Managing the crisis: General tax considerations on managing working capital of businesses

Doha: From a tax compliance perspective, as we have observed globally, tax authorities have been quick to respond to the crisis mainly through short term alleviating measures such as an extension of tax filing deadlines and deferral of tax payments to allow businesses to adjust to new ways of working. However, organisations should also carefully consider existing relief measures embedded in the local legislation from a managing working capital aspect. For example, changes in accounting policies may be used to accelerate tax deductions and defer revenue recognition (or do the opposite if they are loss making). In addition, the re-evaluation of intercompany transactions through the review of transfer pricing policies to reflect the current market conditions, or the reassessment of existing intercompany financing policies and cash pooling arrangements with the view of reducing costs, also comprise effective relieving measures.

The QFC’s tax regime offers firms several features to efficiently manage their working capital. The QFC operates a territorial tax regime whereby only locally sourced profits (as defined) are subject to tax. The regime also offers concessionary treatments (exemptions or reduced rate) on election basis, subject to certain requirements drawn from international tax standards.

These incentives, combined with the reduced tax base and mild rate, result in a moderate tax burden. A reduction of costs is generally an important factor for companies’ performance and cash flow management. This is more so in a crisis context.

In its purest form, VAT should not affect a company’s profits because it is borne by the final consumer. However, being a tax, it has a compliance cost, which translates into a reduction in cash flows. Also, the time difference between paying the input VAT on purchases and collecting output VAT on sales results in a cash flow gap. This gap may become an issue where the company has a VAT credit, as it needs to submit a refund request, incur additional costs and wait for more time before the refund is obtained.

The absence of VAT in Qatar is sufficiently important to be highlighted, as it brings savings in time, costs and cash flows.

Qatar has more than 80 effective tax treaties covering most of its trade partners. QFC firms have access to this network, allowing them to benefit from the concessions and guarantees offered by these treaties. The access to these benefits is operationalised in coordination with the General Tax Authority.

Because the treaty benefits result in reduced tax liabilities, they may be lawfully used to reduce tax costs and improve cash flow positions.

Taxable profits in QFC are based on accounting profits as adjusted for tax purposes. Any accounting principle that is consistent with IFRS or other GAAPs that are accepted under the QFC tax regulations and that result in a deferred recognition of revenues or accelerated deduction of expenses, will be accepted in the determination of the tax base, provided there is no explicit restriction in the tax regulations.

This allows companies to reduce the tax liability and improve their cash flow position.

Losses may be carried forward indefinitely in the QFC. This allows their use to reduce tax liability in subsequent profitable years.

Further, QFC entities that are part of a group may transfer losses amongst themselves to reduce the tax liability of profit-making members using the losses incurred by loss-making members.

This article was co-authored by Salah Gueydi, Director of Tax at Qatar Financial Centre (QFC); and Jennifer O'sullivan, Tax and Legal Partner at PwC Qatar.