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PwC Qatar

Corporate GovernanceSeminar 2014Accounting & Taxation

For discussionpurposes only

22 September 2014

PwC22 September 2014

Program

Corporate Governance Seminar 2014 • Accounting & Taxation

Session 3

International taxation

Session 4Advisory

Session 1Accounting update

Session 2Domestic taxation

- Break -


Accounting update

1



Your presenters

2Corporate Governance Seminar 2014 • Accounting & Taxation

Mohamed Elmoataz

Partner, Assurance

Tel. : +974 3328 7919

[email protected]

Mark Menton

Director, Assurance

Tel. : +974 3372 6946

[email protected]


Introduction

Keeping upto date with

changes

Financialstatementdisclosure

issues

UJVsConstruction

accounting

Compliancewith laws

andregulations



Governance challenges - Accounting


Keeping upto date

withchanges

Transparency


issues

UJVsConstruction

accounting

Compliancewith laws

andregulations


Revised and new standards

…2013

2017…

Effective 1st January 2014


Investment entities

IFRS 10 amendment

Offsetting and novation ofderivatives

IAS 32 and 39 amendments Levies

IFRIC 21 New

Financial Instruments

IFRS 9 New

Amend IFRS 11

Amend IAS19R

Revenue

IFRS 15 NewLeasing standard

Re-exposed

5


Amortised cost FV-OCI

Classification and measurement of debt instrumentsBusiness Model Assessment

Does the company apply the fair value option to eliminate anaccounting mismatch?

Yes

No

No

Yes

Yes Yes

No

Fair valuethrough

P&L

No

No

Yes

Is objective of the entity’sbusiness model to hold thefinancial assets to collectcontractual cash flows?

Is the financial asset held toachieve an objective by bothcollecting contractual cashflows and selling financialassets?

Corporate Governance Seminar 2014 • Accounting & Taxation6

Do contractual cash flows represent solely payments of principaland interest?


Expected credit lossesGeneral model

Effective interest on grosscarrying amount

12 month expectedcredit losses

Recognition of expected credit losses

Interest revenue

Change in credit quality since initial recognition

Stage 1 Stage 2 Stage 3

Performing(Initial recognition*)

Underperforming(Assets with significant

increase in credit risk sinceinitial recognition*)

Non-performing(Credit impaired assets)

Effective interest on grosscarrying amount

Lifetime expectedcredit losses

Effective interest on amortisedcost carrying amount

(i.e. net of credit allowance)

Lifetime expectedcredit losses

*Except for purchased or originated credit impaired assets



Expected credit lossesGeneral modelAssessment of a significant increase in credit risk

Probability ofDefault(‘PD’)

Absoluteprobabilities

are notsufficientVariation

betweenreporting date

and initialrecognition

12 monthsunless

lifetimeassessment is

necessary

Maximumcredit risk for

a portfolio

Counterpartyassessment



Expected credit lossesGeneral model

Expected credit losses

Financial assets

ECL represent a probability-weighted estimate of the difference over the remaining life ofthe financial instrument, between:

Undrawn loan commitments

ECL represent a probability-weighted estimate of the difference over the remaining life ofthe financial instrument, between:

Present value of cashflows according to

contract

Present value of cashflows the entity expects

to receive

Present value of cashflows if holder draws

down

Present value of cashflows the entity expects

to receive if drawndown


9


Operational simplifications for ECL model

• Low credit risk: the loss allowance for financial instruments that aredeemed low credit risk at the reporting date would continue to be recognisedat 12-month ECL.

• For trade receivables or contract assets that do not contain asignificant financing component: Relief from calculating 12-month ECLand to assess when a significant increase in credit risk occurred. Lifetime ECLthroughout the trade receivable’s life.

• For lease receivables and trade receivables or contract assets thatcontain a significant financing component: Accounting policy choice toapply simplified approach to measure loss allowance at lifetime ECL on initialrecognition.



IFRS9 Effective date and transitionOverview

• Effective on or after 1 January 2018

• Retrospective application is required withfew exceptions

• Early adoption choice:


Own Credit Risk for FL

All Classification and Measurement+

Impairment+

Hedge Accounting*+

Own credit risk

OR

* Policy choice to apply IFRS 9 or IAS39 hedge accounting

11


IAS 18

Revenue isincome from ordinary activities

IAS 39

IAS 17: leasing income

Other income:government grants,

investment property,agriculture and so on….

IAS 39

IAS 18

Scope


IFRS 15Revenue from contracts with customers

Royalties

Sale of goods &services

IAS 11

Dividends

Interest

Constructioncontracts

Performanceobligations satisfied

over time

Performanceobligations satisfied at

a point in time


New leasing standard – still under consideration

Proposed Requirements Impact

Leases • Re-exposure in Q2 2013; redeliberation from March 2014 withcertain significant changes :

• Lessee accounting• all leases will be on-balance sheet unless they are

short-term or small ticket leases or not leases at all(Right-of-Use asset and a liability to make leasepayments)

• a single income statement approach that result infront loaded expenses for all leases . This is anotherturnaround from the dual model of the Re-exposuredraft.

• Lessor accounting• another big change from Re-exposure draft: latest

tentative decision is not to move away from thecurrent lessor model under IAS 17

• IASB and FASB now show signs that convergence is no longer apriority during the redeliberation

• Structuring of certaintransactions;

• Lease vs. buy decisions• Typical negotiated

terms may change• Tax accounting impact• Regulatory capital

impact• Compliance of bank

covenant• Analysis by Financial

Statement users• System & process



...relativelystableplatform

...staff training

Think about...


...understanding& implementingchanges

14


Disclosure challenges

15






issues

Keeping upto date

withchanges

Transparency

UJVsConstruction

accounting

Compliancewith laws

andregulations


What makes a good set of accounts?

A single story

How the money is made

What worries the Board

Consistency

Cut the clutter

Clarity

Summarise

Explain change

True and Fair



Income statement

Expenses by function

Expenses by nature

Notes 2013 2012

Revenue 21 2,057,540 3,648,095

Cost of sales 1,751,932 3,217,165

Gross profit 305,608 430,930

Marketing costs 51,842 67,430

Distribution costs 22 189,771 243,268

Administrative costs 6,742 8,398

Employee benefits 36,872 46,752

Finance expense - net 23 5,313 8,498

EBITDA 19,097 58,988

Depreciation and amortisation (3,122) (3,184)

Exceptional gains - 1,304



Related party disclosures – IAS 24

Related party is defined as a personIncluding close family who has:

- Control or joint control- Significant influence

- Key management personnel

Managementand sponsor

charges

‘Arms length’disclosure

Controls foridentifying related

parties

Fraud risk

Exemption forGovernment

entities



Tax disclosures

Numerical reconciliation of tax expense andaccounting profit at the effective tax rate

Disclosure of litigation / tax investigations

Sufficient to understand relationship betweenaccounting profit and tax now and in the future

Direct cost versus management recharge

Provisions versus accruals



Cash flow statement – common pitfalls

Inconsistency between the cash flow statement and elsewhere in thereport

Reporting foreign currency cash flows

Diversity in items classified as cash equivalents

Inconsistent classification of cash flows

Different starting point to determine operating cash flows

Netting items and material or unusual items not disclosed separately



Other issues

Boilerplate

policies

Creditquality of

tradereceivables

Keyjudgements

andestimatesLiquidity

riskdisclosure

Contingencyand

commitments

Can you tellthe readersomething

positiveReason forapparent

under / overprovisiondisclosed?

Are theykey?

Meaningfulsensitivities

Includeundiscountedfuture interest

payments

Complete?Leases -

dilapidationprovisionrequired?



Construction accounting

23





Transparency

UJVsConstruction

accounting


issues

Keeping upto date

withchanges

Compliancewith laws

andregulations


Which accounting standard?

The standard applies to accounting for contracts inthe financial statements of contractors

1. Involves the construction of an asset

2. Are specifically negotiated, that the asset being constructed is tothe customer's specification.

IAS 18 - Revenue

An agreement is for the sale of goods/services when construction takesplace independently of the agreement and the buyer has only alimited ability to influence the design, for example, selecting a design froma range of options that is determined by the entity.

IAS 11 – Construction contracts

Judgement required(some guidance provided by IFRIC 15)




Revenue measurement

The outcome of acontract can be

reliably estimatedNo Yes

Stage ofcompletion

method

Contract costs are recognised asan expense when incurred

Revenue to the extent of theseexpenses only when it is probablyrecoverable

In both cases, any expected contract loss is recognisedimmediately and in full.




Revenue - Variations in contract work, claims and incentivepayments

A variation is aninstruction by the

customer for a change inthe scope of the work tobe performed under the

contract

A claim is an amountthat the contractor seeks

to collect asreimbursement for costs

not included in thecontract price.

Incentive paymentsare additional amounts

that the customer pays ifcertain specified

performance targets orstandards are met.

The customer willapprove the variation

The revenue can bereliably measured

It is probable that thecustomer will accept the

claim

The amount of the claimcan be reliably measured

It is probable that thespecified performancestandards will be met

The amount of theincentive payment can be

reliably measured



Overview

Joint operations Joint venture

IFRS 11

Rights to assets; liabilities forobligations

Rights to net assets

Own share of assets, liabilities,revenue, expenses

Equity accounting (proportionateconsolidation not allowed)



UJV Accounting challenges

No legal status Is it a Joint arrangementJoint operation or joint

venture

Tax status

Accounting practicalities:

Who

How

What

Obtaining assurance forall stakeholders


Regulatory environment

30





Transparency

Compliancewith laws

andregulations

Transparency

UJVsConstruction

accounting


issues

Keeping upto date

withchanges


Going concern – Article 290

What is it

• Losses reach half the sharecapital

• Within 30 days fromreaching the loss to thisextent

• Submit the issue to partnersassembly

Consequences andchallenges

• Meeting not called ordecision not reached,directors or shareholdersmay be jointly responsiblefor the liabilities resultingfrom their negligence

• On going support from groupcompanies not mentioned inthe law

Under Commercial Law Number (5) 2002



End of service benefits

Legal matters

• Do payments made beforethe end of service extinguishthe liability?

Accounting challenges

• Liquidation method ofaccounting common in Qatarnot in compliance with IAS19

• Potential benefit of chargesto OCI and finance costs ofIAS 19 approach versuscomplexity of calculation

Nationalisation targets mean the accounting for defined contributionpensions will increase in the future



Domestic taxation

34



Your presenters


Neil O’Brien

Partner, Tax

Tel. : +974 4 419 2812

[email protected]

Upuli Kasthuriarachchi

Senior Manager, Tax

Tel. : +974 4419 2807

[email protected]


Board Level

Ta

xR

eg

ula

tor

yD

ev

elo

pm

en

ts

Shareholders

Ex

ter

na

lF

ac

tor

s

Corporate Governance : The Tax Dimension


Tr

ain

ing

Re

so

ur

ce

s

Policies

Procedures

Compliance

OperationsStrategic

Tax management


How does governance help manage your tax risks?


Components to effective taxmanagement

Setting an appropriate goal or philosophy towardtaxation. e.g. minimizing tax risk, ensuring fairpayment of tax

Policies and procedures to promote amanagement response to informationreceived from operations

Systems to ensure visibility and transparency ofkey tax information and decision makers

Provide adequate tax resourcesand training to those responsiblefor tax management

Creating a pro-active attitude towardtax risk management


Benefits of Corporate Governance – Tax perspective


4. Enhancement of the overall business performance

1. Minimise financial risks

3. Strengthen relationship and reputationwith tax authorities and otherstakeholders

2. Oversight of tax foot print


Developing a tax function to manage tax governance


Incident drivenStandardised/

formalisedOptimised/ pro-

active

Operations

Strategic

Incident driven

Recognised butinformal

Awareness oftax issues

Recognised

Documented &managed

Manage taxrisks &

opportunities

Returns used toidentify risks

andopportunities

InformalManaged/

collaborative

Compliance

Unclear

Ad-hoc

None

Compliant buttax risks &

opportunitiesnot identified

Documented

Tax risks &opportunities

monitored

Monitor andaddress tax

risks &opportunities

Visibility oflocal taxfootprint

Pro-activeplanning

Maturity

Parameter

Statement Informal CollaborativeIncident-driven Formalised Pro-active

Compliance Operational Strategic


Qatar tax – Trends & updates


1. State Law

• No legislation developments, tax authorityundertaking consultations

• Evolving landscape; e-filing system• Increased scrutiny, sophisticated queries and

link up with other ministries2. Qatar Financial Centre ( the “QFC”)

• Amended regulations and rules• Tax exempt treatment of 90% Qatar

owned entities• Expansion of QFC licensed activities

3. Qatar Science & Technology Park (“QSTP”)

• Entry to QSTP – Remains restriced• Tax obligations of QSTP Entities• Ongoing debate of further free zone 4. Customs & VAT

• Loss of EU GSP status, ongoing discussionsof an EU FTA

• Singapore – GCC Free Trade Agreement• Continued discussions on the introduction of

VAT


Case study, tax considerations for 100% Qatar/GCCowned LLC


100% QatariEntity

Temporarybranches

Non-residents

Payments

Payments

Issues• WHT• Retentions• Tax filings

• Appropriate policies• Management systems• Staff trainings• Strategic review of QFC

Action


Case study, tax considerations for a 49%/51% LLC


Qatari LLC

49%Foreign

51%Qatari/ GCC

Issues• Sourcing income rules and…..documents• Transfer Pricing• Funding requirements

• Strategic review of QFC• Tax efficient contract

structuring• Transfer pricing

documents• Other supporting

operational documents

Action


Case study, tax considerations for an unincorporated JV


100% QatariOwned

49/51% LLCTemporary

BranchPE

UnincorporatedJoint Venture

Issues• Accounting• Complicated tax

considerations• Funding

requirements

• Clearly defined JVagreements

• Upfront discussions withthe Principal

Action


Summary - It’s a brave new world


Historic tax function no longerappropriate

Qatar tax environment reflectingglobal trends

Choice in operating model

Business opportunities

Companies are reacting

• Strategic

• Enriched operations

• Compliance gaps


45



International taxation

Welcome back

46



Your presenters


Sajid Khan

Partner, Tax

Tel. : +974 4 419 2802

[email protected]

David Yates

Director, Tax

Tel. : +974 4419 2811

[email protected]


Agenda


Recap

Case Study

Governance & International Taxation

Summary

Tax governance – bestpractice tools

Q&A


Let’s recap


1. Tax is an important dimension

3. Benefits

2. Components of efficient taxmanagement

4. Approach to taxfunction


International tax governance


Why itmatters toyou?

What isimportant?

How is itachieved?


What does international mean?


International = Multi National Companies

Traditionally…

Evolving…

Crossingborders

1-50

Regionalsubsidiaries

Globalgroups


Why are you international?


People

People

People

People

People

BusinessPartner

Asset/warehouse

BusinessPartner

BusinessPartner

BusinessPartner

Rep Office

Rep Office

Rep Office

Rep Office

Agent

Agent

Asset/warehouse

Agent

Agent

ContractorContractor

Contractor

Contractor

Asset/warehouse

QatarCo


Governance and international taxation


CorporateIncome Tax

VAT

PetroleumRevenue

Tax

Income taxfor non-resident

companies

Landfill Tax

EnvironmentalTaxes

AirportPassenger

Duty

CapitalGains Tax

InsurancePremium

Tax

GrossTransportationIncome Taxes

AlternativeMinimum

tax

AccumulatedEarnings Tax

PersonalHolding

CompanyTax

ClimateChange

Levy

AggregatesLevy

CarbonReduction

Commitment

PersonalIncomeTaxes

StampTaxes

InheritanceTaxes

SocialContribution

Tax

State Taxes

PropertyTaxes

Patent BoxRegime

TemporaryCIT

Surcharge

Transfer ofGoodwill

TerritorialEconomic

Contribution

TurnoverTaxes

Child Tax

Road Tax

CapitalDuty Tax

Deed tax

RegistrationDuties

SystematicRisk Tax

EnergyTaxes

WithholdingTaxes

CustomsTax

EducationalSurtax

StumpageFees

ResourceTax

PersonalHolding

CompanyTax

UrbanConstruction

andMaintenance

Tax

MineralResource

ExtractionTax

Social SecurityContributions

InsuranceTax

PersonalIncomeTaxes

RealProperty

Gains Tax

BusinessTax

FiscalInvestment

FundRegime

FLOOD TAX JIHAD TAX RAIN TAX


Governance and international taxation – Externalfactors


Financial institutions are struggling toimplement FATCA procedures withouthaving all the final forms, coordinatingand implementing regulations and theirtechnical corrections




What isgovernance?

What isimportant?

How is itachieved?


Case study I - planning for international expansion


Qatar Co

HoldingCompany ?

HoldingCompany ?

How will theinvestments beheld? What are

the taxconsequences?

Where are youexpanding to?Has Tax beenconsidered?

Holding companies -operational &

reportingimplications –

Management buy in /understanding?

Well definedtax strategy,

aligned tocommercialobjectives

Tax isfactored in

the earlydecisionmakingprocess

Key GovernanceMessage


Case study II – planning for deal sourcing, negotiatingand closure


Qatar Co

HoldingCompany

Target

Target

Substanceconsiderations

Deal sourcingconsiderations

Dealstructuring

Holding structure

Financing

Repatriation

Personal Tax

Permanent Establishments

Supporting substance

Formal policiescovering taxinput at each

important stage

Controls andmonitoring



Case study III – planning for ‘Steady state’


Qatar Co

HoldingCompany

Investment 2

Investment 1

Investment 3

Investment 4

Changes inpersonnel/

responsibility

Continued taxefficiency of

structure

Changes incommercial

factsAwareness of responsibility

Structure maintenance

Do’s and don’ts of activities

Holding structure

Financing

Repatriation

Ensuring you aremonitoring internal& External change

on a real time basis

Pro-activelymanaging its

impact





What isgovernance?

What isimportant?

How is itachieved?


Key strands of good tax governance


Centralised/

De-centralised/

Hybrid arrangement

Responsibility matrix

In-house tax functionstructure specific to theorganisation

Governance models

What does it looklike?

Key factors toeffective governance

Tools to assist

Board Responsibility

Best practice


Key strands of good tax governanceTax governance tools



Summary


Benefits of goodgovernance -internal and

external

Benefits oftechnology

Challenges tomaking it

happen

Key elements ofeffective taxgovernance


Summary (cont’d)


Financial ReputationBrand KPI’s Bonuses

$

$


Advisory

64



Your presenter


James Tebbs

Director, Forensic Services Leader, Qatar

Tel. : +974 4419 2715

[email protected]


Setting the scene – the scale of the problem


Source: PwC Global Economic Crime Survey – Economic Crime in the Arab World

One in threeorganisationsglobally reportedsuffering some formof economic crime


Setting the scene – types of economic crime suffered inthis region


71%

35%

35%

37%



Setting the scene – the impact of economic crime



The financial impact


Setting the scene – the impact of economic crime


The collateral impact


The current state of prevention and detection



Detection methods in the middle east

Preventionrequires a clearunderstanding

of the risks

Only 26% of companiesconduct an annual fraud

risk assessment

48% never conduct one,or don’t know whether

their company does


An effective governance programme includes fraud riskmanagement


Fraud Risk AssessmentAn effective assessment of all economic crime risks, covering allaspects of the business: considers internal and external factors, thepast and future expectations.

Key Considerations:• Has your business conducted a recent, comprehensive fraud risk

assessment? How well do you understand fraud?• Do you really understand the fraud risks your business faces

domestically and globally?

Training & AwarenessEnsuring your own staff are aware of the policies and their practicalimplications, and trained regularly. Ensuring the implications of abreach are well known.

Key Considerations:• Are your own staff and those in your supply chain well informed?• Are your policies easily accessible?

Fraud RiskAssessment

IntegratedPolicies and

Controls

Training &Awareness

Reporting

Investigations

Integrated Policies & ControlsPolicies and controls specifically designed to address the fraud riskshighlighted and integrated into the broader control environment

Key Considerations:• Are your controls really operating effectively to mitigate the risks?• Are your policies in line with leading practices?• Are internal audit covering fraud risks in their assessments?


An effective governance programme includes fraud riskmanagement


InvestigationsThe process of inquiring into an allegation of fraud throughresearch, follow-up, study, or formal procedure of discovery.

Key Considerations:• How effective are your investigation policies and procedures?• Do you need to set up an Investigation Unit?• Are your staff appropriately trained to conduct an

investigation?• Will you take demonstrable action against fraud?

Fraud RiskAssessment

IntegratedPolicies and

Controls

Training &Awareness

Reporting

Investigations

Internal Reporting & External ReportingA robust process for ensuring employees and externalstakeholders can highlight fraud issues to senior management,and that regulators are kept informed where necessary

Key Considerations:• Do you have an effective whistleblowing hotline?• What is your relationship with your regulators like?• Have you ever needed to report and are you aware of the

implications of not reporting effectively?


Closing thoughts


• Good governance integrates fraud risk management intothe control environment

• Preventing economic crime requires a clearerunderstanding of the threats your business faces

• Effective fraud risk assessments are consistently lacking

• Corporate controls – more work is needed to integrate therisk assessment into the control environment

• Tone at the top - instil a culture of ethical compliance

• Take clear and decisive action when fraud is uncovered


Thank you

74


We hope you have enjoyed this seminar, the fifth in our series.

Today’s presentation will be available online at:

http://www.pwc.com/en_M1/m1/tax/pwc_series_2014.jhtml

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