MESA Tax Update - June 2019
Welcome to the latest edition of our Middle East and South Asia (MESA) Tax Update, bringing you the latest news in tax from the MESA region. As countries in the region look to reform their tax systems to attract foreign investment and become more globally competitive, keeping up with trends and developments is more important than ever.
Inside, you'll find briefings on key news, events and thought leadership contributed by tax professionals in KPMG member firms across the region.
In this issue :
Bahrain – VAT Update
We have outlined below the key takeaways from this session for your perusal:
- Tax Invoice Particulars: The NBR has confirmed the obligation for taxable persons to ensure that the full address as per the VAT registration certificate is indicated on the Tax Invoice. However, the NBR has provided relief from compliance with this requirement for Tax Invoices received during the first quarter of 2019, provided all other required particulars are displayed on the Tax Invoice.
- Relief from Tax Invoice Issuance: The NBR has confirmed that the relaxation from issuance of a Tax Invoice for exempt margin-based financial services would also be extended to such margin-based financial services when they are zero-rated (due to the export conditions being met).
- Rounding Rules: Rounding of output tax amounts on electronic transactions is to be applied to the nearest Fils and is based on the sum of output tax from the multiple supplies on the Tax Invoice (Total Invoice rule). If this cannot be applied due to system limitations in displaying output tax amounts in more than three decimal places, the rounding of the output tax amounts shall be done at the level of each supply (Taxable Supply rule). Further, the taxable base should be reported in the VAT returns based on the rounded VAT amounts. In case of differences between the taxable base as per the system records and the taxable base reported in the return due to the above rounding rules, records should be maintained to explain the difference.
- Input Tax Deduction on Motor Vehicles: The NBR will soon release a decision on the mechanism for determining the proportion of input tax that may be deducted on expenses related to vehicles which are used for business as well as non-business use. In the meantime, taxable persons are expected to maintain documentation evidencing their basis of recovery.
- Transfer of a Going Concern (‘TOGC’): Where a TOGC occurs, both the purchaser and the seller should notify the NBR within 30 days of the transfer. A form specifically made for this purpose will soon be available on the NBR’s website.
- Bank Statements: A Bank Statement may be used as a valid Tax Credit Note or Debit Note (subject to the initial Tax Invoice which it relates to being a Bank Statement). While there is no requirement for the bank statement to have the label “Credit Note” or “Debit Note”, the adjustment must be easily identified on the Bank Statement.
- Self-billing: A taxable person issuing tax invoices on behalf of a registered supplier under a self-billing arrangement may also issue Tax Credit Note provided they relate to tax invoices which were originally issued under the self-billing arrangement provided the self-billing agreement between the supplier and the customer provides for issuance of credit notes.
- Bulk Post-Supply Discounts: A single Tax Credit Note may be issued as long as the invoice numbers of all Tax Invoices which include the relevant transactions are indicated on the Tax Credit Note. An appendix to the Tax Credit Note which includes the details of the related Tax Invoices will be acceptable provided such appendix expressly forms part of the Tax Credit Note.
- Correction of Tax Invoices: If a Taxable Person issues a Tax Invoice for a standard-rated supply and later discovers that the supply should have been zero-rated, this should be corrected through cancelling the Tax Invoice by way of a Tax Credit Note and reissuing another proper Tax Invoice. The same correctional measure should be applied if a Tax Invoice is issued for a zero-rated supply which is later discovered to be standard-rated.
- VAT Grouping: The Group TRN must be used by a company that joins a Tax Group. The company’s old TRN will be considered dormant with no requirement to deregister.
- Deferring Payment of VAT on Imports: The NBR has indicated that the option for taxable persons to defer payment of VAT on imports will not be available in the near future.
- NBR VAT Guides: The NBR has indicated that the Transport Guide, Oil and Gas Guide, and the Basic Food and Retail Guide will soon be published on the NBR’s website.
Lebanon - Amendments to the Lebanese code of commerce
In order to modernize the Code of Commerce (issued in 1942) and keep it in line with progress in the business world, the Parliament has approved in 29/3/2019, a number of amendments to the Lebanese code of commerce.
The new amendments mainly include:
- Reducing the minimum number of shareholders in a limited liability company to one instead of three shareholders
- The possibility to separate the positions of chairman and of general manager in the joint stock companies
- Permitting digital correspondence in the board of directors meetings
- A natural or legal person can hold accounting records, such as journals, ledgers, inventories, by using a secured digital application
- Other amendments that aim to provide stakeholders the necessary information about the entity that they are dealing with
Lebanon looks forward that these amendments will contribute in creating an environment conducive to business, and encourage investors to invest in the country.
Oman – Tax updates
1. Recent clarifications on Oman withholding tax (WHT) post issuance of ER amendments
(a) Suspension of Oman withholding tax on dividends and interest
Following a Royal Directive, the Capital Market Authority Oman (CMA) announced the suspension of WHT on dividends and interest. This suspension, as per the announcement, begins from 6 May 2019, is valid for a period of three years and can be extended for further periods if required. The WHT suspension on interest will potentially benefit all payers and, on dividends, will benefit joint stock companies—other forms of companies were not subjected to dividend WHT. The above Royal Directive is prospective in nature. Consequently, WHT on dividends and interest prior to 6 May 2019 will continue to apply based on the existing law.
(b) WHT clarification for interest payments prior to 11 February 2019
Under Omani tax laws, interest paid to foreign persons was made subject to a 10% WHT effective 27 February 2017. However, in the absence of detailed executive regulations (ERs) at that point in time, some taxpayers had applied for WHT clarification on interest payments. In response thereto, the Omani tax authorities instructed the respective applicants to delay payment of WHT on interest payments until ERs had been issued. Thereafter, Ministerial Decision 14/2019 was issued amending the ERs to clarify applicability of WHT on various payments. The amended ERs are applicable from 11 February 2019. Amongst others, the amended ERs exempted specified interest payments by banks and government. However, the treatment of WHT on interest payments held for the prior period i.e. between 27 February 2017 till 10 February 2019 (due to the specific clarification) remained unclear. Hence, it is advisable to seek a formal clarification.
Recently, in the case of certain taxpayers other than banks, the Omani tax authorities have clarified that WHT on interest payments remains applicable from 27 February 2017. Therefore, WHT held back because of the earlier specific letter issued will now have to be remitted to the Government. KPMG Oman assisted in seeking such clarification.
(c) Interest rate swaps
Based on a specific application by certain taxpayers, the Omani tax authorities have clarified that payments for interest rate swap arrangements which are in the nature of hedging transactions are not subject to WHT. Taxpayers who intend to rely on this clarification should consider obtaining a specific written clarification to their specific facts so as to protect their technical position.
(d) Other payments
KPMG Oman have engaged in discussions with Omani tax authorities and have obtained their views on a case by case basis regarding applicability of WHT on various other payments such as cost sharing arrangements, subscription charges and transaction charges.
(e) Reminder on timely compliance
The Omani tax authorities have issued a letter reminding the taxpayers to undertake compliance of depositing WHT and provide necessary data (i.e. WHT returns) on a timely basis. It has been reiterated that delay or failure in deposit of WHT will attract additional tax at the rate of 1% per month as provided under the Oman tax law. The letter also clarifies that the authorities will review the WHT details submitted by taxpayers with the data available with them to identify gaps, if any and take necessary action.
2. Introduction of scientific and other specialized zones
Royal Decree 27/2019 was published on 28 April 2019 with regard to the set-up of scholarly zones affiliated to the Research Council, scientific zones and other specialized zones subject to the approval of the Council of Ministers. Entities operating in these zones will be entitled to incentives such as exemption from tax initially for 5 years (renewable twice for a period of 5 year each), import duty exemptions, waiver of minimum capital requirement and benefits relating to usufruct of land. Such incentives are subject to licensing and other conditions. However, entities such as banks, financial institutions, insurance, re-insurance, communications or land transport services companies are excluded from the purview of exemption. It is expected that establishment of such zones will happen in the near future.
3. New economic substance requirements in offshore jurisdictions from 2019: impact for UAE and Omani businesses
Due to the introduction of a European Union (EU) blacklist of non-cooperative jurisdictions, and wider changes in the global tax environment, many low and nil tax jurisdictions have been forced to implement economic substance requirements. Jurisdictions where substance compliance is required from 2019 include Bermuda, British Virgin Islands, Cayman Islands, Guernsey and Jersey. Entities in these jurisdictions may need to increase local presence, activities, local expenditure, and recruit local employees in order to comply. Our detailed analysis on the above for the UAE can be found here and for Oman, here.
4. Oman ratifies double tax treaty with Sri Lanka
Oman ratified a double tax treaty with Sri Lanka on 20 January 2019 under Royal Decree No 7/2019. The treaty was signed in August 2018, with the objective of avoiding double taxation and preventing income tax evasion.
5. Global Forum assists Oman in their fight against tax evasion
An Induction Programme for Oman to participate in and benefit from the international developments in tax transparency and exchange of information was launched with the visit from the Secretariat of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) on 7-11 April 2019.
Oman, which joined the Global Forum in October, 2018, will be reviewed against the standard of exchange of information upon request (EOIR) in the next 2-3 years. Oman is also committed to implement the standard on automatic exchange of financial account information (AEOI) by 2020 and will also be reviewed against this standard in the near future.
During the visit, a seminar was also held to raise awareness among the government authorities on the international standards of transparency and exchange of information for tax purposes and their implications and opportunities for Oman. It was followed by a workshop on AEOI to help Oman draft its AEOI legal framework. This induction programme will enable Oman to implement the EOIR and AEOI standards and to prepare for its peer reviews. The Oman authorities confirmed their commitment to comply with the international standards of tax transparency.
6. Excise tax update
On 13 March 2019, Oman published Royal Decree No. 23/2019 (‘Decree Law’) in the Official Gazette, providing for introduction of excise tax in Oman ninety days after the date of publication. Excise tax will therefore become effective in Oman from 15 June 2019. The Executive Regulations to Decree Law (‘Regulations’) are yet to be published. The Decree Law allows six months from the date of publication of the Decree Law to publish the Regulations. The Decree Law does not specify which goods will attract excise tax and the applicable tax rate. According to media reports, excise tax in Oman is expected to be levied at the rate of 50 percent on carbonated drinks and 100 percent on alcohol, energy drinks, tobacco products and pork products.
Saudi Arabia – Excise Tax update
General Authority of Zakat and Tax (GAZT) has widened the scope of Excise Tax on some products. This comes after the GAZT Board of Directors approved the amendments to the provisions of the implementing regulations of the Excise Tax law.
GAZT widens scope of Excise Tax in KSA to include:
- Sugary drinks at excise tax rate of 50%
- Electronic cigarette and other electronic smoking tools at 100%
- Electronic cigarette fluids at 100%
While the new amendments will be the effective immediately to the e-cigarette and its related products, according to the published decision, the board of directors of GAZT has delegated powers to the GAZT’s chairman to identify a suitable effective date for sugary drinks.
Sri Lanka – 2019 Budget Proposals
The Budget Proposals for 2019 titled ‘Empower the People, Nurturing the Poor’ were presented in Parliament on the 5th of March 2019 by Minister of Finance Hon. Mangala Samaraweera. It focused on re-awakening the entrepreneurial spirit of Sri Lanka through the empowerment of people politically, socially and economically.
Income Tax Concessions and Exemptions
The New Income Tax Act which came into operation from 01 April 2018 limited the income tax exemptions. The following Income tax exemptions were proposed in the budget 2019:-
- Income accruing to a non-resident person on sovereign bonds denominated in local or foreign currency,
- Interest income earned by a resident person on sovereign bonds denominated in foreign currency (including Sri Lanka Development Bonds),
- Interest income earned by any person on NRFC and RFC accounts will exempt for 5 years
- Interest income earned up to Rs. 5,000 per month on minors’ accounts maintained in a financial institution and
- Interest on loans accruing to a person outside Sri Lanka (this will not be applicable to loans granted by a Non-Resident Company to its Holding Company or a Subsidiary Company in Sri Lanka and will continue to be withheld at the rate of 5%).
Certain proposals were directed towards providing clarification to the current income tax law and amendments to certain provisions.
In the Budget, the government introduced incentives for large scale investment under the BOI regime. In addition to the following Income tax incentives, exemptions from NBT, PAL, Cess and Customs Duty are to be granted during the project implementation period.
- Investments above USD50Mn to USD100Mn: 100% deduction of the expenditure incurred on depreciable assets, excluding intangible assets, in a project approved by the BOI for a period of 10 years from commercial operations
- Investments above USD100Mn: 150% deduction of the expenditure incurred on depreciable assets, excluding intangible assets, in a project approved by the BOI for a period of 10 years from commercial operations
- Investments above USD1Bn:
- 150% deduction of the expenditure incurred on depreciable assets, excluding intangible assets, in a project approved by the BOI for a period of 10 years from commercial operations
- the period for deduction of unrelieved losses to be increased to 25 years
- dividends and employment income of expatriate employees to be exempt from WHT during the period that such dividends are paid out of profits sheltered by enhanced capital allowances
It was proposed that the income tax proposals will be effective from 01 April 2019. However the Bill to amend the law has not been submitted to the Parliament.
Value Added Tax (VAT)
Changes to Value Added Tax include the imposition of VAT on condominium housing units, to be implemented with effect from 1 April 2019, where the deed of agreement relating to such supply is not executed prior to 01 April 2019.
Nation Building Tax (NBT)
It is proposed the NBT exemption will be reintroduced in favour of the main construction. Further NBT will be imposed on the cigarette production.
It was proposed the introduction of NBT at the rate of 3.5% on the usage of debit and credit cards for foreign payments from 1 June 2019 in substitution of the existing stamp duty.
Also a NBT exemption was proposed on the foreign currency receipts by tourist hotels registered by the Sri Lanka Tourism Development Authority (SLTDA) was also provided.
Economic Service Charges (ESC)
The ESC rate applicable on exports was proposed to be reduced to 0.25% (previously the rate was 0.5%). It is also proposed to charge ESC at the point of importation.
Betting and Gaming Levy
It is proposed that the annual levy for carrying on the business of gaming other than playing rudjino will be increased to LKR 400mn and the Levy on the gross collection is revised to 15%. Both these proposals were expected to be effective from 01 April 2019. However the laws are yet to be enacted. The Casino Entrance Levy is proposed to be reduced to USD 50 wef 01 June 2019.
Levies on the Motor vehicles
The Budget this time brought in few revisions on the levies pertaining to Motor Vehicles. It is proposed to introduce a ceiling on the Carbon Tax payable on the “Commercial Vehicle”. It is expected that this proposal will be effective from 01 June 2019.
A Budget Proposal was introduced for the specification of the rates in relation to the Luxury Tax on Motor Vehicles. Though the law was passed in 2018, it did not provide the rates. Hence the budget proposal specified the rates. Accordingly the Luxury tax on Motor Vehicle will be applicable on the CIF value or the ex-factory cost in excess of the luxury tax free threshold. It is proposed that it will be effective from 01 June 2019.
Excise duty on the Motor Vehicles also were revised upward and the rates were effective from 05 March 2019 mid-night.
The rate of the Customs Import Duty on selected goods has been revised as well. The removal of customs import duty (CID) and cess on Go Karts and the tires used in Go Karts was proposed.
It was proposed in the Budget 2019, that from 1st April 2020, online booking/reservation websites can register hotels and similar establishments offering more than 5 rooms per property, only if such establishments are registered with the Sri Lanka Tourism Development Authority.
Further there was a proposal to grant a residential visa for a period of three years for foreigners who invest more than USD 400,000 in condominiums. However the visa will not be valid if the foreigner exits from the investment.
Also the government proposed that in order to support the local construction industry, foreign companies will be allowed to tender for Government projects only if the project is fully funded by foreign funds without forming a joint venture with a local construction company.
The Budget 2019, proposed certain Excise Duty revisions and removal of para-tariffs on importations.
A relief package was introduced to strengthen tourism sector. VAT on the tourism sector has been revised from 15% to 5% on hotels and tour operators registered with SLTDA for one year from 21 May 2019. The government will also offer duty free import facilities (except for NBT) for security equipment.
UAE - Double tax treaties, Economic substance requirements and other tax updates
1. Increasing number of UAE’s double tax treaties (DTTs)
With the purpose of promoting bilateral investments, the UAE is constantly progressing with the number of concluded DTTs, which are now 91 in force. In addition to the GCC unique DTT between Kingdom of Saudi Arabia (KSA) and the UAE:
- the UAE has recently signed new DTTs with Gabon and Argentina;
- DTTs with Angola, Brazil, Chad, Costa Rica, San Marino, St. Vincent and the Grenadines, Suriname, Iraq have recently been ratified by one or another party to a DTT.
- The ratification process for the KSA-UAE DTT is now complete. The DTT will come into effect on 1 January 2020. The UAE – KSA DTT is aligned to international standards, factoring in emerging OECD principles pertaining to the abuse of PE and DTT frameworks. The DTT has some unique features- particularly with respect to ‘resident’ and PE clauses, the tax credit mechanism, and the force of attraction- that will require close attention.
2. Economic substance requirements for UAE
Due to the introduction of a European Union (EU) blacklist of non-cooperative jurisdictions, and wider changes in the global tax environment, many low and nil tax jurisdictions have been forced to implement economic substance requirements from and within 2019. In a BEPS world, where the location of profits need to be aligned with the value creation, substance is a key aspect. Every company having cross-border operations should consider whether it has the appropriate substance from an operational, economic and regulatory standpoint.
Given that UAE has signed up to the BEPS Inclusive Framework, similar substance rules are expected to be issued in the UAE very soon. This may have an impact on the minimum requirements for establishing entities in Free Trade Zones in the UAE and issuance of Tax Residency Certificates to UAE based companies. Entities may need to increase local presence, activities, local expenditure, and recruit local employees in order to comply. Any developments in this regard should be actively monitored.
3. UAE VAT refund of goods and services connected with Expo 2020
The Government decision grants the official Expo 2020 participants (i.e. countries and intergovernmental organizations) the ability to access refunds on import and local procurements made by them for their pavilion at the Expo 2020 Dubai site.
For specified construction and operational activities at the Expo 2020 Dubai site, official participants, which are unlikely to separately register for VAT, would be required to obtain a refund entitlement certificate from the Bureau Expo 2020 Dubai office. Such refund entitlement certificates would enable them to obtain VAT refunds subject to review and processing.
4. UAE VAT refund for foreign business visitors
The Federal Tax Authority (FTA) released a detailed guide on operationalizing the business visitor scheme. Foreign businesses can now claim refunds for VAT incurred on goods and services used in the UAE, subject to fulfillment of specified conditions. The guide provides a list of countries with whom reciprocal arrangements are approved by the Ministry of Finance (MoF).
5. KPMG Lower Gulf is now a UAE FTA registered tax agency
KPMG Lower Gulf is a registered tax agency with the FTA and hence may represent clients before the FTA during audit and inspection. Apart from representation, the firm can manage tax correspondence, obtain clarifications, file reconsiderations to decisions issued by the FTA and file VAT returns on behalf of clients.