On 17th November 2009 His Highness the Deputy of the Emir of
Qatar issued Law No. (21) of 2009 concerning the Tax Law to apply
to income earned on or after 1st January 2010 (New Tax Law).
The New Tax law effectively repeals Law No. (11) of 1993 (Old Tax Law).
There are a number of changes occasioned by the introduction of the New Tax Law and this article proposes to examine the same in some depth.
Under the Old Tax law income was defined as including: (a) profits from contracts carried out in Qatar; (b) profits arising from the sale of an asset (c) commissions due to agencies; (d) fees for consultancy services and the like; (e) rent from real estate; (f) franchise and royalty fees; (g) recoupment of bad debts; (h) liquidation profits; and (i) bank interest and returns realised outside of Qatar.
The New Tax Law focuses less on profits and now sets out various definitions for types of income. Gross Income is defined as total income and profits from applicable sources. Net Income is defined as Gross Income less allowable deductions. Taxable Income is now Net Income less losses from previous years (up to a three year maximum carry over period).
The applicable sources for Gross Income include the Old Tax Law's income sources with reference to Gross Income rather than profits. However, the sources are also expanded to (a) Gross Income derived from the sale of shares in land rich companies; (b) Gross Income from shares held in Qatari companies; (c) interest on loans obtained in Qatar; (d) Gross Income from the exploration
Whereas foreign workers will be pleased that the exemption from the provisions of the law for salary and wage earners as contained in Article (49) of the Old Tax Law is now is mirrored in Article (2) of the New Tax Law, the situation for Qataris and GCC nationals has been changed slightly with significant implications. The exemption that meant that citizens of Qatar were free from tax is subject to those persons being residents of Qatar as set out in Article (4) of the New Tax Law. In theory, a Qatari citizen who was no longer resident in Qatar, may be required to pay tax on any Taxable Income derived in Qatar. Whilst the number of persons affected by this change will probably be very small, where it is significant is in its consequences for GCC Nationals.
Under Law No. 9 of 1989 regarding Equal Tax Treatment for Nationals and Companies of the Gulf Cooperation Council States, GCC citizens and companies wholly owned by GCC citizens are treated similarly to Qatari national and companies in relation to tax matters, thus the law allowed the GCC nationals and companies to enjoy the same exemption from tax as enjoyed by Qatari citizens and companies. If this exemption now only applies to GCC nationals who are resident in Qatar (as the Ministry of Economy and Finance now appear to interpret the situation) this will have significant consequences for GCC companies and nationals not resident in the state. For example a GCC company that is trading in Qatar but is not having a permanent establishment will now be subject to the new withholding tax (see below). How this sits with Qatar's treaty obligations within the GCC will be interesting to follow over the next few months as the Ministry of Economy and Finance come to grips with the New Tax Law in terms of procedures and implementation.
For taxpayers in Qatar the most significant change imposed by the New Tax Law is in the rates of tax. Rather than a marginal system employing rates from between zero and 35% depending on the level of income, there is now a flat rate of 10% (Article 11). Most large enterprises will welcome what should in most cases work out to be a reduction of tax, but for smaller taxpayers the opposite effect may be the result. For example a taxpayer under the Old Tax Law that earned a taxable income of 450,000 QR would pay 10% on income between 100,000 and 450,000 QR i.e. 35,000 QR (the first 100,000 QR being tax free). Under the flat rate now imposed, the tax will now be 45,000 QR.
For foreign businesses the introduction of a clear and workable withholding tax is perhaps the most significant development of the New Tax Law.
Under the Old Tax Law foreign businesses earning income in Qatar but not having a permanent presence in Qatar were free from the imposition of tax. Now for businesses without a permanent establishment in Qatar, Article 11 of the New Tax Law imposes a withholding tax on 5% of the gross amount of royalties and technical fees or 7% of the gross amount of interest, commissions, brokerage fees, director's fees, attendance fees and any other payments for services carried out wholly or partly in the State. Unfortunately terms like technical fees and attendance fees are not defined in the legislation so this will leave questions open for some time.
Nevertheless the withholding tax procedure is quite clear. Basically any person who pays fees for services to an entity without a permanent presence in Qatar will be required to withhold the requisite amount of funds from the supplier. This will be administered through a tax card system that all taxpayers in Qatar will be required to obtain (Article 12). The thought process is that if services are supplied by a person not holding a tax card, then that person will not have a permanent establishment in Qatar and so funds should be withheld from that person.
The obligation for payment of the withholding tax is place not on the foreign supplier but on the person making payment to such supplier. Any natural or legal person is required to perform the withholding and remit the same to the Ministry by the 16th day of the calendar month following the date of making the withholding.
What these procedures mean is that persons who do not have a tax card will find that their customers are going to withhold the requisite 5% or 7% and remit the same to the Ministry in no more than 47 days. There is as yet no system set up for entities that enjoy an exemption under international tax treaties so it is envisaged that all of the same will need to apply for some form of exemption letter from the Ministry so that there customers have some grounds to justify not making the withholding, other than the tax card.
Whilst the introduction of a withholding tax only brings Qatar in line with tax regimes in most countries the devil is in the lack of detail.
Article 11 does make the withholding subject to the provisions of tax agreements and some agreements like the France-Qatar appear to make it clear that a foreign entity paying tax in its home jurisdiction on income earned in Qatar will be exempt from the withholding tax, for reasons discussed above this may not apply to GCC entities. As such, we could find the situation that a French company supplying services to Qatar remotely will not be required to pay any tax in Qatar, but a company in Bahrain providing the same services in Qatar will be required to pay the tax.
The lack of detail and clarity has already lead to an indefinite moratorium being placed on the 7% withholding imposed on interest. Banks in Qatar would clearly prefer the situation to remain as it was. Collecting withholding on payments of interest creates new and expensing collection operations, not to mention a lower and less attractive interest rate as a permanent result. The Ministry of Economy and Finance has yet toadvise when the moratorium will be removed. Use of unfamiliar and undefined terms like attendance fees and technical fees will also only serve to create problems as well.
Whilst the appeal system in the New Tax Law is not too dissimilar from the Old Tax Law and there is still a Tax Appeals Committee, there are some significant changes.
Under Article 26 of the Old Tax Law, the composition of the Committee was two representatives from the Ministry, and one each from the State Audit Bureau and the Qatar Chamber of Commerce and Industry, with the Chairman being a Judge of the Courts of Justice. Whilst the members are still nominated as above, there is an additional member from the Qatari Association of Chartered Accountants and the Chairman is now required to be a Judge from the Appeal Court (Article 30).
Whereas appeals from the Committee's decision were required under the Old Tax Law to be made to the Civil Major Court, under Article 35 appeals are now required to go to the Administrative Chamber of the Court of First Instance. This should have the benefit of developing judicial expertise in tax matters, a problem faced in many jurisdictions.
Another feature of the New Tax Law is the establishment of a separate tax rate for taxpayers having agreements relating to oil operations as defined in Law no. 3 of 2007. In such cases the rate applicable is not less than 35%.
In cases where there is an agreement between a government body and a taxpayer (not related to natural resources) and such agreement does not specify a tax rate then the rate of 35% shall be applied.
It is understood the Ministry will be releasing further regulations which hopefully can clarify some of the points above. With any new system that comes into play there will be teething problems and any judgment must be reserved until such time as these problems are sorted out, hopefully sooner than later.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.