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  • Service: Tax, Global Indirect Tax, Mergers & Acquisitions, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Date: 11/23/2012

Compliance requirements in selected MESA countries  

Compare compliance requirements across selected Middle East and South Asian (MESA) countries.

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Compliance Requirements in Selected MESA Countries


 

Egypt

Kuwait

Oman

Qatar

Saudi Arabia

Language of tax books & records?

Legal books (e.g. journal entry book and inventory book) must be in Arabic. Analysis (e.g. general and subsidiary ledgers) may be in English, although Arabic translation may be requested. All contracts should be translated into Arabic.

No requirements for tax books and records; submissions (e.g. registration forms, tax declarations, formal letters) must be submitted in Arabic.

Tax filings accepted in Arabic or English; objections and appeals must be submitted in Arabic.

Tax filings accepted in Arabic or English; objections can also be submitted in English. Appeals must be submitted in Arabic.

Tax books and records must be kept in Arabic in the country and retained for 10 years.

Issues arising from tax versus accounting differences?

Egyptian accounting standards are followed to compute net profit, which is the base for taxable profits.

Non-deductible costs include provisions and accounting depreciation; tax depreciation is deductible for income tax purposes.

Used provisions are also deductible, provided the supporting documents are made available to the tax authority during the taxpayer’s income tax audit.

Differences exist in income computed for tax and accounting purposes (e.g. adjustments in tax declaration for provisions, unrealized foreign exchange gains or losses and tax depreciation rates).

Financial statements are prepared under IFRS and tax returns are prepared in accordance with Omani tax law and current tax authority practices.

Depreciation for accounting purposes is calculated in accordance with IFRS. Tax depreciation computed according to Qatari tax law.

Tax and Zakat returns are prepared based on audited financial statements; all tax and Zakat returns must be filed together with audited Arabic financial statements. Saudi accounting standards must be followed and are acceptable for tax purposes as well. In the absence of a specific Saudi standard dealing with a matter, the relevant IFRS may be adopted. Differences between accounting and tax treatment mainly involve depreciation, provisions, interest limitation, and loss carry-forward and disallowed expenses.

Tax registration requirements for non-residents?

Companies working in Egypt should be registered with the Egyptian Tax Authority within 30 days from commencing activities in Egypt.

Non-residents who are regarded as residents for tax purposes in Egypt maybe required to open a tax file in Egypt. However they will be liable to pay income tax at 20 per cent on gross income in the absence of the audited financial statement signed by an Egyptian auditor.

Tax law does not define ‘non-resident’; in practice, corporate income tax only imposed on companies owned by non-GCC citizens and incorporated outside GCC; where company is tax-exempt (e.g. due to tax treaty, the company must register for tax and file an annual tax declaration to claim treaty benefits).

Where a non-resident company creates or has an Oman taxable presence (permanent establishment), it is required to register with the tax authority within 3 months from when the activity commenced.

Currently, there are no such requirements under current Qatari tax law interpretation from the tax authorities. Qatari withholding tax may apply to amounts paid to non-residents (generally, those without a Qatari tax registration card) where activity is not related to a permanent establishment in Qatar and services are carried on ‘wholly’ or ‘partly’ in Qatar.

Where a non-resident company creates or has a Saudi taxable presence (permanent establishment), it is required to register with the tax authority, file annual tax returns and pay taxes within 120 days of financial year-end.

Special procedures or treaty clauses regarding creation of taxable presence?

A new permanent establishment concept was introduced in Egyptian new tax law

Tax law does not define ‘permanent establishment’; in practice, a foreign entity’s representative in relation to business contract would create a taxable presence in Kuwait; for certain income (e.g. royalties, management fees), the income is considered taxable regardless of any physical presence of representatives

Where a taxpayer is incorporated in a country with which Kuwait has a tax treaty, the treaty’s permanent establishment provisions may be claimed.

Omani tax law has defined the term ‘permanent establishment’ and set out conditions for the creation of a permanent establishment. This includes a dependent agent permanent establishment and a service permanent establishment. Treaty definitions of permanent establishment generally are in line with OECD model treaty.

Qatar’s tax authority requires every taxpayer to apply for a tax registration card within 30 days of commencing activity in Qatar.

Saudi tax law contains specific instances when a taxable presence may be created, and is not time specific. All of the tax treaties signed by Saudi Arabia contain specific permanent establishment clauses and are in line with the domestic tax law.

Documentation to prevent adverse taxable presence determination?

Under the domestic tax law, the permanent establishment is created from day one. However in the presence of a tax treaty, the provisions of the double tax treaty should apply.

In the absence of a treaty, even a single day’s presence in Kuwait of a foreign entity’s representative creates a taxable presence. Where a treaty exists, a schedule of the number of each foreign employee’s days in Kuwait must be kept, supported by copies of passports, entry and exit stamps and visas. Employee travel must be linked to onshore services invoiced to customer in Kuwait.

Whether or not a taxable presence (permanent establishment) exists is a question of fact. Adequate documents should be kept to support the taxpayer’s position that no permanent establishment exists; for example, due to limited visits. These could include details of personnel visits (including duration of stay), supported by time sheets and passport copies.

Currently, a tax registration card is the key requirement to evidence the existence of a permanent establishment in Qatar.

Registration with the tax authority is required where a PE is created and obtaining a Zakat certificate. Alternatively, contractual arrangements should ensure that PE exposure is minimized and/or provision for responsibility and liability of taxes between contracting parties is adequately addressed.

Transfer pricing approach and documentation requirements?

OECD-based transfer pricing rules were recently introduced, but have not yet been tested on audit; head office expenses are accepted at up to 7 per cent of taxable net profit for foreign branches (provided it excludes royalties, interests, commissions and direct wages).

A certificate confirming the balance of the overheads should be obtained from the head office’s external auditor in order to deduct the overheads.

The tax authority is entitled to verify that inter-company/group transactions are conducted on an arm’s length basis. If not, the tax authority will compare the transactions with those of unrelated companies. In practice, the tax authority may arbitrarily disallow 20 per cent to 40 per cent of the related party costs even where supporting documents exist.

No specific transfer pricing rules apply other than in respect of thin capitalization. The tax authority reviews transactions to determine whether they occur at arm’s length, and may look through structures or transactions in cases of perceived tax avoidance.

Qatar follows the OECD principles for transfer pricing. Tax authority may impose ‘market value’ on related-party transactions that it deems are not at arm’s length. A substance over form approach is used to assess reasonableness of transactions.

No specific transfer pricing rules are in place. Saudi tax law requires related-party transactions to occur at arm’s length; if not, related income may be taxed or deductions disallowed. Contemporaneous documentation, including agreements and invoices, should be maintained to support all costs.

Non-resident withholding tax requirements?

20 per cent withholding tax on payments to non-resident regarding royalties, interest, and services rendered abroad.

Non-resident income recipient is required to approach the Egyptian Tax Authority to get a benefit from the reduced rate under an applicable double tax treaty between Egypt and its foreign country in case of royalties and interests only.

No withholding taxes; under a system of tax retention, a tax amount is released to the beneficiary to whom it is owed on presentation of a tax compliance certificate.

Foreign companies with no PE in Oman who derive payments from royalties, R&D, management fees or use or rights to use computer software from Oman, must deduct 10 per cent tax on gross income at source (with no deduction for related expenses).

5 per cent withholding tax applies on technical fees and royalties and 7 per cent on interest, commissions, and fees for intermediary, directors’ and other services performed in Qatar.

Withholding tax applies at 20 per cent on payments to non-resident for management fees, 15 per cent on royalty payments. Related party charges and other payments are not defined. Withholding tax applies at 5 per cent for technical services, dividends, insurance, interest, air tickets and air and maritime freight and international telecommunication services.

Withholding tax issues or planning opportunities?

If withholding tax may be reduced by a tax treaty, the Egyptian payer should withhold 20 per cent of the amount and the income recipient must apply for refund.

Reduced tax treaty rates cannot be applied to tax retentions.

Any service that attracts withholding tax should have a separate agreement and not be paid as part of a lump-sum payment including services that do not attract withholding tax, if not, the tax authority could assess withholding tax on the entire lump-sum payment. Treaty provisions should be carefully reviewed as they may provide for either lower rates or a narrower definition.

Withholding tax is often a key risk area, as Qatar imposes severe non-compliance penalties of up to 100 per cent of the withholding amount not disclosed to the tax authority. Qatari tax law allows for the application of international tax agreements (Qatar currently has over 40 tax treaties in place) to minimize or eliminate tax. An application for approval must first be made to the Qatar tax authorities to utilize this relief mechanism.

Withholding tax rates for royalties are reduced by Saudi tax treaties, and exemption from withholding tax on interest is available in some cases.

However, domestic tax treaty rates must be applied in all cases and application for refund made by non-resident.

Existence of advance compliance programs allowing taxpayers to gain certainty over tax treatment of transactions?

Tax law provides for advance tax rulings and advance pricing agreements, but it is rare in practice to receive a ruling issued by the tax authority.

No

Advance rulings can be obtained, although not specifically provided in the legislation.

Advance rulings can be obtained, although not specifically provided in the legislation.

Non-binding advance tax rulings available on request.

Selection of taxpayers for audit – universal or sampling?

Sampling; in practice, all large taxpayers are included in audit sample.

Universal

Universal (2 or 3 years are usually assessed at the same time).

Universal (generally an audit is performed in conjunction with the tax assessment process. Back-dating of the audit period is also common practice).

Sampling (based on results of initial assessment and desk audit).

Evidence of information-sharing with other government departments or tax authorities of other countries?

Tax and customs authorities appear to be sharing information for enforcing sales tax.

Tax authority appears to be sharing information with Ministry of Commerce to identify taxpayers.

Information is normally obtained by the tax authorities from ministries and other government organizations and companies in respect of payments made to foreign companies. Documents such as tax clearance certificate are also requested by the Ministry of Manpower (before issuing work permits) and Ministry of Commerce and Industry (before liquidation).

Information sharing does occur between the Qatar ministries. For example, commercial registration, required for all companies incorporating in Qatar, is used as a source of investigation by the tax authorities to ensure compliance with tax registration procedures.

Tax authority has direct access to customs documentation for imported goods; keep reconciled import records to verify cost of imported goods presented in tax/Zakat returns.

Current and expected future developments?

Additional tax law reforms are expected.

Introduction of withholding taxes and VAT are expected in the near term.

A newly formed Large Taxpayers Unit will likely result in more attention being paid to assessments of large companies, albeit through a more efficient and productive approach.

GCC countries, including Oman, are undertaking studies to implement VAT with a current target date of 1 January 2016.

Qatar’s tax framework, introduced as of 1 January 2010, is relatively new, and a number of important future developments (e.g. VAT) are expected as the country continues to align itself to international best practices.

New IT systems allow for electronic tax payments and system-based initial assessments; payers must register for a unique tax/Zakat file number.

Other tax compliance risks?

No

Tax law lacks detail and thus is open to the interpretation of the tax authority; due to inconsistencies in practice, foreign entities are advised to local tax advice.

With the issuance of new executive regulations, tax audits are likely to be driven by rules and regulations rather than principles.

Qatar’s new tax law has introduced increased penalties for non-compliance.

Potential ownership or status changes should be reviewed to determine impact on tax/Zakat status. Scrutiny is increasing on the issuance of investment license to foreign investors. The practical application of certain aspects of the tax law creates uncertainty. Zakat issues are open to interpretation due to lack of formal laws and regulations in this area.

Source: KPMG International, 2012.


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