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Issue:# 3 NEWSLETTER |
September, 2008 |
Welcome to the Cragus Group newsletter. Please feel free to contact us on [email protected] To add yourself to our mailing list, unsubscribe, or forward to a colleague, please see links at the bottom of this email
We wish all friends, clients, colleagues and their families, Ramadan Kareem! |
| Guide to the World's Leading Tax Advisors
Euromoney Survey |
If you would like to participate in the Euromoney survey for the Guide to the World's Leading Tax Advisors, please click this link: Expert Guides / Tax survey |
| DIFC issues new regulations for Family Office |
 The Dubai International Financial Centre (DIFC) have announced new regulations to encourage family businesses to establish Single Family Offices (SFOs), these become active from the 2nd of September. Along with the DFSA, the DIFC has created regulations specifically tailored to the needs of family-run institutions and so allowing holding companies in the centre to manage private family wealth, and family structures located anywhere in the world. HE Dr. Omar Bin Sulaiman, Governor of the DIFC was quoted as saying: "In recent times, family offices have become highly significant on the global economic landscape. In the Middle East, where family-run businesses make up over 75 per cent of firms and have total assets in excess of US$1 trillion, the need for a specialised legal and regulatory framework is especially acute." SFOs do not have direct public liability, thus requirements differ significantly. The Regulations offer distinct benefits and as such exclude SFOs from many of the regulatory constraints placed on conventional organisations. The regulations are part of an initiative that also aims to provide infrastructure solutions, such as support services, encouraging of relevant training, and various complimentary businesses within the financial centre; along with DIFC's current zero percent tax rate, and the ability for foreign companies to easily migrate to the centre, this offers an attractive solution to family businesses within and outside of the Gulf. |
| Egypt Introduces Withholding Tax on Treasury Bills |
| Also in Egypt, the government has introduced withholding tax on interest on treasury bills. In the absence of a double tax treaty, the statutory withholding rate of 20% will apply. On August 19, 2008, the Ministry of Finance issued a directive clarifying the mechanism as follows:
(1) If Treasury Bills are purchased on auction day and are held until maturity, the withholding tax will be applied on the difference between the original issue discount and the par value of the Treasury Bill at maturity. The tax will be calculated on the actual yield to maturity for the entire period the investment was held.
(2) If Treasury Bills are sold prior to maturity, regardless of the discounted sale price, the withholding tax will be applied on the actual interest accrued for the period the investment was held.
The withholding calculation mechanism for Government Bonds has not yet been announced. | |
| Saudi Arabia is rapidly expanding its treaty network |
| The country's double taxation treaties with the UK, Austria and South Africa were ratified in the past 3 months. The existing treaties are those with France, China, Pakistan and India. Treaties with Italy and Malaysia have been signed but not yet ratified. Many others are in the pipeline. |
| Jordan proposes Tax changes |
 On July 28th, The Minister of Agriculture Muzahim Muhaisan said that the Cabinet would soon take a decision to exempt inputs of locally produced agricultural products from sales tax in order to contribute to sustainable agricultural development and help achieve food security.
The decision to exempt both animal and plant products from the 4 per cent sales tax seeks to cope with the unprecedented increase in food and oil prices and the Minister added that they plan to help farmers by supporting them financially and facilitating easy loans for them to plant essential crops. "Developing the country's agricultural sector is top priority", says His majesty King Abdullah.
This was followed in August, by announcements from the Minister of Finance Hamad Kasasbeh on Thursday reiterated to the Lower House's Financial and Economic Committee that the government will not impose any taxes on the Amman Stock Exchange, taxes on workers' financial rights and savings, including those of Jordanian expatriates, under a proposed tax law.
During a meeting with committee members, the finance minister emphasized that the purposes of a draft tax law is to ease citizens' financial burdens, especially amid high inflation rates and suggested that the legislation is also designed to improve investments into the Kingdom, essential to propel the economic drive.
From the legal perspective, all current taxes and regulations will be unified under one bill to streamline tax procedures and preclude overlapping and address existing loopholes.
Income and Sales Tax department Director General Iyad Qdah has stated that other reforms are being considered:
- Income and sales taxes, property transfer taxes, university fees and other taxes
- Exempt medical treatment charges from taxes as well as university fees
- Exempt around 80% of the citizens from income tax
- Expand the tax base
- Exempt Up to JD12,000 of income for a 6 member family from taxes
- Unify tax regulations for individual corporate companies and financial companies, starting at 10% on the first JD50,000 of a company's income
- Tax levied on banks however will remain the same at 35%. |
| Kuwait amends existing tax decree No. 3 of 1955 |
On the 20th July 2008, the executive bylaws were implemented following the Issuance of Law No. 2 which was announced on 22 January 2008, by His Highness, the Amir of Kuwait which further amended Decree No. 3 of 1955, set to commence after 3 February 2008.
The Ministry of Finance has stated that the regulations were prepared by a group of specialists in cooperation with the Ministry of Commerce and Industry, the Central Bank of Kuwait and the KSE. Analysts at the Kuwait Stock Exchange (KSE) have expressed their satisfaction with the amendments, commenting that they expect the amendments will attract foreign investors and protect new and existing investments in Kuwait. Excerpts of the amended decree states:
- Profit earned by foreign companies from trading in Kuwaiti shares, whether directly or through investment portfolios or funds, is not to be taxed, and excludes from taxation the profits of Kuwaiti agents earned on trading foreign goods for their own account.
-Neither the old tax law nor the new amendment subjects foreign individuals to income taxes. Only foreign corporations with independent jurisdiction are subject to taxation.
- The law also imposes a limit on a company's ability to carry losses forward, which is limited to three years. Under the previous tax law, companies were able to carry losses forward for an unlimited period of time.
- The law also clarifies that the profits of Kuwaiti commercial agents are not subject to taxation under the law and that only commissions paid to foreign companies as a result of an agency agreement are subject to tax. A Kuwaiti commercial agents earnings are not taxed as long as profits arise from the sale of goods for the agents own account.
- The most important feature of the amendment is the replacement of the old progressive tax rate structure - which saw companies charged between 5% and 55% on earnings above KD 5,250 - with a flat rate tax of 15%.
-The tax does not apply to foreign individuals or to Kuwaiti companies with non-Kuwaiti partners or shareholders, unless those shareholders or partners are foreign companies, in which case the tax is imposed on the foreign company's share of the earnings.
-According to NBK, while the new tax rate reduces the tax liability of most companies, those with earnings below KD 37,500 will actually have a higher tax bill as the low tax brackets with 5% and 10% rates are done away with and replaced with the 15% flat rate. For those investors that might be affected, the tax environment will at least be smoother and more predictable. Overall, NBK reports that the amending law is expected to promote foreign investment by reducing the tax liability in most cases.
"With the modifications of the old tax rate that had not been updated since 1955 and consisted of a gradual sliding scale with brackets from 5%-55% to a flat 15% tax rate, Kuwait has created a great opportunity to increase foreign investments. While there are some investors and companies that will notice a difference in the exclusion of the lower 5% and 10% brackets, a majority of the investors will see a greater reduction in their taxes by cutting this rate to the flat 15%. This, we believe, will invite more foreign investors to establish partnerships and operations based inside Kuwait for the additional tax incentives from these amendments", says Mr Jassim Al-Sharah, Head of Tax for Cragus Kuwait. |
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- On 1 August 2008, Macedonia ratified the first-time income tax treaty with Qatar, signed on 28 January 2008 in Doha.
- Qatar signs tax treaty with Malaysia 23-Jul-2008 - Qatar and Malaysia signed a tax treaty on 3 July 2008 in Putrajaya, the administrative centre of the Malaysian Federal government, strengthening bilateral ties and further expand cooperation between the two countries to other areas, such as trade and investment, education, tourism, culture and information. Qatar is the sixty-eighth country to sign a tax treaty with Malaysia, and the twentieth country from among 57 members the Organisation of Islamic Conference.
- Qatar and Mauritius signed a first-time income tax treaty on 28 July 2008
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| Standard Chartered calls for Capital Gains Tax on UAE property - unlikely say analysts |
| In July, a Standard Chartered Bank report suggested real estate speculators need to be rooted out of Dubai's housing market by introducing a 50 per cent capital gains tax as the best way to discourage short-term flippers thus improving the stability of the market.
"We need to get speculators out of the market", said Marios Mara-theftis, the bank's regional head of research for Middle East, North Africa and Pakistan.
The introduction of a capital gains tax would encourage long-term investors and end-users to buy property, he said, charging on the profit accrued from the sale of a non-inventory asset purchased at a lower price, such as stocks, bonds, precious metals and property. As yet there has been no feedback to suggest that a capital gains tax will be implemented by the government, despite Standard Charterered's Forecast. However, such practices have been implemented in other countries previously that have also experienced similar property booms and rising prices, particularly in the Asia-Pacific. |
| South Africa phasing out STC |
In South Africa, as earlier reported, the government proposes to phase out the Secondary Tax on Companies (STC). The details of this, and other tax law changes proposed in the Budget, are set out in the draft Revenue Laws Amendment Bill 2008. The Bill proposes to convert the STC to the 'New Dividends Tax' at the shareholder-level, rather than at the company level. The target date set for the new Dividends Tax is late 2009. The new Dividends Tax will be withheld by the company declaring the dividend, and tax may also be collected by intermediaries "in several circumstances as a matter of practicality." STC credits are to be maintained within the new Dividends Tax system for a limited period; they can be offset against the new Dividends Tax for a three-year transition period, after which all remaining STC credits will be eliminated.
The Treasury announced that certain other "collateral issues," such as the taxation of foreign dividends, the taxation of deemed dividends and anti-avoidance rules are to be dealt with in a separate policy statement to be issued in 2009, and that the full introduction of the Dividends Tax is contingent on several tax treaties being renegotiated. |
| Egypt withdraws tax free zone exemptions to certain industries |
| In Egypt, all the tax and customs exemptions given to energy-intensive companies in free zones were withdrawn in May. The withdrawal affects about 39 companies in the steel, fertilizers, petrochemicals, natural gas liquefaction and natural gas transport industries. Custom exemption will however be available for 3 years only on capital goods and machines for companies which are still being set up. |
| New DIFC Arbitration Law Enacted |
| His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, has enacted the new Arbitration Law of the Dubai International Financial Centre (DIFC).
The new Law will enable the recently established DIFC-LCIA (London Court of International Arbitration) Arbitration Centre to provide efficient and reliable dispute resolution services to companies throughout the world, covering all stages of the arbitral process, from the arbitration agreement to the recognition and enforcement of arbitral awards.
"With the introduction of the Arbitration Law, DIFC now offers a legislative platform for comprehensive dispute resolution," Omar Bin Sulaiman, Governor of DIFC, said. Universally applicable and compatible with both civil and common law systems, the new law also offers the international business community, lawyers and arbitrators a comprehensive and modern set of rules and procedures to enable effective settlement of arbitration cases.
The LCIA Court is the final authority for the proper application of the DIFC-LCIA Arbitration Centre's rules and procedures. Its key functions will include appointing tribunals, determining challenges to arbitrators and controlling costs. The centre's facilities are not limited to companies registered with the DIFC but can be availed of by almost all companies across the world. LCIA is one of the longest-established international institutions for commercial dispute resolution in the world. The new DIFC venture overseen by a locally established secretariat with assistance and support from the LCIA, will be able to host arbitration hearings, but more importantly will be able to enforce awards both in the UAE and elsewhere. |
| Nigerian practise note: "tax exempt" profits could be taxed when distributed |
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This note highlights an exposure issue that could be significant but is often overlooked by investors, particularly those that are wholly or partially exempt from tax under any of the tax incentives schemes provided by the government. Section 19 of the Companies Income Tax Act provides as follows:
"Where a dividend is paid out as profit on which no tax is payable due to-
(a) No total profits
(b) Total profits which are less than the amount of dividend which is paid, whether or not the recipient of the dividend is a Nigerian company, is paid by a Nigerian company, the company paying the dividend shall be charged to tax at the rate prescribed in subsection (1) of section 40 of this Act as if the dividend is the total profits of the company for the year of assessment to which the accounts, of which the dividend is declared, relates."
At the risk of over simplifying, "Total profits" above effectively equates to taxable profits. The tax authorities and, from a few appeal decisions in the past few years, the Tax Appeal Commissioners have interpreted this to mean that even tax exempt income would be taxable at the full rates when distributed as dividends. This would lead to the conclusion that the tax exemption schemes granted by the government are in effect actually tax deferral schemes. The correctness of this interpretation may be debatable, but it has often come as shock to the unwary investors. Until the matter is clearly resolved, it would be important to note this as a risk issue, and plan towards its mitigation, when undertaking to invest under a tax incentive scheme. |
| Value Added Tax (VAT) not to be introduced in the UAE until 2010, say officials |
The Dubai Customs Authority continues to work on the pilot VAT regime for Dubai, and in June Ahmad Butti Ahmad, Director General of Dubai Customs confirmed that draft laws have already been submitted for approval to the UAE's federal authorities.
In light of the current high inflation across the GCC, governments are keen to ensure that any concept of VAT will be inflation neutral. With Dubai's intended initial rate of 3% VAT, it is argued that the effect on inflation will be minimal, but the scope of VAT being much broader than the current customs duty means that critics believe there will inevitably be much larger implications.
The GCC set up a customs union in 2003 that demands the charging of a uniform five percent import tax duty. Replacing import tariffs with VAT will involve the creation of a "huge infrastructure" and may not be possible unless all six member-states of the GCC adopt the system together, newswire Bloomberg reported Saeed Khalifa Saeed Al-Marri, deputy director general of the UAE Federal Customs Authority, as saying. If the introduction of VAT is dependant on a GCC-wide agreement it will be even more difficult because many of the countries are yet to start looking at it, Monica Malik, chief economist at EFG-Hermes Holding SAE told the newswire.
In August, Saeed Khalifa Saeed Al Merri, deputy director-general of the UAE Federal Customs Authority declared: "VAT has not yet been approved. The government is studying the impact, so it might not do it at all, maybe by 2010. If we reach the point where it might come into effect, which means we have to study all the procedures, because it will affect the customs union and it will affect even the whole customs work in the UAE." |
| Other Headlines |
| - Treaty between Croatia and Syria signed - Croatia and Syria signed a first-time tax treaty on 18 July 2008 in Zagreb. | |
If you would like further information on The Cragus Group or tax matters relating to the Arabian Gulf or surrounding region, please contact:
Dominic Treays, Director of Practice Development, on [email protected]
Or visit our website www.cragus.com
Sincerely,
Gemma Eagle
Marketing Manager
The Cragus Group
[email protected] |
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| About The Cragus Group
The Cragus Group is made up of hand-picked individuals from tax, legal and accounting backgrounds, with experience of international tax in the Middle East dating back 20 years. Primarily dealing with corporate international tax planning, they also provide advice on transfer pricing, tax controversy, legal structuring, oil and gas and general corporate advisory services. They serve a range of clients across the Middle East and Africa.
The Cragus Group consists of well known international tax advisors based in Dubai and a long standing network of trusted independent Member law firms and advisors of high professional reputation in Kuwait (Kuwait City), Oman (Muscat, Salalah, Sohar), Saudi Arabia (Jeddah), Qatar (Doha), UAE (Abu Dhabi, Dubai), and the USA (Washington DC).
Tax Leadership:
Reggie Mezu (Tax leader)
Over 20 years tax and legal experience: including roles from the UK, Nigeria, Singapore, The Netherlands, and the UAE; within Andersen, Price Waterhouse, and Shell (most recently serving as regional tax manager for the Middle East, Caspian, and South Asia).
Mark Stevens (Strategic adviser)
Over 20 years tax and legal experience within "big 5" audit firms, including 10 years based in the Middle East. Formerly part of the original Ernst & Young International Tax Services team in the region, then serving with Arthur Andersen, and later also heading tax and legal for PwC in the Lower Gulf.
Robert E. B. Peake (Strategic adviser)
International tax advisor experienced in advising global investors on managing tax risks and maximizing investment return by reducing tax liabilities. Formerly, Director and Partner of International Tax Services with Ernst & Young Middle East and Head of Tax and Legal Services for Lower Gulf with Arthur Andersen. Subsequently, senior tax advisor to a government investment institution and a member of the UAE Free Trade Agreements negotiation team with particular responsibility for matters relating to investment and dispute settlement.
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