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Digg 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.
Income
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
Exemptions
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.
Tax rates
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.
Withholding tax
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.
Appeals
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.
Other features
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.
Regulations
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.
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