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Bahrain: Minister of Finance signs the GCC Unified VAT and Excise Tax Treaties

In brief

On 1 February 2017, the Kingdom of Bahrain signed the GCC unified VAT and Excise Treaties. The Minister of Finance stated that Bahrain is planning to introduce VAT by mid-2018 and is targeting to introduce Excise Tax by mid-2017. The normal constitutional processes will need to be completed prior to the introduction of the taxes.

In detail

The GCC Unified Treaties for VAT and Excise Tax (the Treaties) are the framework through which GCC Member States will implement their own VAT and Excise Tax national legislation and executive regulations.

Signing the Unified Treaties is one of the final steps required before the application of the taxes in Bahrain. The signature of the Unified Treaties suggests that VAT will be introduced in Bahrain by mid-2018, imposed at an expected rate of 5% for most goods and services, with certain exceptions.

The Excise Tax is planned to be introduced by mid-2017 in Bahrain, with tobacco products subject to excise tax at 100%, soft drinks at 50% and energy drinks at 100%. Other goods may become subject to the tax.

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OECD publishes BEPS peer review documents for exchanges of tax rulings and country-by-country reports

On 1 February 2017, the Organisation for Economic Cooperation and Development (OECD) published documents detailing the processes for review of countries’ implementation of two of the OECD/G20 Base Erosion and Profit Shifting Project (BEPS) minimum standards. These relate to the compulsory spontaneous exchange of information amongst tax authorities of:

  • tax rulings (the ‘transparency framework’), in accordance with Action 5, and
  • country-by-country reports (CbC reports), in accordance with Action 13.

These annual reviews encourage comments on a country’s implementation of the respective standards from its peers in the BEPS Inclusive Framework, currently comprising around 100 countries. The peer review and monitoring process for the transparency framework will be conducted by the Forum on Harmful Tax Practices (FHTP); the process for CbC reports will be conducted by an ad hoc ‘CbC Reporting Group’, comprising delegates of both OECD Working Party 6 and Working Party 10 under the aegis of the Inclusive Framework.

‘Terms of reference’ include each of the elements that a jurisdiction needs to demonstrate it has fulfilled in order to show proper implementation of each standard. The ‘methodology’ contemplates collecting the data points relevant to the peer review by using standardised questionnaires sent to the reviewed jurisdiction as well as to the peers.

The OECD does not specifically seek business and civil society groups’ participation in the formal evaluation processes. However, the publication of the upcoming review schedules would enable interested parties to provide information either to tax administrations or to the OECD Secretariat. The documents note that the final annual reports summarising the findings and recommendations will ultimately reflect only the views of each jurisdiction reviewed and its peers.

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New rules providing 100% foreign ownership will boost investment in Bahrain

The Kingdom of Bahrain is in the process of making comprehensive changes to its corporate laws and procedures to make it easier to set up and carry out business in Bahrain. The changes will allow for easier company incorporation, the streamlining of the company administration process and the easing of restrictions on foreign ownership.

A series of new laws and amendments have been introduced over the last 24 months to modernize and streamline the regulatory regime, enhance corporate governance and increase accountability, empower shareholders and facilitate foreign participation in Bahrain companies. They are designed to promote enterprise in Bahrain and encourage foreign investors to choose Bahrain as a destination of choice for doing business in the Middle East.

The Bahrain cabinet has further announced that it is to allow 100% foreign ownership in residency, real estate, administrative services, health and social work, information and communications, manufacturing, mining and quarrying, food, arts, entertainment and leisure, water supplying and professional, scientific and technical activities.

Business opportunities in Bahrain are set to increase heavily in the period leading up to the new the Ministry of Industry and Commerce (MOIC) regulations, which for the first time puts Bahrain on a competitive footing with some of the region’s mega free zones and business hubs. The nature and size of the proposed business, as well as the particular requirements of investors, will govern the choice of legal structure in Bahrain. All types of Bahraini companies give the shareholders or the directors an Investor’s Residence Visa.

Bahrain imposes no exchange control restrictions on repatriation of capital, profits and dividends, enabling full financial transferability of capital, profits and dividends. Bahrain currently levies no taxes on personal or corporate income. There is no capital gains tax, no withholding tax and VAT.

Forming a company in Bahrain offers excellent access to the GCC states, especially Saudi Arabia, which is the largest market in the region. Bahrain has an expanding treaty network that includes over 30 double tax agreements with key partners in Asia, Europe and the Americas, as well as the Middle East and Africa. This is supplemented by bilateral investment treaties with countries including India, Italy and the US, and Free Trade Agreements with trading partners such as the US and Singapore.

Potential investors should speak to a consultant to ensure that the company they are establishing complies with the various new MOIC rules and regulations. Sovereign is in a unique position, through its global network of offices, to give guidance on suitable structures available to meet any personal and business requirements.

The Bahrain property market is already highly competitive when compared to other regional locations due to its attractive residential and commercial rents and values, but the huge monetary investment into the city and its infrastructure combined with the new opportunities for foreign investment will certainly help to support sustained activity in the long term.

Given the boost to real estate values and rents in Bahrain, property owners should be ensuring that their ownership structures and succession plans are fit for purpose. Many property owners are not fully conversant with local legal procedures or taxes and may not fully recognize the longer-term implications in terms of potential exposures to capital gains tax, inheritance tax or forced heirship rules. Substantial benefits may be derived through the use of corporate, trust or foundation structures to address these issues.

Sovereign assists many of its clients with the acquisition of real estate worldwide. We advise on tax and structuring and can manage the transaction process and financing arrangements. With our regional knowledge of property ownership laws and regulations, along with our tax planning expertise, we can help you reduce any potential exposure.

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Singapore to keep pursuing other Free Trade initiatives

Singapore says it will continue to participate in other free trade initiatives, as members of the Trans-Pacific Partnership (TPP) consider new options after new US President Donald Trump ditched the trade pact that he said kills American jobs. The Ministry of Trade and Industry (MTI) told The Straits Times that the Republic will also have to “discuss the way forward” with TPP partners.

“Each of the partners will have to carefully study the new balance of benefits,” MTI said in a statement. Countries from Singapore to Mexico are now considering their next move, after Mr Trump signed an executive order to withdraw the US from the 12-nation TPP that together accounts for 40 per cent of world trade. He also vowed to renegotiate a free trade agreement with Canada and Mexico.

Australia and New Zealand said they still hope to salvage the TPP despite the US withdrawal. But the deal cannot go into effect in its current form without US participation, MTI said.

“Singapore is committed to pursuing a rules-based trading system and greater regional integration,” it added. “The agreement that the TPP parties has negotiated is one such pathway to achieve stronger trade linkages that will promote growth opportunities and job creation in all the member countries.”

The MTI spokesman said Singapore will continue to participate in regional initiatives such as the Regional Comprehensive Economic Partnership (RCEP) and the proposal for a Free Trade Area of the Asia-Pacific. RCEP is an Asia-Pacific trade liberalisation initiative led by China that includes the 10 Asean members as well as Australia, New Zealand, Japan, South Korea and India.

Meanwhile, the Singapore Business Federation (SBF) called on the Government to join and encourage other TPP member countries to push for the implementation of the TPP, with or without the US. “Without the US, the TPP continues to provide substantial benefits for businesses as the US market is already quite open,” noted SBF chief executive Ho Meng Kit.

Singapore already has a bilateral free trade pact with the US, as well as with all of the other TPP countries except Canada and Mexico. This means the about-turn by the US “might not have much detrimental impact on Singapore”, noted DBS economist Irvin Seah.

The Trump administration’s shift towards greater protectionism could hurt more, he said, adding: “This will deal a big blow to global trade liberalisation. It is negative for Singapore because we are a small, open, trade-dependent economy.”

Other TPP partners have also expressed their keenness to make the deal work. Australia’s Trade Minister Steve Ciobo, for one, told ABC Radio that a TPP without the US was “very much a live option”. Japan, another TPP member, has been pressing other signatories to push on with the pact too, while suggesting it will try to change Mr Trump’s mind before next year, the deadline for the deal’s ratification.

Prime Minister Shinzo Abe’s top adviser Yoshihide Suga told CNBC: “We believe we still have an opportunity to convince the US about the importance of free trade.” But Professor Kamel Mellahi of Warwick Business School said: “The survival of the TPP trade deal is inconceivable. Plus, many Asian countries have an alternative in China’s proposals.”

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Bahrain, US Sign FATCA Agreement

Bahrain has signed an agreement to implement the US Foreign Account Taxpayer Compliance Act with the United States.

FATCA, enacted by the US Congress in 2010, is intended to ensure that the US obtains information on accounts held abroad at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30 percent tax on payments of US-sourced income.

The Intergovernmental Agreement will provide for a simplified framework for Bahraini financial institutions to comply with the US FATCA, through a centralized agency, and remove any legal restrictions on the collection and exchange of the relevant information.

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EFTA and India continue Free Trade Talks

The EFTA states – Switzerland, Liechtenstein, Norway, and Iceland – and India recently discussed how to push for the conclusion of a bilateral free trade agreement.

The free trade negotiations started in October 2008, with 13 rounds being held until November 2013. Chief negotiators decided to resume negotiations in 2016 after taking stock of their status and held a 14th round of negotiations in October 2016.

The two parties held a 15th round of negotiations in New Delhi on January 11-13. Experts from both sides held targeted discussions on outstanding issues regarding trade in goods, trade in services, rules of origin, and intellectual property rights. They also reviewed the state of play of all other topics under discussion.

Both sides agreed to continue negotiations with a view to concluding an agreement in the near future. The next round of negotiations will be held in Geneva in spring 2017.

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Key tax related items from the 2017 National Fiscal Budget of Kingdom of Saudi Arabia

The Kingdom of Saudi Arabia (KSA) National Budget 2017 sees a progressively lower budget deficit with the aim of achieving break even by 2020. The government has considered taxes as one of the sources for additional revenue with the introduction of certain new/revised levies on expatriates and, most notably, the Value Added Tax (VAT). Whilst these reforms will result in additional revenue for the government, it may increase the cost of doing business in KSA.

Expatriate Levy

Currently, companies pay a levy of SAR 200 per month per expatriate employee, but only for expatriate employees that exceed the number of Saudi employees. From next year, this fee will be increased gradually (from January every year) until 2020. Furthermore, for expatriate employees not exceeding the number Saudi employees, the fee will no longer be waived but will be levied at a discounted rate.

In addition, a new fee on dependents of expatriate employees will be levied. This fee will be applicable from July 2017. The fee will be SAR 100 per dependent per month and will increase gradually every year until 2020.

The potential plans to levy income tax and or remittance tax on expatriate employees has been placed on hold for now.

Value Added Tax (VAT)

The Saudi National Budget 2017 revealed that KSA signed the GCC (member states comprising Bahrain, KSA, Kuwait, Oman, Qatar and UAE) unified framework agreement for VAT in December 2016. The Saudi National Budget 2017 also confirmed the implementation of VAT in KSA from January 2018.

The current indication is that most goods and services will be subject to VAT at 5%. Certain goods and services may be either zero rated or exempt from VAT. More details on applicability of VAT will be available once the GCC framework and KSA VAT law is published.

Excise Tax on harmful goods

Excise tax will be implemented on certain products that are viewed to be harmful to individual’s health.

Excise Tax of 50% on soft drinks (at this stage, there is no indication on whether it will apply to all or specific soft drinks), and 100% on tobacco products and energy drinks will be imposed from April 2017. This will result in these specific products becoming costlier and potentially achieving the objective of reduced consumption.

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Revision of Tax Treaty between India and Cyprus: Beginning of New Era

History

India and Cyprus had signed an agreement in June 1994 and were bound to exchange information to avoid tax evasions.  It is considered to be a tax haven before 2015 and stands seventh on the list of Foreign Direct Investment (FDI) destinations in India. India received foreign investments of approximately INR 42,680 from Cyprus from April 2000 to March 2016.

On 1st November, 2013 India has marked Cyprus as “Non- Cooperative Jurisdiction/ Notified Jurisdiction” under Section 94A of Income Tax Act, 1961 of India, upon its failure to disclose crucial information about money being transferred by Indian citizens and are suspects of tax evasions. Consequently, the transactions for transferring the funds from and to Cyprus reduced to avoid payment of higher withholding taxes and disclosure requirement. The authorities at Cyprus recognized the need to take effective steps in this regard and initiated change in their policies.

In October, 2015 the Organization for Economic Cooperation and Development (OECD) declared that Cyprus had been found to be complaint with the requirements and standards laid down by Global Forum on Transparency and exchange of information for tax purposes. Cyprus got rating equals to United States, United Kingdom and Germany. With this, Cyprus lost its status of a tax haven.

The new Treaty

Mid 2016 has been a very significant period for tax treaties of India with major tax havens. Marking a historic change, India – Mauritius tax treaty have been re-negotiated and it began a new chapter of foreign investments in India.

On 29th June, 2016 the Ministry of Finance of Cyprus issued a statement that they have completed the negotiations with India and reached at agreements on all pending issues between India and Cyprus after an official level meeting held on 28th and 29th June at New Delhi. On 1st July, 2016 the Indian Ministry of Finance issued a press release confirming the same and mentioning to provide a “Grandfathering clause” for investments made prior to 1st April, 2017 for residence based taxation of capital gains. These agreements also paved way for removal of Cyprus from notified jurisdictions with retrospective effect.

These provisional agreements later been put before the cabinet of Indian Government headed by Prime Minister of India and approved by the Cabinet in August, 2016. The approved agreements which will now replace the 1994 treaty were signed on 18th November, 2016 at Nicosia, the capital of Cyprus. Mr. Ravi Bangar, high Commissioner of India to Cyprus and Mr. Harris Georgiades, the Minister of Finance of Cyprus has signed the agreement on behalf of India and Cyprus respectively. It is expected to come into force with effect from coming financial year i.e. 1st April, 2017.

The Major Provisions

The new agreements provide for source based taxation of capital gains arising from transfer of shares rather than residence based taxation as provided under previous treaty. Accordingly, all the capital gains from transfer of shares can now be taxed in country of transaction and India shall benefit by taxing the transactions undertaken in the country by Cyprus residents.

It is important to note here that as provided by the “Grandfathering clause” in the agreement, investments made prior to 1st April, 2017 can be taxed in the country where the taxpayer is resident.

The new agreement broadens the scope of permanent establishment and rate of withholding tax on royalties is reduced from 15% to 10% to bring it in line with the tax rate under Indian Laws.

New agreement also defines the provisions related to the exchange of information between the countries as per international standards and both the countries assisting each other for collection of taxes. This new treaty also paves the way for removing Cyprus from “Notified Jurisdiction” in India with retrospective effect from November, 2013 after the treaty comes into force.

Conclusion

This is a welcome move for investor and industry in both the countries. Both the countries have enjoyed good trade relations in past decades and this step shall definitely foster the growth. Cyprus shall once again become one of the largest sources of FDI in India and other parts of the world. The government’s keenness to improve the level of transparency in investments to and from Cyprus have already started delivering results and Cyprus has become a popular destination for European investors under Alternate Investment Fund Manager Directive. If Cyprus manages to keep up with robust compliance and transparency, it shall soon be most preferred destination for investment vehicles across the world.

For more details reach us at [email protected]

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Treaty Updates

  • Saint Kitts and Nevis – United Arab Emirates: DTA Signed
  • Hong Kong – Romania:  DTA Signed
  • Cyprus – India: DTA Signed
  • Germany – Australia: DTA entered into force
  • Canada – Madagascar: DTA Signed
  • Russia – Singapore: DTA entered into force

 

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Saudi Arabia, Turkey sign 8 agreements to promote business

RIYADH: Saudi Arabia and Turkey have signed eight agreements in Istanbul in the presence of Commerce and Investment Minister Majid Al-Qassabi and Turkish Economy Minister NihadZabka to boost bilateral trade.

The signing of agreements took place during the Saudi-Turkish Joint Business Council meeting in Istanbul.

Speaking after the signing of the agreements, Zabka said that Turkey has set up an investment-friendly climate for foreigners to do businesses with a sense of security, which would protect their interests in the country. “We have removed all obstacles and facilitated smooth investment procedures in Turkey,” Zabka noted, adding that Saudi and Turkish businessmen can harness these incentives for mutual interests.

Responding to Zabka’s speech, Al-Qassabi said that such incentives are important for the two countries to forge ahead.

Mazen Rajab, head of the Saudi side of the business council, said that Saudi investments in Turkey have reached $10 billion which is a healthy growth of bilateral trade.

Saudi companies mainly invest in the industrial sector in Turkey in collaboration with the Turkish private and public sectors. They can also increase their investments in agricultural, finance, tourism and communications sectors.

Turkey, on the other hand, has had a sizable number of highly qualified and technologically superior contractors who are present today in every part of the globe, including the Arabian Gulf states.

In the field of tourism, Turkey has been doing very well. A total of 39 million tourists visited Turkey in 2013, raising revenue from tourism to reach $32 billion.

“Economic ties between the two countries are strongly backed by identical approaches on the whole range of bilateral and regional issues,” YunusDemirer, the Turkish ambassador in Riyadh, said in an earlier interview.

Trade between Turkey and Saudi Arabia has been growing consistently. Around 80 percent of Turkey’s exports to the Kingdom are industrial products, whereas agricultural products account for 10 percent of exports.

On the other hand, the bulk of Turkey’s imports from Saudi Arabia come from crude oil and petrochemical products.

A close observation of the imports shows that the share of crude oil in total imports declined from 79 percent to below 40 percent between 2000 and 2014, while the share of petrochemicals increased drastically (the value of imports of polypropylene rose to $1 billion) in the same period. On the other hand, the decrease in the last two years was mainly related to the decline in crude oil prices.

Speaking about the upswing in trade and investment, Ambassador Demirer said that there is a genuine opportunity to establish a long-term partnership between the Turkish and Saudi business communities. Saudi visitors feel at ease in Turkey, says the envoy.

“As neighbors and two of the world’s oldest civilizations, Turkey and Saudi Arabia have shared a long history of religious, cultural, scientific and economic linkages,” said the envoy, adding that Turkish imports from Saudi Arabia have been traditionally dominated by fossil fuels.

For more details reach us at [email protected]

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