According to a panel discussion at the recently concluded Ernst & Young’s Middle East & North Africa Tax Seminar 2011 held in Houston, Texas, significant new developments in the MENA region are impacting tax outcomes, compliance procedures of companies and promoting better transparency. Presentations by Ernst & Young MENA Tax Leaders highlighted that tax authorities in the region have begun to depart from earlier accepted and expected tax norms.
Nearly 100 tax decision-makers from major multinational organizations from across the US and Europe took part in the event. Other topics presented include a general overview of the MENA tax landscape as well as country specific tax updates.
Sherif El-Kilany, Middle East Tax Leader, Ernst & Young, said: “The MENA taxation environment has become increasingly disparate with different countries diverging from earlier established norms and practices to tailor their policies according to changes they have undergone or anticipate. There has been a recent clampdown on corruption in some countries which has resulted in more transparent, business-friendly and reform-minded government initiatives. As change becomes the new norm, companies in the region need to stay more agile so that they can rapidly respond to these shifts in policy.”
The changing MENA Tax Laws – promoting business
New opportunities have risen from efforts to rebuild economies and infrastructure in terms of new contracts, licenses and new financing. Tax policies in many countries have been relaxed and tax rates reduced to encourage investment.
However, low natural resource countries have an urgent need to increase tax collections to strengthen public finances, compensate for lower tax rates and finance public subsidies. Consequently in these countries there has been increased scrutiny and enforcement of tax compliance which has lead to higher administrative burden on companies. There has also been an increased focus on the taxation of foreign businesses considered capable of bearing a larger share of the tax burden. Localization policies also include tightening of work permit policies, resulting in more restrictions and delays.
MENA tax environment and challenges
Tax authorities have also started focusing their attention on technically complex tax matters. New Transfer Pricing legislation introduced in new tax laws have given tax authorities in the region more legislative power to review pricing of related party transactions. However there is still no clear compliance guidance from the tax authorities, which leads to uncertainty about their approach. The concept of Permanent Establishment (PE) is subject to wide interpretation by tax authorities in their efforts to bring more companies into the tax net. Finally, withholding tax, payable on certain payments made to non-residents, is now subject to increasing compliance scrutiny, with responsibility now enforced on the payer in many cases.
Sherif added: “The increasing depth of tax compliance scrutiny by MENA tax regimes is exemplified by the increasing consideration given to thin capitalization. In Egypt, for example, the maximum debt to equity ratio is 4:1. If the debt exceeds such a ratio, the excess interest will not be a deductible expense. In Kuwait, interest paid to financial institutions outside Kuwait could be challenged. In Oman, interest on loan from related parties may be challenged. Careful consideration should be given to the definition of Royalties as it differs from one country to another country and subject to broad interpretation by authorities. In Kuwait, for example, Royalty and similar payments are taxed on a deemed profit up to 98.5%.”
Tax deductions subject to more stringent scrutiny
Tax deduction and compliance has become stricter and requires more detail and documentation. On-site inspections of books and records by tax departments are increasing while possibilities of being taxed on deemed profit basis are declining. Interpretation of new tax law and tax treaties by taxpayers may not match entrenched tax authority approach and exemptions have been reconsidered to facilitate the development of special sectors and encourage expertise within nationals.
In Qatar, for example, the period for tax exemptions has been reduced from 5 to 3 years and from 10 to 6 years. Authorities have decreased the number of years when tax losses can be carried forward and they now have stricter conditions on the utilization of losses; Kuwait reduced this to 3 years from an unlimited period.
New tax laws have reduced the corporate tax rate across the MENA region with the largest reduction being seen in Kuwait, decreasing from 55% to 15%. Other notable differences in the taxation rate of change were seen in Qatar, Iraq and Oman.
MENA pricing practices better aligned with international principles
Tax authorities in the MENA region are becoming more sophisticated and transfer pricing issues are becoming more prevalent. In the absence of formal transfer pricing rules, the challenge for taxpayers is the lack of guidance and precedent to determine an acceptable transfer price. Expanding tax treaty networks based generally on the principles set by the Organization for Economic Co-operation and Development (OECD) is prompting taxpayers in MENA to align their transfer pricing practices with internationally accepted principles and arm’s length principle is generally followed. Tax authorities in the MENA region are now focusing more on the structure of the transaction undertaken by the concerned parties.
Double taxation treaties
There has been a significant increase in the number of countries in the MENA region which have ratified double taxation avoidance treaties over the last five years.
“Since 2006, Kuwait signed 16, Qatar signed 29, Saudi Arabia signed 14 and the UAE signed 16 double taxation treaties. Many other treaties are signed and are at various stages of the ratification process. There are no tax treaties between GCC members as they operate in economic agreement to coordinate and standardise economic, financial and monetary policies. Notable countries with which treaties are missing across the MENA region include Australia, Brazil and Japan,” concluded Sherif.