Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Middle EastApril 3 2005

A new line on taxes

After extensive research into international taxation practices, the Qatar Financial Centre has adopted a different tax regime from the rest of the country.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

The Qatar Financial Centre (QFC) recognises that tax is a key issue for international businesses. It has carried out extensive research into international taxation practices and consulted widely within the business community to ensure that its tax regime achieves a fair balance between its own fiscal objectives and the needs of businesses participating in the centre.

Two key messages came from this consultation. First, taxation will not be the primary consideration for businesses locating in the QFC. Rather, tax is a secondary factor, which businesses consider to ensure that its impact does not negate the commercial case for locating in the centre. Second, the adoption of a modern, straightforward tax system, applying a comparatively low tax rate on profits to fund the QFC, is perceived to have genuine advantages over the “offshore” model of zero tax and a regime of fixed registration fees and licence fees adopted in many financial centres across the world.

By taking the taxed-environment route, the QFC believes there are clear advantages for businesses locating in the centre. Registration and licence fees are a cost arising before any profit is earned, whereas tax is only payable to the QFC when profit is generated. And taxes paid in the QFC should be creditable against tax in the head office country of participating businesses, whereas fees are an absolute cost to participants.

Compliance with international best practice is a key objective of the QFC. It believes that having a tax system will bring reputational benefits and should engender a better reaction from other countries and the international business community at large. The Organization for Economic Co-operation and Development is leading an international drive to eliminate harmful practices of tax havens and preferential tax regimes and the QFC supports this initiative.

Minimising risks

The design of the QFC tax regime will reflect these messages while the overall philosophy behind its approach is to minimise businesses’ costs and risks, taking account of its fiscal objectives and the international framework within which the QFC will operate.

To ensure the regime fulfils these objectives, a period has been allowed for further consultation with business and refinement of the regime. There will be no taxation on businesses in the QFC for the first three years of the centre’s existence. Thereafter, the basic tenets of the QFC tax regime are that business profits will be taxed at an internationally competitive rate of 10%, with taxable profits being closely aligned with accounting profits computed under normal commercial principles for the particular entity – in practice, for members of listed groups, this is likely to be IFRS or US GAAP, but other forms of GAAP would be accepted where appropriate. The QFC tax law will be designed to ensure neutrality of treatment between Sharia and non-Sharia compliant financing techniques.

Tax payments will not be required until after the end of the accounting period and there will be no withholding taxes or transaction taxes and no personal income tax. Provisions will be included to deal with the treatment of common business transactions, such as granting tax relief on conversion of branches into subsidiaries or on intra-group transfers of assets. There will also be customary exemptions for dividend income and capital gains from qualifying investments held for a specific time period. Future developments will include the creation of suitable investment fund vehicles, both corporate and tax transparent to encourage the development of fund management business. Investment funds will not be subject to taxation on investment gains. Tax transparent investment vehicles will enable investors to claim the benefit of their own double taxation treaties.

The tax laws will be codified in English and enforced through a credible regime of return filing, audit and tax collection. The system will include an independent appeal mechanism for resolving disputes with the QFC tax authority.

One frequently asked question is how will the QFC tax regime compare with the rest of Qatar? The answer is that the QFC regime has been designed from scratch as a self-contained regime, so there are more differences than the obvious one between the rates of tax (the top rate of tax is 35% for the rest of Qatar, compared to 10 per cent in the QFC). One important difference is that businesses’ liability to tax in the QFC will not be determined by the residence of the owners. In Qatar generally, businesses are only liable to tax on the portion of profits attributable to non-resident owners. In the QFC, tax losses can be carried forward indefinitely, as opposed to three years in the rest of Qatar.

In the long term it is possible that economic developments may lead to greater convergence between the QFC regime and the rest of Qatar. There are however, no current plans for harmonisation - the two regimes will be distinct and operate separately from each other.

Was this article helpful?

Thank you for your feedback!

Read more about:  Middle East