MENA Tax Insight

November 2013 Edition

MENA Tax Insight is a monthly newsletter from EY, intended to provide you with up-to-date news of tax developments relevant to companies doing business in the Middle East. Each month we cover the latest changes to tax laws, tax rulings, appellate decisions and tax practices that may be of interest to you. MENA Tax Insight is a summary, early information communication designed to alert, notify or forewarn on a timely basis. It is not intended to provide comprehensive advice on the matters addressed. Accordingly, should any topic be of interest to you or your organization, we encourage you to contact the appropriate EY tax partner or director listed as contact for further information and advice specific to your organization. In this November 2013 edition of MENA Tax Insight we include news updates on: GCC. New GCC Singapore Free Trade Agreement Bahrain. Bahrain China DTA amendments Egypt. VAT implementation on the agenda again Qatar. New thin capitalisation rules Saudi Arabia. DZIT confirmation of WHT relief under DTA

GCC. Free Trade Agreement between the GCC and Singapore (GSFTA)

Singapore will grant zero-tariff treatment on all GCC imports

Rules of origin Rules of origin determine the nationality of a product for customs purposes. In the GSFTA, the rules ensure that only products that are sufficiently worked or produced in the GCC or Singapore qualify for the tariff concession in the Agreement. Under the GSFTA, a product can qualify for preferential treatment if at least 35% of the Ex-works price (value added percentage) can be attributed to manufacturing and other operations in the originating country. There are however 10 products where the origin criteria are based on change in tariff classification. Customs procedures the agreement provides for certain customs procedures to aid the free movement of goods between the GCC and Singapore, including: Advance rulings on the eligibility of originating goods for preferential treatment and tariff classification The requirement for a certificate of origin is waived for low-value originating goods Risk management to focus on high-risk goods and to facilitate the clearance of low-risk consignments Trade in services The GSFTA will provide Singapore service providers with enhanced market opportunities into the GCC. Some GCC countries will relax the foreign equity limits in certain key sectors of interest to Singapore, including, construction services, distribution services and hospital services, while other GCC countries will relax the foreign equity limit across the board for all sectors between 70% and 100%.

Unlocking the preferential savings

A free trade agreement between the GCC consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates and Singapore (referred to here as the GSFTA) entered into force on 1 September 2013. The GSFTA is a comprehensive agreement that covers trade in goods and services, government procurement and other areas of cooperation. Major industry sectors that are expected to benefit include telecommunications, electrical and electronic equipment, petrochemicals, jewelry, machinery and iron and steelrelated industries. The principal beneficiaries of the GSFTA will be Singapore exporters to GCC markets who will enjoy preferential tariff treatment compared with other foreign exporters. The GSFTA will offer limited preferential treatment to GCC exporters to Singapore, as the majority of these products presently enjoy the zero most favored nation (MFN) tariffs. Singapore businesses doing business in the GCC will also benefit as GCC foreign equity limits will be relaxed; however, the relaxation of the GCC equity requirements may need further legislative changes in the respective GCC states and therefore this beneficial status may not be immediately available to Singapore investors. The procedural requirements for claiming preferential tariff treatment are still not finalized and exporters should seek prior advice before seeking to apply preferential tariff treatment under the agreement.

1 | GCC
New GCC Singapore Free Trade Ageement

2 | Bahrain
Bahrain China DTA amendments

3 | Egypt
VAT implementation on the agenda again

4 | Qatar
New thin capitalisation rules

Key features of the GSFTA

Trade in goods The agreement provides for comprehensive tariff elimination that will make Singapore goods more competitive compared with other foreign imports entering the GCC. Initially GSFTA will exempt about 95% of all GCC tariff lines for Singapore exports.

5 | Saudi Arabia
DZIT confirmation of WHT relief under DTA

MENA Tax Insight November 2013 Edition

With increased trade between Singapore and the GCC, the GSFTA presents opportunities for businesses to significantly reduce costs in their supply chains. However, the term free trade should more accurately be termed conditional trade because in order to obtain the preferential treatment, businesses must comply with the specific rules of origin to determine whether a product actually qualifies. The GSFTA rules are complex and full compliance with the terms is essential to obtain the benefits under the agreement and to avoid the risk of incorrectly claiming benefits. For more information and specific tax advice, please contact EY Qatar Tax Partners, Finbarr Sexton: finbarr.sexton@qa.ey.com or EY Qatar Senior Director, Garrett Grennan: garrett.grennan@qa.ey.com or any Partner from EY offices in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (please see contacts in the directory listing).

The exchange of information will no longer be restricted to the taxes specifically mentioned in Article 2 of the DTA The scope of the persons or authorities to whom information can be made available, will now include those concerned with the determination of tax appeals in each State Each contracting State shall now use its information gathering measures to obtain requested information even if the other member State does not need such information for its own tax purposes Contracting States shall not decline to supply information solely because the information required is held by a bank, other financial institution, nominee or person acting in an agency or fiduciary capacity or because it relates to ownership interests For more information and specific tax advice, please contact EY Bahrain Tax Director Ivan Zoricic: ivan.zoricic@bh.ey.com.

The IMF has previously stressed that A number of fundamental structural reforms, including the transition to a VAT-like consumption tax and reform of the highly inequitable and costly system of subsidies, are needed to improve the efficiency of public spending and help reduce the fiscal deficit in the medium term. This is certainly a current fiscal imperative. It has been widely suggested that the Egypt VAT regime is likely to be structured with a standard rate ranging between 8 to 10 percent, replacing existing sales tax rates. Exemptions and rate concessions are likely to be provided for specific essential commodities and services such as food products, health, education and social services. Dr. Ahmed Galal also announced that consultations and education programs will be launched, engaging with the public and private sector, and the tax authority will prepare the necessary infrastructure to administer the VAT regime. With these recent announcements and developments, it would be prudent for businesses especially companies engaged in the provision engineering, construction, oil and gas related and other services under long term contracts to take into consideration the possibility of the introduction of VAT in 2014 or 2015. For more information and specific tax advice, please contact EY Egypt Tax Partner Ahmed El-Sayed: ahmed.el-sayed@eg.ey.com.

Bahrain. Amendments to Bahrain China Double Taxation Agreement

On 16 September 2013 the Kingdom of Bahrain and the Peoples Republic of China signed a protocol to amend the Avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income Agreement (DTA) of 2002. This protocol, when brought into force will give rise to the following changes: The WHT on dividend payments will increase from 5% to 10% Where a Chinese company has a direct or indirect holding in the Bahraini company exceeding 20% and receives a dividend from that company, any tax credit offered in China shall take into account any tax paid by the Bahraini company on its income Other changes effected relate to the exchange of information between the two governments in connection with the prevention of fiscal evasion.

Egypt. VAT implementation mooted again

The introduction of Value Added Tax (VAT) as a replacement of the existing sales tax system has been under consideration for a number of years. However, the events of the last two years and consequent disruption to the economy and business has delayed implantation. It appears that the Ministry of Finance (MOF) is once again deliberating switching to VAT which is regarded by most experts and tax jurisdictions as a more efficient, effective and business friendly tax system than sales taxes. Egyptian Finance Minister, Dr. Ahmed Galal recently reiterated that the introduction of VAT would lead to a fairer distribution of tax, add services to the tax base, and boost businesses and in particular exporters competitiveness by allowing input tax credits.

MENA Tax Insight November 2013 Edition

Qatar. New QFC thin capitalization rules

Safe harbor debt/equity ratio

As a means of providing certainty for QFC taxpayers and to minimize the cost of undertaking a transfer pricing study or benchmarking exercise for related party loan agreements, the TP Manual has outlined safe harbor debt/equity ratios as follows: 2:1 for a non-financial institution 4:1 for a financial institution These safe harbor debt/equity ratios are non-statutory and are non-binding on either the taxpayer or the QFCA Tax Department. It should be noted that the safe harbor ratios relate only to the quantum of the loan, not the interest rate. The safe harbor guidance applies for accounting periods beginning on or after 1 January 2012. The QFCA Tax Department does not consider reopening settled cases agreed on a basis different from that set out above. Other ratios (e.g., debt/EBITDA ratio, interest cover) may be relevant and may be used by a taxpayer to support the view that despite the gearing being higher than the safe harbor debt/equity ratio, the entity should not be regarded as being thinly capitalized. For more information and specific tax advice, please contact EY Qatar Tax Partners, Finbarr Sexton: finbarr.sexton@qa.ey.com, Paul Karamanoukian: paul.karamanoukian@qa.ey.com, MarcelKerkvliet: marcel.kerkvliet@qa.ey.com or EY Qatar Senior Director, Garrett Grennan: garrett.grennan@qa.ey.com.

On 18 July 2013, the Qatar Financial Centre Authority (QFCA) issued the QFCA Tax Manual Extract on Transfer Pricing (or the TP Manual), which provides guidance on the application of the arms length principle to transactions between QFC registered taxpayers and their related parties. Along with the guidance on transactions related to intra-group services, the Tax Manual provides guidance on thin capitalization requirements. A taxpayer may be thinly capitalized where it has funded its operations with levels of debt which are excessive to its arms length borrowing capacity and as a consequence is claiming excessive interest deductions. The TP Manual specifies that the arms length capacity of a QFC taxpayer is the amount of debt which it could and would have financed its operations, as a stand-alone entity, from a non-related independent lender. The debt/equity ratio, or gearing, of a QFC registered entity is regarded as the key ratio in determining whether a QFC registered entity is thinly capitalized. A thinly capitalized QFC registered entity will be subject to restrictions on the level of interest which can be claimed as a tax deduction.

Saudi Arabia. DZIT confirmation of WHT relief under DTA

In response to a companys request for confirmation of non-taxability of advisory services provided by a non-resident affiliate, the DZIT has confirmed that the non-resident affiliate is entitled to relief under the Saudi/UK double tax agreement (DTA). The DZIT has also confirmed that payments to the non-resident affiliate for advisory services should not be subject to WHT under the same DTA. For more information and specific tax advice, please contact any EY Tax Partner at the Jeddah, Al Khobar or Riyadh offices.

MENA Tax Insight November 2013 Edition

Forthcoming MENA events and dates

Saudi Income Tax and Zakat seminars. December 2013 register now
EY Saudi Arabia will conduct its annual tax seminars covering recent Income Tax, Zakat and commercial developments at various locations during December. The seminars are aimed at Tax Managers, Tax Directors and CFOs from companies doing business or considering doing business in Saudi Arabia. Tax Partners and Directors from EY will review recent developments and explore tax planning opportunities. EY is pleased to invite you to the Saudi Tax and Zakat seminars at the following locations. Date 2 December 2013 10 December 2013 11 December 2013 12 December 2013 Location Riyadh Al Khobar Jeddah Bahrain Venue Ritz Carlton Movenpick Crowne Plaza Ritz Carlton to each country: Service PEs and dependent agency risks Incomes attributable to a foreign branch or PE Restrictions on deductibility of expenses Tax considerations related to staff secondments Thin capitalisation Related party transactions Withholding tax related implications Country reviews will be followed by a panel discussion on specific issues and risks and close with a participants Q&A session. To register and for joining instructions, please contact: me.webcast@ae.ey.com.

Webcast seminar. Update on GCC indirect tax developments, 11 December 2013

There have been a number of important indirect tax developments affecting businesses with interests in the GCC. The developments are likely to impact the GCC supply chains of both GCC inbound and outbound investors. It is important that businesses are aware of the changes to assist with supply chain planning and to avoid costly surprises. Indirect tax experts from EY Singapore, Europe and the GCC will review these developments, consider how businesses will be impacted by these developments and offer practical insights as to what actions they should take to navigate these changes successfully. The seminar will cover the following key topics: The new Free Trade Agreement between the GCC and Singapore including practical implementation issues. The loss of Generalised System of Preferences (GSP) status and the implications for GCC companies exporting to the EU particularly for businesses in the oil, gas and petrochemical sectors. Customs duty compliance developments relating to the Jebel Ali Free Zone where Dubai Customs have been strictly applying a number of customs rules during compliance audits resulting in significant penalties. An update on the proposed GCC VAT implementation. Information on how GCC entities can claim refund for European VAT incurred in 2013 Subject matter reviews will be followed by a participants Q&A session. To register and for joining instructions, please contact: me.webcast@ae.ey.com.

For more information and to register, please contact your EY Tax Partner in Bahrain, Jeddah, Al Khobar or Riyadh or Balaji Ganesh, balaji.ganesh@kw.ey.com.

Iraq and Libya Oil & Gas Tax Workshop 2013 Dubai. 4/5 December 2013
EY Iraq and Libya will conduct an oil and gas workshop to review recent tax developments relevant to international oil companies, oil service companies and EPC contractors. EY MENA Oil & Gas Tax Leader Finbarr Sexton, EY Iraq Tax Partner, Ali Samara and other MENA Oil & Gas tax specialists will consider and discuss issues and tax implications arising from tax developments relating to the oil and gas sector. To register please contact, MENA Tax Knowledge Resource Centre, Executive Director, Balaji Ganesh, balaji.ganesh@bh.ey.com.

Webcast seminar. Tax implications of operating as a foreign branch or PE 20 November 2013

The use of foreign branch entities and PEs provide an expedient, flexible and in many cases, an efficient means to do business. This is especially so in the case of one-off contracts or where the incorporation of a local subsidiary is subject to process difficulties or restrictive regulations. However, in most MENA countries the tax implications of operating a branch entity or a foreign PE require careful consideration and the adoption of appropriate operating arrangements. Tax directors from Egypt, Kuwait, Oman, Saudi Arabia and Qatar will review the tax consequences relating to foreign branches, PEs and related operating arrangements, highlight current issues and consider how businesses may manage tax consequences and risks. The seminar will address the following matters as appropriate

MENA Tax Insight November 2013 Edition

MENA EY contacts
Bahrain Ivan Zoricic ivan.zoricic@bh.ey.com Egypt Sherif El-Kilany sherif.el-kilany@eg.ey.com Ahmed El-Sayed ahmed.el-sayed@eg.ey.com Hossam Nasr hossam.nasr@eg.ey.com Iraq Ali Samara ali.samara@jo.ey.com Jordan Ali Samara ali.samara@jo.ey.com Kuwait Alok Chugh alok.chugh@kw.ey.com Tobias Lintvelt tobias.lintvelt@kw.ey.com Lebanon Ramzi Ackawi ramzi.ackawi@lb.ey.com Libya Gerry Slater gerry.slater@ly.ey.com Oman Sridhar Sridharan sridhar.sridharan@om.ey.com Ahmed Amor Al-Esry ahmed.amor@om.ey.com Pakistan Nasim Hyder nasim.hyder@pk.ey.com Mustafa Khandwala mustafa.khandwala@pk.ey.com Palestine Saed Abdallah saed.abdallah@ps.ey.com Qatar Finbarr Sexton finbarr.sexton@qa.ey.com Paul Karamanoukian paul.karamanoukian@qa.ey.com Marcel Kerkvliet marcel.kerkvliet@qa.ey.com Saudi Arabia Al Khobar Naveed Ahmed Jeddy naveed.jeddy@sa.ey.com Farhan Zubair farhan.zubair@sa.ey.com Jeddah Mohammed Desin mohammed.desin@sa.ey.com Irfan Alladin irfan.alladin@sa.ey.com Craig McAree craig.mcaree@sa.ey.com Riyadh Asim Sheikh asim.sheikh@sa.ey.com Ahmed Abdullah ahmed.abdullah@sa.ey.com Imran Iqbal imran.iqbal@sa.ey.com Franz Josef Epping franz-josef.epping@sa.ey.com Syria Abdulkader Husrieh abdulkader.husrieh@sy.ey.com UAE Abu Dhabi Tobias Lintvelt tobias.lintvelt@ae.ey.com Dubai Michelle Kotze michelle.kotze@ae.ey.com Stijn Janssen stijn.janssen@ae.ey.com

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