The GCC’s emerging tax order
Like medicine, tax is an evolving science. Norah Al Khalaf explains how tax policies have changed across the member states of the Gulf Cooperation Council and what tax departments should prepare for next.
Tax policy is changing and developing rapidly in the GCC region. Taxpayers interested in expanding their operations to new jurisdictions may face high risks of audits and investigations with regards to international taxation. Understanding the relevant laws and regulations is essential and, therefore, the demand for tax consultations is increasing accordingly.
In the GCC countries, tax policy is maturing and becoming increasingly complicated. In the past five years, various tax laws have been amended and numerous others have been introduced.
In 2017, excise tax was introduced in the UAE at various rates between 50% to 100% on certain products. On December 1 2019, the Federal Tax Authority (FTA) added a few more products to the list. In 2018, the UAE implemented a VAT for the first time in accordance with the GCC agreement.
Furthermore, the FTA announced on January 2022 the introduction of a corporate income tax (CIT) at a rate of 9% on businesses net profits. Effective for financial years starting on or after June 1 2023. The CIT regime is expected to cover transfer pricing rules and requirements on eligible taxpayers.
On the other hand, Saudi Arabia implemented VAT for the first time in 2018 as well. The Zakat, Tax, & Customs Authority (ZATCA) amended the regulations on several occasions since they were first published. The VAT rate increased from 5% to 15% on July 1 2020 due to the pandemic.
Transfer pricing regulations were published in 2019. However, the arm’s-length principle was embedded in the Income Tax Law.
The real estate transaction tax (RETT) regulation was effective as of October 4 2020 at rate of 5%. The regulations were amended a couple of times.
Moreover, several amendments were made to the existing regulations of Zakat and Corporate Income Tax and final versions were published by 2019.
A royal decree in 2017 introduced major changes in CIT in Oman, increasing the rate from 12% to 15%, introducing a 3% CIT rate on small taxpayers, extending withholding tax of 10% to dividends, interest, and payments for services, and more.
Moreover, Oman was the fifth country to implement excise tax, which took effect on June 15 2019. The excise tax rate was either 50% or 100% depending on the type of product. Furthermore, Oman was the fourth GCC country to implemented VAT at 5% in 2021 with some exempted items.
The Bahrain National Bureau for Revenue (NBR) introduced excise tax on December 30 2017 with a rate of either 50% or 100% depending on the type of product.
Moreover, and due to the pandemic, the Council of Ministers approved the increase rate of VAT from 5% to 10%, which took effect on January 1 2022.
The future of tax in the GCC
Qatar and Kuwait are in the process of introducing VAT since both countries are under a common GCC framework for value added tax.
Moreover, couple of countries may introduce or increase their corporate income tax rate to 15% in alliance with the global minimum tax rate which will ensure that multinational enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023.
Other countries may introduce digital service taxes (DSTs)” which may target the big tech companies. On the other hand, countries that increased VAT rates to recover from covid-19, may decrease it once their economies recover.
How to prepare for these tax changes?
There are various ways for business to prepare for tax changes. Some of these are:
· The best way to prepare is to tax plan
Tax planning is a legal method in which you can make use of tax exemptions and benefits to reduce your tax liability. You need to set a tax strategy for your business and plan accordingly. The first step would be to analyze your current tax situation, especially if you are an MNE.
Understand what are the applicable laws and regulations that applies to your business. Make use of any exemption or tax benefits. Familiarise yourself with relevant tax treaties and agreements. Understand your tax rights and how to use the laws in your advantage.
· Be proactive
If believe you are facing a complex tax situation, seek answer. Either by communicating with the relevant tax authority to get a tax ruling or by seeking advice from tax experts.
· Always have proper records of your tax accounting.
You may be required to maintain proper books of accounting. In Saudi Arabia for example, you are required to maintain records for ten years and they should be kept in Arabic.
While in the UAE, for VAT purposes, VAT-registered companies are required to keep books of accounting for a minimum of five years. Nevertheless, keeping proper books of accounting will help you keep track of your records and makes it easier to navigate through.
· Tax Provisions
Keeping records can also give you a historical view on previous tax trends which may help in forecasting future tax changes. Accordingly, revise your tax provisions periodically to have better estimates.
· Be aware of double taxation
Changes in tax law can make you a resident in multiple jurisdictions, which can lead to double taxation.
In some case you may be double taxed in two countries or more on the same transaction, which is called “jurisdictional double taxation”.
This occurs when two countries apply similar taxes on the same income or capital in the hands of the same individual or an entity. This may occur when a taxpayer is considered a resident in two jurisdiction and would possibly be subject to pay taxes in both jurisdictions.
These sorts of conflicts are solved through double taxation agreements, which gives the right to one of the jurisdictions involved to tax that transaction.
In other cases, you may be taxed on the same income twice from , which is called “economic double taxation”. This occurs when one or more than one country apply similar taxes on the same income or capital but in the hands of more than one person.
For example, when income earned by a corporation is taxed both to the corporation and to its shareholders when distributed as a dividend. You need to be alert and aware of those two forms of double taxation.
· Avoid penalties
If you are not updated with recent tax law changes, you may commit mistakes and tax penalties may arise. Penalties can be a huge burden on taxpayers. In some cases, penalties exceeded tax due amounts. Therefore, it should be taken seriously. It can be avoided by following very simple steps, to name a few:
o Know what taxes apply to your business
o File on time to avoid late-filling penalties
o Double check the numbers
o Be honest
o Match your tax returns with your audited financial statements
o Be responsive to tax authorities to avoid non-cooperation penalties
o Provide supporting documents (if it can be obtained and verified from a third party, it will serve as a more authentic evidence)
· Prepare for audit
Tax audits generally cannot be avoided. It is never a matter of “will you get audited” but a matter of “when will you get audited”. Therefore, the right way of thinking would be “how to prepare for an audit”.
The best way to prepare is to first get a better understanding of tax regulations, being aware of what taxes apply to your business, make sure you are complying, and finally enhance your credibility by maintaining supporting documents.
· Appeal when you can
In any case, you may receive a tax assessment from tax authorities which would have been made based on the available information to that tax authority. Therefore, it is very important to familiarise yourself with the appeal process in the countries in which you conduct business.
If you don’t appeal in time, you may never be able to defend your position and you’d find yourself overtaxed with no right to object. When you appeal, always make sure to refer to the relevant tax laws and regulations and prepare to be representing your case during hearings, if needed.
A lot of changes have happened in a short period of time and it is expected that more and more changes will occur in the near future. It can be cumbersome for taxpayers to stay updated on changes and amendments.
Consequently, taxpayers usually seek professional consultation on the tax implications to avoid penalties and paying more taxes than expected. When taxpayers are updated and well informed on the coming tax changes, they can be prepared and avoid having audits and assessments from tax authorities.