Principles of Taxation - Qatar - Case Study Example

Principles of Taxation Introduction Several factors are causing constraints to the Gulf Cooperation Council state, where Qatar is a member. As a result, they are receiving calls to implement various forms of taxation. These factors include local public services provisions increasingly absorbing the revenues from energy export; the future energy export volumes are likely to be under threat; the increased number of bilateral and Free Trade Agreements have reduced revenues, and economic globalization requires implementation of taxation policies. This paper thus aims at discussing one possible form of taxation that Qatar can implement. It has, therefore, selected to study how Qatar would adopt and apply the Introduction of Value Added Tax (VAT). Introduction of Value Added Tax (VAT) in Qatar This form of tax will be an indirect tax. It will be a general, broadly based consumption tax, which will be assessed on the value added to services and goods, and apply more or less to all services and products that are sold and bought for consumption or use in the Community. On broader terms, the Value Added Tax will be a general tax, which will apply, in principle, to all commercial activities engaged in the production and distribution of goods as well as in the provision of services. In addition, the Value Added Tax will be a consumption tax because the final consumers will bear it, and it will not be a charge on the business. The charging of the Value Added Tax will be a percentage of the price, which implies that the burden of the tax will be visible at every production stage and distribution chain. This tax will be fractionally collected through a system of partial payments where all registered VAT businesses/taxable persons will deduct from the Value Added Tax they will have collected any amount of tax they will have paid to other VAT-registered businesses/persons during purchases for their company activities. The sellers of goods and providers of services will be responsible for remitting the collected tax to the tax authority. Rate to be charged As stated by Townsend (2015), given that Qatar has not been charging this tax before, neither has it been charged by other Gulf Cooperation Council states, a low rate of 3-5% is proposed. The extra revenue collected by charging this rate will help Qatar to meet the increasing challenges due to economic and population growth. The country will be able to fund its scale of public welfare provision as well as public sector jobs to which its populations are accustomed (Harrison, 2010). The introduction of the Value Added Tax and at such rates will further offer the option of spearheading a tax burden between the foreign and local populations and companies. This rate will also help in ensuring that investors are not driven away (Isanti, 2015). Additionally, this rate might not hurt the poor who have all through been relying on the government for their support. From the study carried out on the effects of Value Added Tax’s introduction on the poor, it was established that the items, mainly consumed by the poor population needed to be exempted from Value Added Tax. This should also be introduced so as to reduce the Value Added Taxs impacts on the most vulnerable sectors of the society. Qatar could introduce Value Added Tax on luxury goods, which are consumed by higher-income consumers rather than to low and middle-income consumers. Another key consideration in setting the Value Added Tax rate at the rate of 3-5% is the need to control inflation. If not correctly considered, high-Value Added Tax rates might have inflationary effects. Such a case was to be experienced when Dubai announced its plan to introduce Value Added Tax to replace its lost custom receipts. How to ensure Compliance The Department of Taxation would ensure that there is compliance by the taxable persons by having the right infrastructure in place. Among them include; Filing requirements One way to ensure compliance is to ensure that all VAT-registered businesses/person file and submit their Value Added Tax returns on a monthly basis. According to the World Intellectual Property Organization (2015), taxpayers carrying on businesses in Qatar are required to file returns with the Department of Taxation on a prescribed form stating the taxable income and any tax due. By doing this, the Department of Taxation will be able to monitor the operations of all VAT registered parties and which will expedite its adoption, implementation and acceptability within a short duration of time. Failure to timely submit the returns should attract some penalties. This will automatically lead to compliance as businesses, and persons will not be willing to pay unnecessary penalties. Accounting Records and Inspection The government of Qatar requires that taxpayers keep all accounting books, documents, and registers relating to their business activities for a period not less than 10 years. The Department of Taxation should also play its oversight role correctly by exercising its rights to inspect the books and records of taxpayers at any particular time, but after issuing a timely notice over its intended inspection. This will ensure that all taxpayers maintain the required accounting books and records, which will facilitate capturing of all production and distribution activities. VAT Schemes that can be introduced Standard VAT scheme Through this scheme, the Department of Taxation will require that the taxable persons be VAT registered persons and fill in at some predetermined intervals, a standard VAT return form. Taxpayers would be required to charge the VAT on the invoices they issue to their customers and subtract any input tax, charged to them by suppliers on purchases made. Under this scheme, taxpayers would reclaim the VAT based on the invoice date rather than on the payment date. Cash accounting scheme The Department of Taxation can introduce this VAT scheme by requiring that businesses determine their liability on the payment made or received basis as opposed to relying on the invoice sent or received. This could be appreciated by taxpayers, especially where businesses are paid in arrears. In addition, taxpayers get an automatic relief for bad debts where customers fail to pay their invoices. Also, taxpayers will be able to reclaim the input VAT timely on purchases. Annual Accounting Scheme Through this scheme, the Department of Taxation will require that taxpayers make their VAT returns once per year. It is vital for the Department of Taxation to coincide the payment of this VAT with the Qatari Governments fiscal year. Flat rate scheme The VAT flat rate scheme will be an incentive offered by the Qatari Government to assist in simplifying taxes and means that the VAT will be charged at a predetermined rate. However, under this scheme, the taxpayers will not be able to reclaim input taxes on their expenses and other purchases except on some agreed upon capital expenditures. The Department of Taxation would charge different rates primarily depending on the type of business one runs. The VAT flat rate scheme is considered to be lower than the standard VAT. The VAT flat rate scheme results in extra revenue. The registered taxpayer will necessarily be acting as the Department of Taxation’s collection agent and is thus allowed to keep some of the extra income as an incentive How the VAT will be Measured By definition, the VAT is that tax on the value created at every stage of a production-distribution chain. According to Le (2003), the value added is defined in two alternative ways. First, it is equivalent to the sum of profits to owners of production factors and the wages of labor. Second, the value added is determined by establishing the difference between the output value and the input costs. From these two definitions, the value added is computed using three major alternative ways. The addition approach Using this method, the VAT tax liability is arrived at by multiplying the value added1 by a predetermined tax rate. Assuming that T1, and T2 are the rates on profits and wages respectively, then the VAT tax liability will be the sum of (T1*profits) and (T2*wages). According to Le (2003), this approach would, however, be politically very difficult to sell to the public since taxpayers would view it as an additional tax burden besides the corporate and personal taxes. However, the VAT tax liability raised in this form could be viewed as replacing both corporate income tax and personal income tax. The subtraction approach Through this method, the VAT tax liability will be determined at every stage and will be equal to the rate of tax multiplied by the tax base or the value added. The invoice-based credit method Le (2003) posits that this is the most used approach to the VAT computation. Under this approach, the taxpayer charges its customers the VAT at every stage of production-distribution chain on its output and subtracts the VAT already paid during the purchase and submits the difference to the tax authority. Types of VAT Base Product typed/GNP type The GNP-typed VAT charges, VAT on all final goods and services other than for intermediate goods. Investment costs are also entered in this tax base. This type of VAT base is preferred as it makes the base be relatively large. However, it is undesirable because the whole investment items bear the full tax burden. Consumption type The base does not include the value of investment items and intermediate inputs from the total value of goods and services. The countries using this base introduce several ways of giving its taxpayers some credit for capital goods. Net national product type This is the income type whose base does not include the depreciation and the value of intermediate items. Value Added Tax Collection An important component in the taxation introduction is the extent to which a country can implement the administration and collection functions. Efficient collection of VAT will require that the necessary institutional infrastructure has been instituted. This tax will be charged on the sales made by a registered Value Added Tax person. This taxable person will be required to deduct all taxes that it will have already paid while making purchases for sale. This will ensure that the Value Added Tax will only be paid on the value created at every production and distribution state and also avoid instances of double taxation. The Value Added Tax paid at the final stage of the product is equal to the summation of the values added at every preceding stage. The Value Added Tax registered traders will each be given a number, which it will indicate on its invoice to customers and show the total invoice, including the Value Added Tax charged. Through this way, if the client is a registered Value Added Tax trader, he/it will know the amount of tax to deduct while the consumer gets to know the tax amount he has paid on the final purchase. In addition, through this manner, the correct Value Added Tax is paid in stages and to the degree at which the system is self-policing. Possible Exceptions Even if Qatar is advised to introduce, Value Added Tax as an alternative form of taxation, there are some goods and services exempted from Value Added Tax. In case where an entity trades in products or offers services that are all exempt, then, it will not be required to register for Value Added Tax as it has nothing to reclaim as Value Added Tax from its purchases or expenses. There are several categories of goods and services that will be subject to exemptions or reduced Value Added Tax rates. Among them include education and training; subscriptions to membership organizations; fund raising events by charities; and insurance, finance, and credit. The Value Added Tax will not be charged on exports between the community and other non-Gulf Cooperation Council member countries and any Value Added Tax inputs of the goods for exports will be deducted; hence differs from imports, as it will be Value Added Tax charged at the moment such imports are made and the taxable persons will deduct it in their next Value Added Tax return. In addition, goods supplied between taxable persons from member states will be deducted leading to a zero-rated supply. The use of the Amount Raised by the Qatari Government Just like any other nation, government or state, Qatar will use the collected amount to add to revenues from other sources and use it in offering public services. These include maintenance of security, both internal and external; provision of infrastructure and communications; provision of basic amenities like education, sports and cultural activities, water and sewerage among others; production and marketing of its local commercial goods and services; and directing the economic activities. Conclusion This paper has identified that one of other sources of revenue that Qatar can adopt is the introduction of Value Added Tax so as to fund its expanding economy and provide services to its growing population. However, the rate adopted should be carefully decided because it can have adverse effects. Such adverse effects include loss of investors, inflationary effects, and hurting the poor, especially where basic commodities are the Value Added Tax charged. Ensure that there is compliance, the Qatari Government through its taxation agent, the Department of Taxation, should require its taxpayers to submit their Value Added Tax returns on a monthly basis, and to keep the necessary accounting records and books. The VAT schemes that can be introduced include the standard VAT scheme, cash accounting scheme, annual accounting scheme and the flat rate scheme. The approach to be used to measure the VAT are the addition approach, subtraction approach, and the invoice-based credit method. The various bases of VAT that the Qatar government will base its tax on include the product typed, consumption typed, and the net national product typed VAT base. This paper supports this form of taxation as it would strengthen the state revenues, particularly when oil prices will be falling. However, for its effective adoption and implementation, this paper recommends that Qatar collaborates with other Gulf Cooperation Council member countries. References Harrison, M. (2010, October). Taxation and the GCC States. Retrieved March 14, 2015, from Lancaster University: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/golcer/i5.pdf Isanti, T. (2015, January 27). Is the time ripe for new taxes? BQ Magazine, pp. http://www.bqdoha.com/2015/01/time-ripe-new-taxes. Le, T. M. (2003). Value Added Taxation: Mechanism, Design, and Policy Issues. Washington, DC: World Bank. Townsend, S. (2015, February 18). Value-added tax ‘could create a black market economy’. Arabian Business, pp. http://www.arabianbusiness.com/value-added-tax-could-create-black-market-economy--582494.html. World Intellectual Property Organization. (2015). Law No.21 of 2009 issuing the Income Tax Law. Retrieved March 30, 2015, from the World Intellectual Property Organization: http://www.wipo.int/wipolex/en/text.jsp?file_id=236935#LinkTarget_469 Read More