opportunities for diversification to Qatari-owned businesses through initiatives by the Qatar Development Bank.

Recent Developments

As the sophistication of Qatar’s tax authority has increased and budgetary pressures have started to have an impact, trends have emerged. Examples of some of the most significant developments are given below. Related-party transactions: The QTD is closely scrutinising related-party transactions and now frequently queries the values declared for such transactions. It is therefore important that taxpayers use appropriate transfer pricing methodologies and have documentation in place to support the method used and the rates they charge. Contract (tax) retention recovery: The wait for recovery of retentions from payments to Qatar branches can have a significant cash flow impact. The QTD has been applying the rules more stringently and challenging the recovery of retention when the payments are not linked to a contract registered on the branch commercial registration. Online filing: Following the QTD’s launch of its electronic filing system in 2014, the QFC has also adopted an electronic filing system, meaning all businesses in Qatar (under the state, the QFC or QSTP) that are required to file tax returns will have to file their tax returns electronically going forward. The electronic filing systems offer potential for tax authorities to increase the efficiency with which they review returns and process applications. It may also assist sharing of information and coordination between ministries. Taxation of non-resident capital gains: The QTD is now of the view that if a non-resident derives Qatar-sourced income (including a capital gain), the non-resident should file a corporate income tax return and pay the tax. As the practical barriers to non-residents in respect of filing a tax return have been removed, it is necessary for non-residents to consider whether they have realised Qatar-sourced income and thus are required to file Qatar tax returns and pay the tax due. Wage Protection System (WPS): The Ministry of Administrative Development, Labour and Social Affairs has recently amended Qatar Labour Law No.14 of 2004 to introduce the WPS. In line with the WPS frameworks in the region, the Qatar WPS imposes an obligation on employers to transfer each employee’s salary in riyals to his or her account at a financial institution in Qatar. The introduction of the WPS raises the question as to whether, in the future, the Qatar tax authority may follow the example of the tax authority in Saudi Arabia and limit the tax deductibility of salary payments to what is reported through the WPS. Approach of Qatari principals: We have seen Qatari principals develop and reinforce their internal controls and tax policies and procedures. Examples include them applying withholding tax and retention requirements more stringently (e.g. reviewing which contracts are on the commercial registrations of branches undertaking work for them) and refusing to agree to tax gross-up clauses in contracts with subcontractors. This trend is expected to continue as the tax awareness of Qatari principals increases and they come under greater pressure to meet budgets and assist Qatar in minimising tax leakage.

Future Developments

The more significant anticipated developments are detailed below.

VAT 

This is to be introduced to widen the tax base of the GCC states and marks the first incident where individuals will be taxed on their consumption in the GCC. The expected arrival date of VAT is 2018, although a transitional period is anticipated. The Qatar tax authority, Qatari principals and Qatar businesses will all need to ensure they are ready for the impact of VAT on their operations.

BEPS 

This is currently the highest trending topic in international tax and its impact will be felt in Qatar even though Qatar is not a member of the OECD/G20. Governments and tax authorities have already been very active, from both a behavioural and a legislative basis. This may lead to further changes in Qatar tax legislation to ensure Qatar can remain capable of protecting its own tax base.

One of the most significant actions of BEPS is Action 13 – Country-by-Country Reporting (CbCR), which will be ready for exchange by late 2017 for countries which implemented CbCR. Although Qatar has not formally announced that it will adopt CbCR, many businesses in Qatar that have activities and/or legal presence in G20/OECD countries or other countries that have already announced CbCR adoption will be impacted with heavy fines imposed on local entities in those countries if they do not provide group-level data under CbCR.

Action Six (Treaty Abuse) and Action Seven ( Permanent Establishment Status) are also likely to impact Qatar. Action Six aims to actively combat treaty abuse, specifically treaty shopping, where treaty benefits are claimed in situations where they were not intended to be granted. Action Seven prevents the use of common tax avoidance strategies that are used to circumvent the existing permanent establishment definition.

Common Reporting Standard (CRS)

Qatar has committed to undertake the first automatic exchange of information under the CRS by 2018. Qatar tax authorities will obtain account holder information from Qatar-resident financial institutions and automatically exchange that information with other jurisdictions where account holders are tax residents on an annual basis.

Outlook

Though Qatar has abundant natural resources, it is not immune from international developments such as BEPS and low oil and gas prices. These factors, allied with the continuing modernisation of Qatar’s regulatory and tax regimes, have given greater impetus to proposals such as the introduction of VAT, and have increased Qatar’s ability to enforce payment of tax and compliance with regulations. In this context, it is more important than ever that businesses operating in Qatar understand such developments and ensure they are able to swiftly respond to such changes.