Qatar was classified as having the least onerous tax framework in the 2017 Paying Taxes report published by PwC and the World Bank Group. According to the country's Law No.21 of 2009, tax is not charged on Qatari-owned business firms, except for companies with 10 million Qatari Riyals or more that file an Income Tax return. This means that employees in Qatar do not have personal income taxes deducted from their pay. Income tax is therefore levied on any permanent commercial operations that generate local source income from residents and non-residents (Neil O'Brien, 2016). Foreign companies with a permanent establishment in the country are subjected to this taxation in the form of corporate income tax. The tax rate for this a flat rate of 10%. Non-residents who do not run permanent businesses are deducted from withholding tax at 5% or 7% of gross receipts. According to the withholding tax system, liability of taxes is on the non-resident, but the tax compliance is the responsibility of the Qatari entity. Therefore the type of income tax operating in Qatar is the corporate income tax. However, a self-employed individual who derives Qatar source income may be subjected to personal income tax. A case study on the effect of this income taxation system on ownership structure, capital structure, and dividends policy will give the picture of how effective this has been to the economy of Qatar.
Effect of Income Tax on Ownership Structure
The taxation system in Qatar has primarily affected its economic growth. The government through this encourages private investment in many sectors, for example, health care, education, tourism and financial services. Amir Sheikh Tamim, the current leader of the country, is expected to focus on the infrastructure development and economic diversification by offering opportunities to foreign investments. Investment Law in Qatar allows foreign investment limited to 49 percent though there is an allowance of approval of up to 100 percent by a particular unit of the government. The income tax law had companies enjoy tax exemption that was established in the Qatar Financial Center since 2005 through 2009 contributing to interest to invest in many foreign companies. We can put it as a getaway to the achievement of the objective of the government. Firms under tax holiday and those with government exemptions are not to be taxed until the end of the contractual agreement as stated in the year 2004.
Despite the openness to foreigners through its tax system, ownership of some sectors is limited especially the oil sector. Competition is not allowed between local and foreign companies including public transportation, steel, cement, water, and electricity. The fuel sector, being the primary income generating natural resource, QFC has been careful to impose 35 percent tax rate on oil and gas operations. Revenue from the exploration of these resources is taxable. Thus, a picture on ownership still gives Qatari nationals a big hand. Note that foreign firms should use a local agent for matters related to sponsorship and have resident employees.
Residents of Qatar do not pay any personal income tax; we have income arising from business activities like rent from property, consultation services, etc. being taxable. Ownership of property, therefore, might be limited by the factor of the payable personal tax income.
Effect of Income Tax on Capital Structure
The capital structure of most Qatari companies has been seen to be influenced by the tax policies. Determinants of capital structure choice that is company size, the company asset structure, company growth and company profitability profoundly determine the tax rates that are imposed on companies in Qatari (Ashikkin, 2012).The tax benefits when realized corporations are allowed to deduct the interest payments associated with debt use. Equity payments are not tax deductible. Most companies are encouraged to use more debt as the use of debt increases the tax proceeds later on the owners. Qatari corporations and individuals on average have a low consumption of debt finance as they are not subject to any form of income taxes –corporate or personal. This culminates in an underdeveloped Qatari bond market. The total debt ratios of Qatari firms is determined by the company size, asset structure, and profitability.
Companies with tax shield as with Qatari firms should advocate for preference on debt rather than benefits that comes with the fact of not paying taxes. Tax shield hypothesis in past studies forecasts a positive relationship between profitability and leverage (Modigliani, 1963).The wise fiscal policy to benefit the company’s asset structure in Qatar should be those that aim to balance tax shield with distresses like bankruptcy costs and leverage agency costs. This will maintain the value of the company at its best position (Myers, 1977).
Effect of Income Tax on Dividends Policy
Dividends in Qatar are not taxed. The system from the year 2008 exempted non-Qatari shareholders from tax who had shares in certain Qatari shareholding companies. Taxes payable are assessed based on the share profits allocable to the foreign shareholders depending on the financial statement of the company.
Effect of VAT on Firms Cashflow
The introduction of VAT in Qatar is an excellent step to changing the tax system. The VAT Framework allows for a standard rate of 5% to be charged. A substantial cash flow will be created, and there is the probability of tax costs. VAT introduction enormously affects the SME’s cash flow that might lead to the downfall of many SME’s in the coming years in Qatar if a law forcing company is not put in place. VAT effect is not initially felt in the case where money is always flowing. However, at one point, it will be realized that a firm is either owing a lot of funds to the government or awaiting refunds. The effect of VAT can be accurately determined as at now for it has recently been introduced into Qatari tax system. A survey by Deloitte indicated that 69% of GCC businesses were concerned with not being ready for VAT(Deulgaonkar, 2017).
Conclusion
Qatar’s tax regime is a crucial factor in its fast-growing economy. Those wishing to do business in Qatar ought to understand the regulations that govern taxes and how best their firms will be set up in the country. The effects of Income on the companies will enable locals to make informed decisions on investment as well as be ready for new changes for example as for the introduction of the VAT.
References
Ashikkin, K. B.-A. (2012). The Determinants of Capital Structure of Qatari Listed Companies. HR Mars.
Deulgaonkar, P. (2017, April 16). VAT may impact cashflow of UAE comapnies:tax consultant. Dubai.
Modigliani, F. (1963). Corporate income taxes and the cost of capital:A correction ,American Economic Review.
Myers, s. (1977). Determinants of corporate borrowing . Journal of Financial Economics, 147-175.
Neil O'Brien, S. K. (2016, December 31). Doing Business in Qatar.
