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15 March 2016

Tax risks faced by Chinese investors eyeing

attractive investment opportunities in GCC

1

Presentation

© 2016 Deloitte & Touche (M.E.). All rights reserved.

1. Introduction

2. Chinese investment in the GCC

3. Middle East/ GCC recent tax Developments

4. Key tax risks faced by Chinese investors

Agenda

2 © 2016 Deloitte & Touche (M.E.). All rights reserved.

Chinese investments in

the Middle East/ GCC


Chinese Investment in the GCC

© 2016 Deloitte & Touche (M.E.). All rights reserved. 4

The emergence of Iran – significant new opportunities


GCC– a few facts

The Gulf Cooperation Council (“GCC”)

• Established May 25,1981

• Members: Bahrain, Kuwait, Oman, Qatar,

United Arab Emirates, Saudi Arabia – (Jordan

under consideration).

• Importance:

o Market of 42 million people (and

growing)

o Gross Domestic Product of $1.6 trillion in

2014

o Despite the drop in the oil prices,

estimated GDP growth rate of 3% for

2016.

o GCC has largest proven oil and gas

reserves

• Customs union allowing free trade between

members

Economic importance

• Exports of 861 billion USD for 2014

• Imports of 476 billion USD for 2014

• Exporter of natural resources – 50% of

world’s oil and gas

• Important hub for trade between Asia and

Europe


Middle East Tax

Developments


Middle East - corporate income tax overview

0%

5%

10%

15%

20%

25%

Corporate income tax – headline rates

• The Middle East/ GCC is often mistakenly perceived as an area with limited or no taxation.

However this is not the case.

• Generally, the companies are taxed on a territorial basis.

• Zakat – “tax” paid by nationals/GCC nationals on their share of the profits e.g. Kuwait (1%),

Saudi Arabia (2.5%)


Middle East – tax developments and recent trends

Ongoing Tax Reforms

International pressure

to introduce taxes

Double Taxation

Treaties expanding

• Jordan introduces new Income Tax Law Effective 1 January 2015.

• Egypt - New VAT law 2015.

• Changes to Oman Income Tax Law

• Kuwait - New Foreign Investment Law and Draft CIT Law

• KSA - Virtual Services PE.

• A large number of treaties have been signed / amended or entered

into force.

• Total treaties in force: Qatar (more than 50 treaties), Oman (26

treaties), Bahrain (over 35 treaties), Kuwait (more than 60 treaties),

UAE (60 treaties), Saudi Arabia (over 30 treaties).

• Egypt has already introduced detailed TP regulations

• Saudi Arabia and Qatar are discussing the introduction of formal TP

regulations

• Pressure from IMF for GCC countries to diversify their revenues

(introduction of VAT).

• Saudi Arabia has introduced e-filing system for Zakat filing and Corporate Tax

• Qatar introduction of Electronic system of tax filing

• The immigration system to be linked with the tax system – exchange of

information

More consideration to

transfer pricing

Increased use of

technology by the

authorities


International pressure to introduce taxes

Governments need to diversify source of revenues


Middle East region

What does the future look like?

• VAT;

• Transfer pricing documentation requirements;

• Tougher anti-avoidance laws and scrutiny of tax

structures;

• More transparency and sharing of information;

• Greater requirement to demonstrate effective tax

governance and strategy/policy


Practical tax risks

applicable to Chinese

investors in the GCC


Key tax risks for Chinese investors in the GCC

Permanent Establishment risk

Permanent establishment not well defined and not fully

aligned with OECD principles. No specific thresholds -1

day could create taxable presence. Virtual Services PE in

KSA.

Application of DTTs/ WHT refunds The application of DTTs is seldom allowed upfront , it

typically requires the approval of local tax authorities and

/ or payment of local WHT first -> cash flow strain on

foreign businesses.

Lack of proper TP legislation and deemed

profits assessment

Currently no formal detailed TP legislation in the region

(with the exception of Egypt), which opens multinational

companies to aggressive challenges on all related party

transactions. To the extent challenged, multinationals can

be subject to tax on arbitrary levels (deemed profit basis).

Restriction on foreign ownership/ nominee

structures Current foreign ownership restrictions force

multinationals to adopt indirect investment structures (e.g.

using local nominees), which can be and are actually

challenged by tax authorities.

Timescales for tax compliance, audits and

refunds There can be significant gaps between filing and paying

tax and being audited by the local tax authority as well as

between requesting and obtaining a tax refund.

Key Tax Risks

Restrictions on

foreign

ownership/

Nominee

Structures

Application

of DTTs and

WHT

refunds

Lack of proper TP

legislation and

deemed profits

assessment


Risk of Permanent Establishment - Example Introduction of “Virtual Services PE” concept

Existing New Targeted mischief


• DZIT issued internal guidance about what constitutes a PE and introduced the

concept of a “Virtual Services PE”.

• Under the guidelines, non residents shall be considered to have created a PE

for Saudi tax purposes in all cases where the duration of service exceeds 183

days within a 12 month period, regardless of the place where the service is

rendered.

• Currently, no specific provision in the local tax legislation to support this

position.

• Not aligned with the OECD and the UN Model guidelines (which typically

represent the norm in interpreting taxation matters). This contradicts the

provisions of most of the DTTs that KSA has entered into.

• This interpretation can result into denial of Withholding Tax (WHT) refund claims

for non resident and can ultimately result in double taxation.

.

Restriction on foreign ownership/ nominee structures



• The region still has foreign ownership restrictions, either generally applicable or

on select industries.

• In some GCC countries, GCC shareholders and their direct investments are not

subject to corporate income tax or alternatively, they are subject to reduced

“taxes” (e.g. zakat).

• Foreign companies use nominee structures – the legal ownership lies with a

GCC national(s), however all de facto beneficial ownership / management lies

with the foreign entity.

• Local tax authorities are enabled to look through the structure of any transaction

to establish the real substance of any such transaction.

• If successfully challenged, the risks for the foreign party can be significant,

ranging from additional tax payable to penalties for tax evasion etc.

.

Lack of proper TP legislation and deemed profits

assessment



• With the exception of Egypt, the region is yet to introduce detailed TP

legislation. This brings a significant risk of challenge to any related party

transactions.

• High risk of disallowance of such costs for CIT purposes, if the transactions are

not at an “arm’s length basis” and not properly supported.

• Although typically accepted, OECD TP reports can still be challenged on the

basis of lacking local comparable studies. However, in practice it is very difficult

to adequately benchmark certain transactions against similar ones in this region

(due to e.g. lack of publicly available information).

• As such, unless properly documented, related party transactions can be

challenged.

Tax Structuring Considerations

Key structuring points

• It is important for Chinese companies to proactively structure their investments/

operations in the region; firstly to meet their commercial objectives (e.g. to allow

management oversight/ flexibility for certain local decisions) and also to be tax

efficient, taking into account the different tax regimes.

• Consideration may be given to structure the investments in the GCC through a

holding company, in a jurisdiction that allows the utilization of a DTT, which can

potentially mitigate/ reduce the withholding tax on the repatriation of profits.

• May identify scope/ opportunities to introduce inter-company transactions that could

increase the tax efficiency of certain local operations, assuming that these are made

for business/ commercial purposes and are at arm’s length.

• Chinese foreign Tax Credit: An ordinary tax credit is granted, both unilaterally and

under tax treaties, for foreign tax paid on foreign income. The amount of foreign tax

credit (FTC) is limited to the amount of Chinese tax on the foreign income.

• China has in place strict anti – avoidance rules including transfer pricing legislation

and Controlled Foreign Company rules, which may impact the overall structuring

considerations. Nevertheless, in practice CFCs are rarely being challenged by the

Chinese tax authorities.



Keep abreast of changes – circulars and instructions

are always introduced and can even be applied

retroactively.

Keep close to the region!

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

About Deloitte

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About Deloitte & Touche (M.E.)

Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is the first Arab professional services firm established in the Middle East region with uninterrupted presence since 1926.

Deloitte drives progress. Our practices around the Middle East help clients become leaders wherever they choose to compete. We invest in outstanding people of diverse talents and backgrounds and empower them to achieve more than they could elsewhere. Our work combines advice with action and integrity. We believe that when our clients and society are stronger, so are we.

Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,000 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has received numerous awards in the last few years which include Best Employer in the Middle East, best consulting firm, and the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW).

© 2015 Deloitte & Touche (M.E.). All rights reserved.


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