As KPMG's newly appointed Head of Tax for the MESA region, Ashok Hariharan brings over 30 years of international tax experience to KPMG's member firms and clients in the MESA region. Ashok helped KPMG set up an international tax practice in Dubai in 2003, which assists local and regional companies to structure and manage their outbound investments. More recently, he was rated as a leading tax adviser in Oman by Expert Guides, a Euromoney publication.
In his new role, Ashok will oversee the growth of KPMG member firms’ tax service offerings to clients across a diverse region that is rich in investment opportunities. Ashok shares his views here on trends.
Some believe that taxes are less important to businesses in the Middle East because many Gulf Cooperation Council (GCC) countries do not levy direct income taxes on domestic businesses. Do you agree with this view?
It's true that GCC countries generally do not tax the profits of domestic businesses and sovereign wealth funds. However, there is Zakat imposed on annual profits accruing to GCC nationals from domestic businesses in Saudi Arabia and also on annual profits of joint stock companies in Kuwait.
Further, in Saudi Arabia, Kuwait and Qatar, foreigners’ shares of profits in domestic businesses are subject to income tax. Even in the United Arab Emirates (UAE), which is generally regarded as a tax-free country, each emirate imposes tax on foreign banks. Foreign oil and gas exploration companies in both UAE and Bahrain are also subject to income tax. It is only in Oman that all businesses are subject to corporate tax irrespective of their nationality. The tax rates are low and vary from 10 percent to 20 percent, with higher rates for oil and gas exploration companies. The GCC also has a common Customs Union and a customs duty of 5 percent, which is generally imposed on all imports into the GCC.
Further, as locally domiciled businesses increase their participation in foreign markets, they face a host of international tax issues related to their outbound investments, whether from income tax, valued added tax, customs duties or other taxes.
The ways in which these entities structure and document their operations in the GCC and beyond can significantly influence the amounts of tax they pay on a global basis. Opportunities to optimize taxes continue to grow as GCC countries expand their tax treaty networks and offer incentives to attract investment in certain activities and locations.
Significant investment opportunities are also emerging in the countries of South Asia, particularly Afghanistan, Bangladesh, Pakistan and Sri Lanka. Compared to the GCC, what is the tax situation for foreign investors in these markets?
While taxation in the GCC is limited, investors in South Asian countries need to contend with a wide range of taxes. Sri Lanka, for example, imposes a total of 23 different taxes. At the same time, Sri Lanka and other South Asian countries have rapidly growing populations and urgent infrastructure improvement needs, so they too are adopting investor-friendly tax policies to attract much-needed foreign dollars. With the right local professional advice, foreign companies can navigate the tax complexity and win significant profits from their investments in South Asia.
As MESA companies grow and expand into new markets and as foreign companies engage in new ventures in the region, what would you say are the biggest tax issues they will confront?
Customs duties pose significant issues for companies with operations in the GCC. Whether a company is engaged in infrastructure development, oil and gas, or manufacturing, most business inputs must be imported. This can create challenges in terms of clearance and documentation that, in some cases, can only be resolved through discussion with the customs authorities. For businesses in free zones, complexities arise from the rules governing re-export. Again, local professional assistance can go a long way toward easing customs compliance.
A second area of concern for companies that are expanding regionally or globally arises from visits or relocations of employees to foreign operations. Companies need to monitor and manage their global workforces carefully, for example, to ensure travelling employees comply with personal income tax and immigration requirements. Companies also need to ensure that their employees’ activities in a foreign market do not create a permanent establishment inadvertently and expose the company to foreign tax obligations.
Finally, for companies that are new to the MESA region, can you offer an idea of what they can expect in dealing with tax authorities and tax audits?
Historically, tax audits in the region have been marked by inconsistency and uncertainty. Tax laws lacked important details, and inspectors relied on tax practices that evolved from year to year and differed in application from location to location. Unlike many tax systems in the West, many MESA countries do not have self-assessment systems. Foreign companies can be caught off-guard by the level of audit scrutiny and caught short by tax inspectors’ requests for documentation, often several years after the fact.
In some MESA countries, things are changing. Tax systems are being modernized, and tax inspectors are receiving specialized training in cross-border and international tax issues. Tax authorities are more proactive in identifying non-compliant taxpayers, for example, by sharing information with customs officials and by pursuing new business registrants in the country. For foreign companies doing business in the region, being adequately prepared for tax inspections is more important than ever.