Taxation and VAT Tax in Qatar - Case Study Example

Taxation and VAT Tax in Qatar Introduction The concept of taxation can be traced back to the ancient periods and is as old as the history of mankind. The concept of taxation has largely remained the same despite the fact that the mode of payment has undergone undeniable transition. During early periods, people used to make payments in kind whereas in the present world, tax authorities receive payments in monetary form. People are expected to make voluntary submission of their payments unlike ancient times when coercion was the order of the day. The basic tenet of levying taxes by any federal system is to raise revenue to ensure effective governing. The main source of revenue for every government is through tax imposition and collection. Taxes are usually imposed on goods and services, income of individuals and companies among others. Without taxation, the government might find it practically impossible to execute its roles and fulfill its obligations to citizens. The tax regime of a country remains crucial for attracting investors looking for new markets for their operations. Qatar’s tax regime has been the centre of attraction for both individuals and companies in the previous years because of the limited amount of taxes the government levies on people working in the country. This paper explores the current taxation laws in Qatar and delves further to assess how the imposition and collection of VAT taxes will benefit Qatar. The Overview of Qatar Qatar is amongst the fastest growing economies globally (Oxford Business Group 245). The tax regime of Qatar is a classic example of a territorial tax regime. The government only levies taxes on income generated within the territorial land and waters of the country while all incomes generated beyond the confines of the nation are tax free. Qatar is ranked one of the richest countries based on per capita income and is a high income economy. Qatar has the largest reserve of natural gas and oil and is deemed to be the first Arab nation to host the World Cup in 2022. The country is highly endowed with natural resources, which makes it easy for the government to discharge its duties effectively without imposing high taxes on its citizens. The Public Revenue and Taxes Department (PRTD) of the Ministry of Finance department, is charged with the responsibility of administrating, managing and collecting taxes in Qatar.  Tax Defined According to the Concise Oxford Dictionary, tax refers to “contribution levied on persons, property or business for the support of government.” McGee denotes Crowe’s definition of tax as “a compulsory contribution to the government, imposed in the common interest of all, for the purpose of defraying the expenses incurred in carrying out the public functions, or imposed for the purpose of regulation without reference to the special benefits conferred on the one making the payment” (McGee 56). General Taxes in Qatar Compared with many countries, people in Qatar largely live a tax-free life. Foreigners in the country have the obligation to pay only very little amount of taxes to the government of Qatar. Income tax is only payable by foreigners who operate businesses in the country. In most cases, the main challenge for people is keeping in touch and being familiar with tax regulation of their home countries. Foreigners have the obligation to remit taxes on their foreign income to their home governments. In Qatar, the tax regime does not include road tax, council tax, television tax, income tax on individuals, car tax and VAT. However, speculations have been on air in recent times that the government of Qatar is planning to introduce VAT in the near future. Speculators have mentioned that plans are underway to impose VAT of 7 percent on goods and services. Nonetheless, no official documentation has been released informing the public about the intention of introducing VAT any time soon. According to McGee, a tax is just only if it is legally imposed for an important reason and its burden is fairly distributed to the public (17). Even though there are few cases of tax payment in Qatar, specific transactions have statutory regulations, which dictate the amount of fees that must be paid to the government whenever such transactions are undertaken in the country. These include: Import Tax An import tax refers to payment levied on all goods shipped into the country for the purpose of reselling. It equates to about 4 to 5 percent of the value of the imports. Imports tax does not include personal belongings shipped into the country, which constitute a person’s relocation. However, the goods must have been used and not newly bought and the person in possession of such goods must be intending to be a resident of Qatar for at least one year (12 months). When a person purchases a product overseas, including a new car, the imported product becomes subject to 4-5 percent import tax. Service Tax Service tax is mostly levied on expatriates who work in the country. The government of Qatar levies 7 percent tax on food and drink bought by expatriates in hotels. In most cases, hotels usually add a 10 percent charge on services they render to foreigners. However, in 2011, the government moved in to stop hotels from charging the extra fee in their restaurant tariffs. Corporate Tax Qatar instituted a new Income Tax Law, No. 21 of 2009, which is also referred to as “the Tax Law.” The income tax law of 2009 became effective on January 1, 2010 and repealed Law No. (11) Of 1993. The law brought about numerous amendments with the most notable change being the establishment of a 10 percent flat-rate Corporate Tax levied on all profits realized by business owned partially or wholly by foreign investors. The change was aimed at replacing the previous sliding scale of 10-35 percent. The flat rate of 10 percent on income tax only applies to businesses owned partially or wholly by foreigners, but not businesses of Gulf Cooperation Council (GCC) citizens. However, in the oil and gas industry, the Qatar government reached some consensus with foreign investors concerning specific tax rates to be applied to promote the growth and development of the industry. A 35 percent tax rate is likely to be applicable for all industries of the economy if the agreed taxes are not implemented. According to the Income Tax Law, No. 21 of 2009, the profit share of a Qatari or GCC business partner is tax exempt. The Tax Law demands that taxpayers pay taxes out of all their taxable income emanating from all sources within Qatar in the preceding year. As such, tax liability not only applies to income received from Qatar sources, but also commissions payable in relation to agency agreements or any business activities whose profits are realized beyond the borders of Qatar, but conducted within the country. A company is a residence if it is incorporated under the laws of Qatar, if its headquarters is based in Qatar and its effective management place is in Qatar. A taxpayer who executes commercial activities in the country must complete and submit an application for tax card, 30-days from the time of initiating the business activities. Income arising from sources in Qatar include: contract implementation, real properties, profit generating activities, share sales in Qatari companies, exploitation of natural resources and interest on loans acquired in Qatar among many others. The 2009 Tax Law created a new withholding tax system concerning payments made to non-residents. According to the new Tax Legislation, withholding tax can be 5 percent of gross sum of royalties together with technical charge. It also includes 7 percent of interest, brokerage fees, commissions, directors’ fees and any other service payments executed wholly or partially within Qatar. Based on the Tax Law, exemption from paying taxes can extend up to a maximum period of six years for key projects provided the projects satisfy the established criteria. Tax Exemptions The items below are exempted from taxation under Articles 51-56 of the new Qatari tax law No.21 of 2009: i. Interest and returns on treasury, development and public corporation bonds. ii. Bank interest and returns payable to natural persons (residents or non-residents) except people conducting activities subject to taxation within Qatar. iii. Capital gains on sales of real estate and securities by natural persons provided the real estate does not constitute part of activity assets. iv. Dividends and other share income provided they were derived from profits subject to tax under the new law and also if they are derived from profits distributed from income exempted from tax under the law or any other relevant law. v. Gross income obtained from activities of agriculture and fishing. vi. Gross income of air and sea transport companies, which are non-Qatari, but operating in the country. vii. Gross income of resident Qatari citizens, including their share of profits from legal persons they have interest in the country. viii. Gross income of companies wholly owned by Qatari citizens and operating in the state of Qatari. ix. Gross income from handcraft work that demands no machine use and with annual proceeds of 100, 000 Riyals or less. The Concept of Value Added Tax (VAT) Value added tax refers to an indirect tax levied on consumer goods and services. It is a multiphase taxation collected based on the value added to products as they move along the production cycle to the consumption point (Kim 103). As such, VAT does not apply to the purchasers of intermediate products. The value added is computed by deducting the total costs incurred on intermediate goods and services from the sales income of the final goods (Lang, Melz and Ecker 193). In fact, the gross national products equals to the sum total of value added of all commercial entities in a country. How Value Added Tax (VAT) Imposition and Collection Is Likely To Benefit Qatar In recent years, Qatar together with other GCC countries has been ruminating over imposing and collecting value added tax (VAT). Various media outlets reported a few years ago that Qatar was considering introducing VAT and levying it at the rate of 5-7 percent. However, GCC nations have displayed a slow implementation of VAT and many member nations may go beyond the deadline of 2015 announced earlier on. Qatar has experienced huge amounts of budget surplus, which has slowed down the urge to implement and collect VAT. VAT could be a major source of revenue for Qatar. The vastness of VAT system would be a major financing engine for the Qatari government because it includes numerous goods and service, which it would bring into the tax box (Anderson 292). VAT would enable the government to impose lower tax rates on sales of goods and services, thus bring in more revenue to the Qatari government. VAT would also ensure minimum tax evasion in Qatar. Compared with other tax bases, VAT is payable on purchase of goods and services and comes with less incentives of evasion like other forms of taxes (Carroll and Alan Viard 173). VAT tax system is self-imposing and is likely to make tax evasion difficult, thus maximizing revenue for the government. Further, VAT minimizes the negative impacts of resource allocation. Form economic standpoint, VAT is a neutral tax because it has negligible impacts on production factors and economic decision of investors. The minimal distortion imposed by VAT while maximizing revenue for the government makes it a suitable tax basis for Qatari government (Almutairi 729). However, VAT is known for its heavy impact on people with less income because of its regressive nature. It does not also raise public conscious since it is not easily noticeable by the public since it is paid on every purchase made on VAT applicable goods. Conclusion Qatar has a regional tax regime, which means that only incomes realized within its boundaries are subject to taxation. Qatar tax rules are governed by Law No. 21 created in 2009, which directs how taxes are levied in the country. The present Qatar tax law brought about major changes such as the withholding tax, to the country’s tax regime. Qatar is among the GCC nations that have been mulling over implementing VAT in recent years. Despite the fact that VAT has some drawbacks, Qatar should move with pace to implement it because it has a vast tax base and will ensure minimum tax evasion while maximizing revenue for the government. VAT also has minimal impact on economic decisions of investors, thus its advantages to Qatar would far much outweigh its disadvantages. Works Cited Almutairi, Humoud. “Competitive Advantage through Taxation In GCC Countries.” International Business & Economics Research Journal, 13.4 (2014): 769-778. Anderson, John E. Public Finance: Principles and Policy. Mason, Ohio: South-Western, 2012. Print. Carroll, Robert J, and Alan D. Viard. Progressive Consumption Taxation: The X Tax Revisited. Washington, D.C: AEI Press, 2012. Print. Kim, Sok B. A Value-Added Tax (vat) and the Federal Income Tax Reform, 2008. Print. Lang, Michael, Peter Melz, and Thomas Ecker. Value Added Tax and Direct Taxation: Similarities and Differences. Amsterdam: IBFD, 2009. Print. McGee, Robert W. The Philosophy of Taxation and Public Finance. Dordrecht: Kluwer Academic Publishers Group, 2003. Print. Oxford Business Group. The Report: Emerging Qatar 2007. London: Oxford Business Group, 2007. Print. Read More