Presentation. Tax risks faced by Chinese investors eyeing attractive investment opportunities in GCC. 15 March 2016

Transcription

1 Presentation Tax risks faced by Chinese investors eyeing attractive investment opportunities in GCC 15 March

2 Agenda 1. Introduction 2. Chinese investment in the GCC 3. Middle East/ GCC recent tax Developments 4. Key tax risks faced by Chinese investors 2

3 Chinese investments in the Middle East/ GCC 3

4 Chinese Investment in the GCC 4

5 The emergence of Iran significant new opportunities 5

6 GCC a few facts The Gulf Cooperation Council ( GCC ) Established May 25,1981 Members: Bahrain, Kuwait, Oman, Qatar, United Arab Emirates, Saudi Arabia (Jordan under consideration). Importance: o o o o Market of 42 million people (and growing) Gross Domestic Product of $1.6 trillion in 2014 Despite the drop in the oil prices, estimated GDP growth rate of 3% for GCC has largest proven oil and gas reserves Customs union allowing free trade between members Economic importance Exports of 861 billion USD for 2014 Imports of 476 billion USD for 2014 Exporter of natural resources 50% of world s oil and gas Important hub for trade between Asia and Europe 6

7 Middle East Tax Developments 7

8 Middle East - corporate income tax overview The Middle East/ GCC is often mistakenly perceived as an area with limited or no taxation. However this is not the case. Generally, the companies are taxed on a territorial basis. Zakat tax paid by nationals/gcc nationals on their share of the profits e.g. Kuwait (1%), Saudi Arabia (2.5%) 25% 20% 15% 10% 5% 0% Corporate income tax headline rates 9

9 Middle East tax developments and recent trends Ongoing Tax Reforms International pressure to introduce taxes Double Taxation Treaties expanding More consideration to transfer pricing Jordan introduces new Income Tax Law Effective 1 January Egypt - New VAT law Changes to Oman Income Tax Law Kuwait - New Foreign Investment Law and Draft CIT Law KSA - Virtual Services PE. Pressure from IMF for GCC countries to diversify their revenues (introduction of VAT). A large number of treaties have been signed / amended or entered into force. Total treaties in force: Qatar (more than 50 treaties), Oman (26 treaties), Bahrain (over 35 treaties), Kuwait (more than 60 treaties), UAE (60 treaties), Saudi Arabia (over 30 treaties). Egypt has already introduced detailed TP regulations Saudi Arabia and Qatar are discussing the introduction of formal TP regulations Increased use of technology by the authorities Saudi Arabia has introduced e-filing system for Zakat filing and Corporate Tax Qatar introduction of Electronic system of tax filing The immigration system to be linked with the tax system exchange of information 10

10 International pressure to introduce taxes Governments need to diversify source of revenues 10

11 Middle East region What does the future look like? VAT; Transfer pricing documentation requirements; Tougher anti-avoidance laws and scrutiny of tax structures; More transparency and sharing of information; Greater requirement to demonstrate effective tax governance and strategy/policy 12

12 Practical tax risks applicable to Chinese investors in the GCC 12

13 Key tax risks for Chinese investors in the GCC Restrictions on foreign ownership/ Nominee Structures Application of DTTs and WHT refunds Key Tax Risks Lack of proper TP legislation and deemed profits assessment Permanent Establishment risk Permanent establishment not well defined and not fully aligned with OECD principles. No specific thresholds -1 day could create taxable presence. Virtual Services PE in KSA. Restriction on foreign ownership/ nominee structures Current foreign ownership restrictions force multinationals to adopt indirect investment structures (e.g. using local nominees), which can be and are actually challenged by tax authorities. Application of DTTs/ WHT refunds The application of DTTs is seldom allowed upfront, it typically requires the approval of local tax authorities and / or payment of local WHT first -> cash flow strain on foreign businesses. Lack of proper TP legislation and deemed profits assessment Currently no formal detailed TP legislation in the region (with the exception of Egypt), which opens multinational companies to aggressive challenges on all related party transactions. To the extent challenged, multinationals can be subject to tax on arbitrary levels (deemed profit basis). Timescales for tax compliance, audits and refunds There can be significant gaps between filing and paying tax and being audited by the local tax authority as well as between requesting and obtaining a tax refund. 13

14 Risk of Permanent Establishment - Example Introduction of Virtual Services PE concept DZIT issued internal guidance about what constitutes a PE and introduced the concept Existing of a Virtual Services PE. New Targeted mischief Under the guidelines, non residents shall be considered to have created a PE for Saudi tax purposes in all cases where the duration of service exceeds 183 days within a 12 month period, regardless of the place where the service is rendered. Currently, no specific provision in the local tax legislation to support this position. Not aligned with the OECD and the UN Model guidelines (which typically represent the norm in interpreting taxation matters). This contradicts the provisions of most of the DTTs that KSA has entered into. This interpretation can result into denial of Withholding Tax (WHT) refund claims for non resident and can ultimately result in double taxation. 14

15 Restriction on foreign ownership/ nominee structures The region still has foreign ownership restrictions, either generally applicable or on select industries. Existing New In some GCC countries, GCC shareholders and their direct Targeted investments mischief are not subject to corporate income tax or alternatively, they are subject to reduced taxes (e.g. zakat). Foreign companies use nominee structures the legal ownership lies with a GCC national(s), however all de facto beneficial ownership / management lies with the foreign entity. Local tax authorities are enabled to look through the structure of any transaction to establish the real substance of any such transaction. If successfully challenged, the risks for the foreign party can be significant, ranging from additional tax payable to penalties for tax evasion etc. 15

16 Lack of proper TP legislation and deemed profits assessment With the exception of Egypt, the region is yet to introduce detailed TP legislation. Existing This brings a significant New risk of challenge to any related party Targeted mischief transactions. High risk of disallowance of such costs for CIT purposes, if the transactions are not at an arm s length basis and not properly supported. Although typically accepted, OECD TP reports can still be challenged on the basis of lacking local comparable studies. However, in practice it is very difficult to adequately benchmark certain transactions against similar ones in this region (due to e.g. lack of publicly available information). As such, unless properly documented, related party transactions can be challenged. 16

17 Tax Structuring Considerations Key structuring points It is important for Chinese companies to proactively structure their investments/ operations in the region; firstly to meet their commercial objectives (e.g. to allow management oversight/ flexibility for certain local decisions) and also to be tax efficient, taking into account the different tax regimes. Consideration may be given to structure the investments in the GCC through a holding company, in a jurisdiction that allows the utilization of a DTT, which can potentially mitigate/ reduce the withholding tax on the repatriation of profits. May identify scope/ opportunities to introduce inter-company transactions that could increase the tax efficiency of certain local operations, assuming that these are made for business/ commercial purposes and are at arm s length. Chinese foreign Tax Credit: An ordinary tax credit is granted, both unilaterally and under tax treaties, for foreign tax paid on foreign income. The amount of foreign tax credit (FTC) is limited to the amount of Chinese tax on the foreign income. China has in place strict anti avoidance rules including transfer pricing legislation and Controlled Foreign Company rules, which may impact the overall structuring considerations. Nevertheless, in practice CFCs are rarely being challenged by the Chinese tax authorities. 18

18 Keep abreast of changes circulars and instructions are always introduced and can even be applied retroactively. Keep close to the region! 18

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