EY: Broadening the taxable basis across the GCC and MENA
To increase the scope of income tax laws, GCC countries are pursuing tax determinations with significantly broader interpretations of activities or actions that constitute doing business in-country. New concepts like Virtual Service Permanent Establishment and dependent agents are being used in Saudi Arabia and Kuwait to determine taxable presence or taxable activities.
Traditionally, a foreign service provider is deemed to have a permanent establishment (PE) when actual presence or activity in-country exceeds a specified number of days as prescribed in the tax law. Under the Virtual Service PE concept, a foreign company may be deemed by the tax authorities to have a PE and liable to tax, merely because the service contract specifies in-country presence or service delivery in country, regardless of the time actually spent in-country. The application of such concepts may broaden the scope of application of the tax laws beyond local and international tax treaty statues.
Sessions on the latest changes and developments in tax laws and tax practices in the GCC and MENA region were held at the biennial EY MENA Tax Conference in Houston for companies in the US and Canada. Initiatives to increase fiscal revenues such as the introduction of VAT in the GCC and Egypt were discussed. The conference was attended by senior finance and tax executives from large corporations doing business in the Middle East or looking to invest in the substantial opportunities offered by the lucrative and fast growing MENA economies.
Sherif El-Kilany, MENA Tax Leader, EY, says, “US companies that conduct business in MENA need to have a solid understanding of the latest tax developments and positions in MENA. The broad tax law interpretations and use of Virtual PE concepts by tax authorities to determine taxable presence and taxable activity may not be line with the traditional interpretation of income tax laws and international double tax treaty conventions. In this regard, it is important for tax payers and tax authorities to appreciate technical interpretations of tax laws in the light of accepted international tax practices and conventions.”
Broader applications of withholding tax law interpretations are being used by the tax authorities in Iraq, Saudi Arabia and Oman to levy and collect tax at source, before payments are received by foreign contractors and service providers.
“Tax authorities in most countries are well aware that tax collections from the imposition of withholding tax on payments made to foreign companies are frequently easier to impose and collect than looking to foreign companies with little or no in-country presence to file income tax returns and settle tax on income earned locally. The attraction of collecting withholding taxes on gross payments made to foreign companies versus assessing income tax on net taxable profits in terms of tax yields has also increased significantly since MENA countries lowered company tax rates to the current low rates of 10 to 15 per cent that prevail in the GCC region,” comments Sherif.