The Middle East has traditionally been an attractive region from a tax perspective. According to the PwC and World Bank “Paying Taxes 2016” study, Qatar is ranked first in the world in terms of ease of paying taxes. With the pronounced decline in oil prices impacting both the public and private sectors, new reforms, including changes to taxation, are being considered by regional governments. Greater private sector activity is also expected to eventually lead to more efficient, quality-driven and quality-oriented services to constituents.
Qatar has already made some headway in transitioning away from a hydrocarbons-based economy. Growth in the non-oil sector has been outpacing that of the oil sector since 2012, and construction and financial services have become the largest contributors to non-oil growth. Yet, there is still more that needs to be done in this area to reduce the reliance, not only on oil and gas revenue, but also on government spending.
The most prominent tax reform we have heard about in Qatar and the GCC as a whole is the potential introduction of value-added tax (VAT) by January 2018. VAT is an indirect tax on the consumption of goods and services, and it can provide a sustainable approach for governments hoping to increase revenue generation, while being neutral for businesses and limiting distortions in the economy. VAT is levied at all stages of the production and distribution chain at a relatively low administrative cost. Even though VAT should not create an additional tax cost from a business perspective, businesses should still prepare to comply in terms of charging, collecting and paying VAT to governmental tax authorities. As VAT will impact whole businesses, there are a number of factors that should be considered for successful VAT implementation. In a region that has historically seen less investment in tax functions, the introduction of VAT will likely prove to be a catalyst for not just additional resourcing, but also the development of an appropriate tax framework to manage tax risks, incorporating governance, tax strategy, tax risk registers and improved systems.
With the debate on the morality of tax avoidance taking place around the world, the introduction of the global Foreign Account Tax Compliance Act by the US and the Common Reporting Standard by the OECD, taxpayers – both individuals and corporations alike – need to place tax compliance at the forefront of their agenda. Governments in Qatar and the GCC are not excluded, as they will have to continue to provide services to their citizens and invest in infrastructure, while also balancing their budgets and reducing deficits via strategic partnerships with the private sector.
Qatar National Vision 2030 (QNV 2030) aims to transform the country into a knowledge-based economy, and the commitment to that goal remains firm even if there is some period of rationalisation during this phase of lower oil prices. Economic growth is still expected to average approximately 5% over the next two years. These measures, coupled with the wider reform agenda, will make Qatar an attractive prospect for foreign businesses. An increasing focus on public-private partnerships (PPPs) to deliver government projects and services will help drive growth in the private sector, reduce government capital spending and diversify the country’s economy. Establishing a robust PPP framework, including tax treatments, and building a track record of successful partnerships with the private sector will be essential.
Qatar has strong fiscal buffers, a clearly defined development agenda and global ambitions. The lower oil price environment will place more pressure on the economy but may ultimately provide an impetus to achieving its ambitions to move beyond the hydrocarbons sector in line with QNV 2030.
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