Browsing 'tax' News

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Omar Chatriwala / Doha News

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Businesses in Qatar are running out of time to get ready for a new tax that GCC nations will soon impose on consumers, financial analysts have said.

The 5 percent value-added tax (VAT) is expected to take effect here in 2018 as part of a GCC-wide agreement.

It comes as Qatar’s government forecasts budget deficits for the next three years amid falling oil prices.

This doesn’t necessarily mean bad news for consumers, however.

Businesses to absorb cost

For one thing, the consumption tax is expected to exempt certain food items, as well as the cost of education, healthcare and social services.

And according to audit firm BDO Qatar, which has been holding seminars with local firms, “retailers may reduce their profit margins and absorb some or all of the VAT costs” in order to maintain their sales and survive in the market.

In anticipation of this, companies need to be ready to change how they do business in Qatar, said Alexis Antoniades, an associate professor at Georgetown University’s School of Foreign Service in Qatar.

Speaking to Doha News, he said VAT compliance costs will be especially high for small and medium-sized enterprises (SMEs).

“These firms will need to change their IT, HR, procurement, finance and marketing processes, and they will need to have auditors check and approve their books,” he said.

Antoniades warned that this could potentially slow down any progress Qatar has made in establishing a “vibrant SME sector.”

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To minimize the damage, he suggested the government opt for a single rate, and introduce a high tax threshold to exclude SMEs from the burden of compliance.

Officials should also continue to keep the private sector informed about what’s coming, he added.

“Poor planning and poor bookkeeping could potentially bring the system down, so the authorities should start immediately setting up the tax authority structure and educating the private sector.”

Reactions

Though it’s still two years off, Qatar’s decision to impose a new tax has been sparking debate in the community.

On Twitter, supporters said VAT will provide a new source of revenue for the government and spur more competitive pricing from businesses.

Last year, Qatar’s Minister of Development, Planning and Statistics, said introducing a tax system was an “urgent” need that would prompt the government to better rationalize its spending.

However, others worry about how a VAT would affect Qatar’s businesses and job market.

And finally, some said they were happy to pay a VAT as long as all consumers were in the same boat.

Thoughts?

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Qatar shoppers will likely find themselves reaching a little deeper into their pockets in the coming years after GCC finance ministers signed a breakthrough agreement to introduce value-added taxes (VAT) across the region, a financial expert has said.

While the GCC has been talking about implementing a VAT for years, actual progress on the idea appears to have been made in 2015.

Rather than a Gulf-wide tax however, leaders this spring signed a regional agreement that gives individual countries more flexibility, said Stuart Halstead, the leader of Deloitte Middle East’s indirect tax practice.

Mangos at Wholesale Market

Omar Chatriwala

Mangos at Wholesale Market

And earlier this month, GCC finance ministers agreed to set a new deadline for member states to individually start levying a VAT.

They also decided to exempt 94 food items, as well as education and health services, from taxation.

“There is a strong likelihood of VAT implementation in at least some of the GCC countries in the next two to three years,” Halstead said last week at a seminar in Doha.

However, in contrast to the UAE, which Halstead predicts will be among the first countries to start charging a VAT, Qatar has not publicly discussed its taxing intentions.

Other tax experts have previously predicted that Qatar would be among the last GCC states to introduce a new tax.

Halstead said this may be because Qatar has historically been comfortable with the amount of money it generates from its oil and gas resources, and may also be waiting to see how quickly other GCC countries move in rolling out their tax policies.

How much?

While government officials have not publicly discussed the size of the new tax, experts believe it will likely be between 3 and 5 percent initially.

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Omar Chatriwala / Doha News

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This will cause the cost of living to suddenly rise, but Halstead said the experience of other countries suggests that the inflationary increase would be less than the size of the actual tax.

“I wouldn’t expect a 5 percent tax to equate to a 5 percent increase in prices,” he told Doha News. “On day one, you’ll see a price rise. But … I think you’ll see an element of (businesses) absorbing that cost over time.”

Though consumers bear the financial brunt of a VAT, Halstead said companies ultimately end up absorbing some of the tax by cutting into their own profits or by finding efficiencies in an effort to compete with other firms and preserve market share.

As talk of new taxes heated up this fall, some of Qatar’s business leaders voiced concerns about the effect a new tax would have on the country’s economy.

Vodafone Qatar's former CEO Kyle Whitehill

Vodafone Qatar

Vodafone Qatar’s former CEO Kyle Whitehill

Kyle Whitehill, the former CEO of Vodafone-Qatar, told Bloomberg Businessweek this fall that many expats are drawn to Qatar because of its tax-free status, but are taken aback by the price of daily items once they arrive.

“You go to get a coffee in Dubai or Doha and you have to reach for your platinum express card,” he said. “A (value-added tax) on top of that could have a destabilizing effect.”

However, Halstead said he believes a VAT of 5 percent or less would “be acceptable to the market” and won’t cause expats to leave en masse.

“If you think about the overall tax burden you suffer here, (even with a VAT) it’s less than you’d be paying (back home).”

The need

Over the past year, persistently low oil and gas prices have put a dent in the finances of GCC countries, exposing the need for alternative – and stable – sources of government revenue.

Last month, Saleh bin Mohammed Al Nabit, who leads Qatar’s Ministry of Development Planning and Statistics, said it had become “urgent” to both reform the country’s generous subsidies as well as develop the tax system to support “the revenue side of the budget.”

Many economists prefer VATs over corporate and income taxes, which theoretically create a disincentive to invest or work.

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The downside is that consumption taxes disproportionately affect low-income families, who must spend a higher share of their household budget on taxes than well-off individuals.

To address this, governments often exempt essential household purchases and food staples from a VAT, which is what the GCC appears to be doing.

Halstead said different nuances in the English and Arabic announcements that followed last week’s meeting of GCC finance ministers make the actual timeline for introducing a VAT unclear.

The Gulf News quoted Younis Al Khouri, undersecretary at the UAE’s Ministry of Finance, as saying that he expects it to take another two or three years to reach an agreement among GCC states. After that, it would take an additional 18 to 24 months to implement.

However, Halstead said he expects things to move more quickly.

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He said the GCC countries appear to have agreed on virtually everything except how to tax services provided by financial firms.

The sector is a complicated one on which to levy consumption taxes, and “a bit of a battlefield” in the GCC where countries such as Qatar exempt some financial service firms from certain regulations in an effort to bolster the sector.

Nevertheless, Halstead said he believes the final agreement will be hashed out in a matter of months, after which countries will have three years to implement a VAT.

However, he said a sudden surge in oil prices could cause the initiative to lose momentum.

Thoughts?


What’s a VAT? Economist William Gale explains how value-added taxes work in this interview with The Atlantic.

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American expats who don’t pay their taxes could have their passports revoked, if lawmakers in Washington DC approve new legislation that gives authorities the power to do so.

The new law is expected to come into effect in January and comes as the US government starts to take a closer look at the Qatar bank accounts of Americans living here.

If the legislation is approved, the State Department would be able to block Americans with “seriously delinquent” tax debts of $50,000 or more from receiving new passports, the Wall Street Journal reported. Individuals in that situation could also have their passports rescinded.

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The proposed measures comes several months after Qatar and the US signed an agreement, known as the Foreign Account Tax Compliance Act (FATCA), that requires local banks to provide information about its American customers to US authorities.

While FATCA and the proposed passport measure are not directly related, financial experts say they add up to much greater scrutiny of the finances of Americans living in Qatar.

“There’s no place to hide,” James Green, area manager for financial services firm DeVere Acuma, told Doha News. “A lot of Americans are not too worried about their tax liability while they are living in Qatar. But they will be when it comes time to renew their passport.”

$200,000 threshold

The US is one of the few countries in the world that taxes the foreign earnings of its non-resident citizens. In recent years, it’s been making a greater effort to collect that money.

FACTA starts to kick in for Americans who hold US$200,000 (QR728,000) in foreign currency or other financial assets, according to the US Internal Revenue Service (IRS). Taxpayers who cross that threshold are required to complete an additional form with their tax return.

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Theoretically, the US government already has a good idea of how much money Americans are keeping in Qatar.

Under the FACTA agreement signed between the US and Qatar earlier this year, local banks are required to report previously private details of their American customers to the IRS.

Already, some Americans living in Qatar say they’ve been contacted by their banks, asking them to complete additional paperwork.

Many of the country’s major financial institutions, including Qatar International Islamic Bank and Qatar National Bank, have set up new web pages with information for US customers.

Green called the “minefield” of new requirements “a massive burden” that has led to reduced banking options for Americans living in other countries in the Middle East with similar FACTA agreements with the US.

He said some have started to refuse to take on new American customers because of the resources required to process the additional paperwork, as well as concerns that a mistake could leads to financial penalties.

“As a bank, do you want to take that risk?” Green asked.

Thoughts?