Managing the Crisis: Tax OpEd
Financial Restructuring from a Tax Perspective
As the COVID-19 pandemic continues to bring unprecedented challenges through its economic and financial impacts, the IMF revealed its updated projections of the global economic growth to stand at -4.9% in 2020, which is 1.9% below the April 2020 forecast.
In the Middle East and Central Asia region, while growth is projected at –4.7% in 2020 according to the IMF, GCC countries are expected to see a rebound in their GDP in 2021 at a 2.5% pace, which will be among the highest economic recoveries.
However, until this recovery is confirmed, businesses in the region must face the effects of the current economic downturn and try to minimise its impact on their cash flows and working capital. Businesses may sustain losses but not a lack of cash flow.
Depending on the business model an organisation adopts, there is a set of tax considerations that are relevant in order to manage working capital. In many respects, the requirement to adapt brought about by the present situation will give rise to an opportunity for businesses to accelerate decisions which will be of benefit long-term, enabling them to operate in a more efficient and agile manner, reduce cost and mitigate risk.
QFC Tax Regime Considerations
- An extension of the tax filing deadline by up to two months by simply invoking the COVID 19 pandemic as a reason;
- A waiver of the Late Payment Charge by reducing its rate from 5% to 0% effective until 31 August 2020; and
- A waiver of the charge on qualifying QFC entities that elect for the 0% Concessionary Rate if the election is made in 2020.
Reorganisations & Restructuring
As a general principle, the QFC regime allows firms to carry out restructuring transactions in a tax neutral manner such that any profits that are achieved as a result of these transactions are disregarded for tax purposes.
This feature is extremely relevant in a crisis context, where companies need to restructure their operations and organisation to mitigate the impact of the crisis.
Treatment of Dividends & Other Payments to Non-Residents
In difficult times, companies tend to optimise their resources and move around their cash to use it where it is needed most. This transfer of cash can be made in different ways, including through loans, dividends, interest, fees, etc. The tax treatment of outbound payments is therefore extremely important in this case.
In the QFC, dividends are exempt from tax. Also, payments to non-residents are eligible for a concessionary treatment. This allows QFC firms to efficiently manage their working capital and cash flow needs without incurring additional tax costs.
Overall, the approach to tax compliance within an organisation should be risk focused, aligned with the key strategies of the organisation and use technology wherever appropriate.
This will drive down the cost of compliance but allow businesses to do more with less and increase effectiveness. By adopting such an approach, this will position the business to be ready for future changes and growth.
General Tax Considerations on Managing Working Capital
However, organisations should also carefully consider existing relief measures embedded in the local legislation from a managing working capital aspect. For example, changes in accounting policies may be used to accelerate tax deductions and defer revenue recognition (or do the opposite if they are loss making).
In addition, the re-evaluation of inter-company transactions through the review of transfer pricing policies to reflect the current market conditions, or the reassessment of existing inter-company financing policies and cash pooling arrangements with the view of reducing costs, also comprise effective relieving measures.
The QFC’s tax regime offers firms several features to efficiently manage their working capital.
Moderate Tax Burden
- The QFC operates a territorial tax regime whereby only locally sourced profits (as defined) are subject to tax.
- The regime also offers concessionary treatments (exemptions or reduced rate) on election basis, subject to certain requirements drawn from international tax standards.
- These incentives, combined with the reduced tax base and mild rate, result in a moderate tax burden.
- A reduction of costs is generally an important factor for companies’ performance and cash flow management. This is more so in a crisis context.
Absence of VAT
- In its purest form, VAT should not affect a company’s profits because it is borne by the final consumer.
- However, being a tax, VAT has a compliance cost, which translates into a reduction in cash flows.
- The time difference between paying the input VAT on purchases and collecting output VAT on sales results in a cash flow gap. This gap may become an issue where the company has a VAT credit, as it needs to submit a refund request, incur additional costs and wait for more time before the refund is obtained.
- The absence of VAT in Qatar is sufficiently important to be highlighted, as it brings savings in time, costs and cash flows.
Wide & Efficient Tax Treaty Network
- Qatar has more than 80 effective tax treaties covering most of its trade partners.
- QFC firms have access to this network, allowing them to benefit from the concessions and guarantees offered by these treaties.
- The access to these benefits is operationalised in coordination with the General Tax Authority.
- Because the treaty benefits result in reduced tax liabilities, they may be lawfully used to reduce tax costs and improve cash flow positions.
- Taxable profits in QFC are based on accounting profits as adjusted for tax purposes.
- Any accounting principle that is consistent with IFRS or other GAAPs that are accepted under the QFC tax regulations and that result in a deferred recognition of revenues or accelerated deduction of expenses, will be accepted in the determination of the tax base, provided there is no explicit restriction in the tax regulations.
- This allows companies to reduce the tax liability and improve their cash flow position.
- Losses may be carried forward indefinitely in the QFC.
- This allows their use to reduce tax liability in subsequent profitable years.
- QFC entities that are part of a group may transfer losses amongst themselves to reduce the tax liability of profit-making members using the losses incurred by loss-making members.
- Salah Gueydi, Director of Tax, Qatar Financial Centre (QFC)
- Jennifer O'sullivan. Tax and Legal Partner, PwC Qatar