Managing Tax Risk & Tax Controversy In The Middle East
All companies are concerned with the same bottom-line question about their taxes: “How much are we going to pay this year?” For global companies, that question is harder to answer than it has been for many years.
From a business perspective, tax costs like all other expenses, need to be managed to ensure certainty of outcomes from business investment. And it is not just how much is payable based on the tax declarations filed, but also “will we have to have a disagreement with the tax authority in order to agree on that final figure?”
Ernst & Young asked more than 500 senior tax and finance executives, audit committee members, tax authorities and policy makers in 18 countries a wide range of questions about their recent experiences and predictions for the future.
According to a report based on this tax survey, “tax risk” and “tax controversy” are both rising rapidly. Tax risk is what companies face when they are unsure of filing correct tax returns. And tax controversy is a polite term for the disputes that arise – alas, with greater frequency – with tax authorities over calculations of tax liability.
Tax risks and tax controversies are as relevant to companies doing business in Middle East countries as they are in other parts of the world. In this article we will review the determinations from the Ernst & Young tax survey and consider their relevance vis-á-vis the tax landscape in the Middle East North Africa (MENA) region.
Ernst & Young Tax Survey Findings
More stringent tax enforcement. : The predominant consensus from the tax survey is that the enforcement landscape is now more challenging than it has ever been. Most respondents agreed that governments will continue to lean heavily on companies in the coming years as tax authorities everywhere strive to increase tax collections. The survey also determined that increasingly stringent enforcement practices are causing considerable stress and uncertainty.
The traditional tax audit:
Tax audits are now more frequent and aggressive and the resulting assessments and penalties significantly increase tax costs. In a relatively new development, some companies find themselves being audited by more than one tax jurisdiction at the same time, in what are called joint audits. As one executive put it, “Dealing with increasingly hostile and aggressive tax authorities is our number one tax risk right now.” These enforcement trends are apparently here to stay: 97% of tax authorities say they will increase their focus on international structures and cross-border transactions in the next three years.
Large increases in the volume of taxpayer information being shared:
Governments rarely shared taxpayer data until recently, but the number of formal agreements to share taxpayer related data has increased significantly over the last few years. That makes it much more likely that a dispute in one country will become a regional or global dispute.
New disclosure and transparency requirements:
78 percent of tax directors and CFOs report that new transparency rules have forced them to disclose more financial data in the last two years. At the same time, tax authorities are focusing on cross-border transactions and insisting that companies disclose when and where they have entered into related party transactions.
Additional attention to indirect taxes:
The tax community now also reports rising levels of risk and controversy over indirect taxes, especially value-added taxes, reflecting the increasing use of this type of tax by governments.
Hot spots for stricter tax scrutiny:
The increasingly global nature of business has directed the attention of tax authorities to issues relating to the movement of intellectual property, the transfer or disposal of assets between group companies located in different countries and the movement of expatriate employees between countries. The complexity of transfer pricing has long been a bone of contention between taxpayers and tax authorities and this is likely to continue.
New tax laws and regulations:
Tax policy-makers have been issuing new tax laws and regulations at an increasing pace, adding greatly to the uncertainty of tax outcomes.
The Tax Landscape In MENA Countries
The Arab Spring and the impact of shifts in the global economy have brought about paradigm changes to the political and social landscapes in MENA countries from Bahrain to Tunisia. Not unexpectedly, the fiscal landscape has also not been spared with bells ringing fiscal change continuing to toll in many countries.
The fiscal landscape in MENA is defined by;
- Low corporate tax rates introduced in most countries (Qatar 10%, Oman 12%, Iraq / Kuwait 15%, Egypt / Saudi 20%) to encourage local and foreign investment
- fiscal pressures to increase tax collections to boost public finances depleted by economic disruption and the need to provide social subsidies (Egypt, Iraq, Oman)
- tax authorities working with relatively simple (limited) tax legislation and tax expertise (Kuwait, Saudi, Iraq)
- the absence of broad based indirect taxes like VAT (almost all countries)
The current fiscal and tax environment is driving tax authorities in many MENA countries to consider changes in tax policy, compliance and enforcement that are likely to have a significant effect on tax costs in the MENA countries.
Tax Risks & Tax Controversies Of Particular Relevance In MENA
The tax assessment and enforcement process is becoming more stringent with increasing scrutiny of cross border transactions and related party transactions in Egypt, Saudi, Kuwait, Oman and Qatar. Tax authorities in these countries are also at various stages of implementing more definitive transfer pricing regulations and compliance requirements.
The authorities also appear to be taking a much broader and at times subjective interpretation of tax law provisions. In a number of countries like Kuwait, Oman and Saudi, the tax authorities are also less inclined to follow OECD guidelines.
Another growing trend – that we believe could have considerable tax cost impact in the coming years - is the increasingly rigorous tax assessments and less favourable tax cost outcomes related to deemed profit tax declarations. Throughout the region we see tax authorities either issuing deemed profit assessments with arbitrary taxable profit determinations (Oman, Kuwait) or introducing laws to discontinue this tax filing option (Egypt, Qatar). Ernst & Young is working with clients to prepare for tax filings on the basis of actual profits, supported by audited local financial statements, by undertaking analytical reviews of operating structures and arrangements, substantiation of related party transactions and tax health checks.
More recently, tax authorities in many MENA countries, including Oman and Qatar, are employing greater emphasis on enforcement of withholding tax laws, scrutiny of WHT compliance and use of pay and claim regulations, clearly to increase tax collections.
In summary, the tax environment and regime in MENA is becoming more challenging with complex tax law concepts being introduced with broad interpretations coupled with increasing tax compliance scrutiny and enforcement. It is clear that in MENA countries as is the case in other jurisdictions, that to reduce tax risks and tax controversies it is increasingly important for companies to get it right before businesses start up and before filing tax declarations.
Morris Rozario is an Executive Director responsible for tax technical communications with Ernst & Young, MENA. Morris is a corporate tax specialist with over 30 years of experience advising and working with multinational companies in Asia, East Africa and the Middle East. Ernst & Young is the leading professional services firm in the Middle East with professional tax advisors and subject matter specialists in over 15 countries across the Middle East and North Africa.
Morris Rozario can be contacted via email at Morris.Rozario@om.ey.com