MENA Tax landscape to promote business and improve transparency, says Ernst & Young
Ernst & Young’s MENA Tax Conference 2012, held in Dubai today, outlined the evolving tax landscape in the Middle East and North Africa (MENA) region.
The conference was attended by more than 250 senior finance and tax professionals from across the region and was chaired by Sherif El-Kilany, MENA Tax Leader, Ernst & Young.
Over the past year, regional developments and economic pressures have impacted the taxation policies of almost all countries in the MENA region.
On the one hand, countries have moved towards a more transparent and business friendly tax environment. On the other, we are seeing increased regulation and enforcement of tax compliance leading to increased administrative burden which, for foreign businesses, may translate to potentially higher tax cost. Most countries have lowered tax rates to encourage investment whilst fiscal policy dictates increased tax collections to strengthen public finances and fund social development.
El-Kilany said: “From a fiscal and tax perspective, the changes we are seeing are largely positive, with business and investment friendly tax laws and increased transparency of regulation and enforcement. The changes rightly factor in the impact of the Eurozone crisis which continues to cast a gloomy shadow. We see MENA countries proceeding with their resources investment, infrastructure development and economic growth plans with more realism than we have experienced in the past.”
The Taxpayer’s Challenge
Regional tax authorities often take a much broader, and at times more local, interpretation of tax concepts that may be different from other jurisdictions. For example, the interpretation and application of new tax laws relating to foreign oil and gas contractors also requires local expert understanding and experience in dealing with the authorities.
A trend that could have considerable tax cost impact in the coming years is the increasingly rigorous tax assessment process and less attractive outcomes related to deemed profit tax declarations. Throughout the region we see tax authorities either tightening on deemed profit assessments or discontinuing this tax filing option.
Transfer Pricing and Tax Treaties
Tax laws in Egypt, Oman and Qatar, now provide the tax authority the right to review the pricing of the related parties’ transaction and compare it with fair market price. Many countries, including Egypt and Qatar, have issued executive regulations that include accepted pricing methods and require tax payers to declare specific information for related parties’ transactions.
More complexity in tax laws relating to dependent agency, thin capitalization and transfer pricing is being introduced in countries like Egypt, Qatar, Kuwait and Oman. Sherif added: “In Egypt, for example, if the debt equity ratio of any company exceeds 4:1, excess interest is not tax deductible. In Kuwait, interest paid to financial institutions outside Kuwait could be challenged. It is important to keep abreast of tax practice in various countries in the region as these practices constantly change and evolve,” added El-Kilany.
Tax treaties concluded by various MENA countries have expanded significantly and the extensive treaty network offers growing opportunities for double tax relief by way of withholding and income tax exemptions or reduced tax rates.
The years ahead
Commenting on the factors defining the fiscal landscape during the years ahead, Sherif said: “From a regional tax perspective, we are likely to see a continuance of low corporate tax rates to encourage local and regional investment. Countries will continue to face fiscal pressures to increase tax collections to fund social programs and subsidies. We will also see a move towards more complex tax laws and regulations to broaden the tax net and enforce compliance. These measures will create an increasingly challenging tax environment in many countries as the assessment process will become more involved with increasing level of scrutiny relating to cross border transactions and related party transactions. These trends will continue in almost all MENA countries.”
Ernst & Young’s MENA Tax Conference 2012 featured panel discussions where tax executives from global companies and Ernst & Young tax specialists exchanged experiences and views to highlight recent changes in tax regulations and practices in Egypt, Iraq, Kuwait, Libya, Oman, Qatar and Saudi Arabia.
The impact of global economic crisis and political changes on the fiscal and tax policies in the region was discussed as were major issues faced by taxpayers in MENA countries. Presentations also included updates on regional transfer pricing policies and tax treaties.
The conference was attended by more than 250 senior finance and tax professionals from across the region and was chaired by Sherif El-Kilany, MENA Tax Leader, Ernst & Young.
Over the past year, regional developments and economic pressures have impacted the taxation policies of almost all countries in the MENA region.
On the one hand, countries have moved towards a more transparent and business friendly tax environment. On the other, we are seeing increased regulation and enforcement of tax compliance leading to increased administrative burden which, for foreign businesses, may translate to potentially higher tax cost. Most countries have lowered tax rates to encourage investment whilst fiscal policy dictates increased tax collections to strengthen public finances and fund social development.
El-Kilany said: “From a fiscal and tax perspective, the changes we are seeing are largely positive, with business and investment friendly tax laws and increased transparency of regulation and enforcement. The changes rightly factor in the impact of the Eurozone crisis which continues to cast a gloomy shadow. We see MENA countries proceeding with their resources investment, infrastructure development and economic growth plans with more realism than we have experienced in the past.”
The Taxpayer’s Challenge
Regional tax authorities often take a much broader, and at times more local, interpretation of tax concepts that may be different from other jurisdictions. For example, the interpretation and application of new tax laws relating to foreign oil and gas contractors also requires local expert understanding and experience in dealing with the authorities.
A trend that could have considerable tax cost impact in the coming years is the increasingly rigorous tax assessment process and less attractive outcomes related to deemed profit tax declarations. Throughout the region we see tax authorities either tightening on deemed profit assessments or discontinuing this tax filing option.
Transfer Pricing and Tax Treaties
Tax laws in Egypt, Oman and Qatar, now provide the tax authority the right to review the pricing of the related parties’ transaction and compare it with fair market price. Many countries, including Egypt and Qatar, have issued executive regulations that include accepted pricing methods and require tax payers to declare specific information for related parties’ transactions.
More complexity in tax laws relating to dependent agency, thin capitalization and transfer pricing is being introduced in countries like Egypt, Qatar, Kuwait and Oman. Sherif added: “In Egypt, for example, if the debt equity ratio of any company exceeds 4:1, excess interest is not tax deductible. In Kuwait, interest paid to financial institutions outside Kuwait could be challenged. It is important to keep abreast of tax practice in various countries in the region as these practices constantly change and evolve,” added El-Kilany.
Tax treaties concluded by various MENA countries have expanded significantly and the extensive treaty network offers growing opportunities for double tax relief by way of withholding and income tax exemptions or reduced tax rates.
The years ahead
Commenting on the factors defining the fiscal landscape during the years ahead, Sherif said: “From a regional tax perspective, we are likely to see a continuance of low corporate tax rates to encourage local and regional investment. Countries will continue to face fiscal pressures to increase tax collections to fund social programs and subsidies. We will also see a move towards more complex tax laws and regulations to broaden the tax net and enforce compliance. These measures will create an increasingly challenging tax environment in many countries as the assessment process will become more involved with increasing level of scrutiny relating to cross border transactions and related party transactions. These trends will continue in almost all MENA countries.”
Ernst & Young’s MENA Tax Conference 2012 featured panel discussions where tax executives from global companies and Ernst & Young tax specialists exchanged experiences and views to highlight recent changes in tax regulations and practices in Egypt, Iraq, Kuwait, Libya, Oman, Qatar and Saudi Arabia.
The impact of global economic crisis and political changes on the fiscal and tax policies in the region was discussed as were major issues faced by taxpayers in MENA countries. Presentations also included updates on regional transfer pricing policies and tax treaties.