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Transcript of PowerPoint Presentationintax-group.com/wp-content/uploads/2016/02/06_Olivia_Matheou.pdf · 1....
15 March 2016
Tax risks faced by Chinese investors eyeing
attractive investment opportunities in GCC
1
Presentation
© 2016 Deloitte & Touche (M.E.). All rights reserved.
1. Introduction
2. Chinese investment in the GCC
3. Middle East/ GCC recent tax Developments
4. Key tax risks faced by Chinese investors
Agenda
2 © 2016 Deloitte & Touche (M.E.). All rights reserved.
Chinese investments in
the Middle East/ GCC
3 © 2016 Deloitte & Touche (M.E.). All rights reserved.
Chinese Investment in the GCC
© 2016 Deloitte & Touche (M.E.). All rights reserved. 4
The emergence of Iran – significant new opportunities
© 2016 Deloitte & Touche (M.E.). All rights reserved. 5
GCC– a few facts
The Gulf Cooperation Council (“GCC”)
• Established May 25,1981
• Members: Bahrain, Kuwait, Oman, Qatar,
United Arab Emirates, Saudi Arabia – (Jordan
under consideration).
• Importance:
o Market of 42 million people (and
growing)
o Gross Domestic Product of $1.6 trillion in
2014
o Despite the drop in the oil prices,
estimated GDP growth rate of 3% for
2016.
o GCC has largest proven oil and gas
reserves
• Customs union allowing free trade between
members
Economic importance
• Exports of 861 billion USD for 2014
• Imports of 476 billion USD for 2014
• Exporter of natural resources – 50% of
world’s oil and gas
• Important hub for trade between Asia and
Europe
6 © 2016 Deloitte & Touche (M.E.). All rights reserved.
Middle East Tax
Developments
7 © 2016 Deloitte & Touche (M.E.). All rights reserved.
Middle East - corporate income tax overview
0%
5%
10%
15%
20%
25%
Corporate income tax – headline rates
• The Middle East/ GCC is often mistakenly perceived as an area with limited or no taxation.
However this is not the case.
• Generally, the companies are taxed on a territorial basis.
• Zakat – “tax” paid by nationals/GCC nationals on their share of the profits e.g. Kuwait (1%),
Saudi Arabia (2.5%)
9 © 2016 Deloitte & Touche (M.E.). All rights reserved.
Middle East – tax developments and recent trends
Ongoing Tax Reforms
International pressure
to introduce taxes
Double Taxation
Treaties expanding
• Jordan introduces new Income Tax Law Effective 1 January 2015.
• Egypt - New VAT law 2015.
• Changes to Oman Income Tax Law
• Kuwait - New Foreign Investment Law and Draft CIT Law
• KSA - Virtual Services PE.
• A large number of treaties have been signed / amended or entered
into force.
• Total treaties in force: Qatar (more than 50 treaties), Oman (26
treaties), Bahrain (over 35 treaties), Kuwait (more than 60 treaties),
UAE (60 treaties), Saudi Arabia (over 30 treaties).
• Egypt has already introduced detailed TP regulations
• Saudi Arabia and Qatar are discussing the introduction of formal TP
regulations
• Pressure from IMF for GCC countries to diversify their revenues
(introduction of VAT).
• Saudi Arabia has introduced e-filing system for Zakat filing and Corporate Tax
• Qatar introduction of Electronic system of tax filing
• The immigration system to be linked with the tax system – exchange of
information
More consideration to
transfer pricing
Increased use of
technology by the
authorities
© 2016 Deloitte & Touche (M.E.). All rights reserved. 10
International pressure to introduce taxes
Governments need to diversify source of revenues
© 2016 Deloitte & Touche (M.E.). All rights reserved. 10
Middle East region
What does the future look like?
• VAT;
• Transfer pricing documentation requirements;
• Tougher anti-avoidance laws and scrutiny of tax
structures;
• More transparency and sharing of information;
• Greater requirement to demonstrate effective tax
governance and strategy/policy
© 2016 Deloitte & Touche (M.E.). All rights reserved. 12
Practical tax risks
applicable to Chinese
investors in the GCC
12 © 2016 Deloitte & Touche (M.E.). All rights reserved.
Key tax risks for Chinese investors in the GCC
Permanent Establishment risk
Permanent establishment not well defined and not fully
aligned with OECD principles. No specific thresholds -1
day could create taxable presence. Virtual Services PE in
KSA.
Application of DTTs/ WHT refunds The application of DTTs is seldom allowed upfront , it
typically requires the approval of local tax authorities and
/ or payment of local WHT first -> cash flow strain on
foreign businesses.
Lack of proper TP legislation and deemed
profits assessment
Currently no formal detailed TP legislation in the region
(with the exception of Egypt), which opens multinational
companies to aggressive challenges on all related party
transactions. To the extent challenged, multinationals can
be subject to tax on arbitrary levels (deemed profit basis).
Restriction on foreign ownership/ nominee
structures Current foreign ownership restrictions force
multinationals to adopt indirect investment structures (e.g.
using local nominees), which can be and are actually
challenged by tax authorities.
Timescales for tax compliance, audits and
refunds There can be significant gaps between filing and paying
tax and being audited by the local tax authority as well as
between requesting and obtaining a tax refund.
Key Tax Risks
Restrictions on
foreign
ownership/
Nominee
Structures
Application
of DTTs and
WHT
refunds
Lack of proper TP
legislation and
deemed profits
assessment
© 2016 Deloitte & Touche (M.E.). All rights reserved. 13
Risk of Permanent Establishment - Example Introduction of “Virtual Services PE” concept
Existing New Targeted mischief
© 2016 Deloitte & Touche (M.E.). All rights reserved. 14
• DZIT issued internal guidance about what constitutes a PE and introduced the
concept of a “Virtual Services PE”.
• Under the guidelines, non residents shall be considered to have created a PE
for Saudi tax purposes in all cases where the duration of service exceeds 183
days within a 12 month period, regardless of the place where the service is
rendered.
• Currently, no specific provision in the local tax legislation to support this
position.
• Not aligned with the OECD and the UN Model guidelines (which typically
represent the norm in interpreting taxation matters). This contradicts the
provisions of most of the DTTs that KSA has entered into.
• This interpretation can result into denial of Withholding Tax (WHT) refund claims
for non resident and can ultimately result in double taxation.
.
Restriction on foreign ownership/ nominee structures
Existing New Targeted mischief
© 2016 Deloitte & Touche (M.E.). All rights reserved. 15
• The region still has foreign ownership restrictions, either generally applicable or
on select industries.
• In some GCC countries, GCC shareholders and their direct investments are not
subject to corporate income tax or alternatively, they are subject to reduced
“taxes” (e.g. zakat).
• Foreign companies use nominee structures – the legal ownership lies with a
GCC national(s), however all de facto beneficial ownership / management lies
with the foreign entity.
• Local tax authorities are enabled to look through the structure of any transaction
to establish the real substance of any such transaction.
• If successfully challenged, the risks for the foreign party can be significant,
ranging from additional tax payable to penalties for tax evasion etc.
.
Lack of proper TP legislation and deemed profits
assessment
Existing New Targeted mischief
© 2016 Deloitte & Touche (M.E.). All rights reserved. 16
• With the exception of Egypt, the region is yet to introduce detailed TP
legislation. This brings a significant risk of challenge to any related party
transactions.
• High risk of disallowance of such costs for CIT purposes, if the transactions are
not at an “arm’s length basis” and not properly supported.
• Although typically accepted, OECD TP reports can still be challenged on the
basis of lacking local comparable studies. However, in practice it is very difficult
to adequately benchmark certain transactions against similar ones in this region
(due to e.g. lack of publicly available information).
• As such, unless properly documented, related party transactions can be
challenged.
Tax Structuring Considerations
Key structuring points
• It is important for Chinese companies to proactively structure their investments/
operations in the region; firstly to meet their commercial objectives (e.g. to allow
management oversight/ flexibility for certain local decisions) and also to be tax
efficient, taking into account the different tax regimes.
• Consideration may be given to structure the investments in the GCC through a
holding company, in a jurisdiction that allows the utilization of a DTT, which can
potentially mitigate/ reduce the withholding tax on the repatriation of profits.
• May identify scope/ opportunities to introduce inter-company transactions that could
increase the tax efficiency of certain local operations, assuming that these are made
for business/ commercial purposes and are at arm’s length.
• Chinese foreign Tax Credit: An ordinary tax credit is granted, both unilaterally and
under tax treaties, for foreign tax paid on foreign income. The amount of foreign tax
credit (FTC) is limited to the amount of Chinese tax on the foreign income.
• China has in place strict anti – avoidance rules including transfer pricing legislation
and Controlled Foreign Company rules, which may impact the overall structuring
considerations. Nevertheless, in practice CFCs are rarely being challenged by the
Chinese tax authorities.
© 2016 Deloitte & Touche (M.E.). All rights reserved. 18
18 © 2016 Deloitte & Touche (M.E.). All rights reserved.
Keep abreast of changes – circulars and instructions
are always introduced and can even be applied
retroactively.
Keep close to the region!
This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.
About Deloitte
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About Deloitte & Touche (M.E.)
Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is the first Arab professional services firm established in the Middle East region with uninterrupted presence since 1926.
Deloitte drives progress. Our practices around the Middle East help clients become leaders wherever they choose to compete. We invest in outstanding people of diverse talents and backgrounds and empower them to achieve more than they could elsewhere. Our work combines advice with action and integrity. We believe that when our clients and society are stronger, so are we.
Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,000 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has received numerous awards in the last few years which include Best Employer in the Middle East, best consulting firm, and the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW).
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© 2016 Deloitte & Touche (M.E.). All rights reserved. 19