With a planned major reduction in its only significant levy, on corporate income, the two Gulf countries are now seen as an enticing spot for entrepreneurial wealth creation, said the latest Forbes Misery & Reform Index.

And reducing the entrepreneurial tax load is a move that can help Gulf countries diversify their economies away from oil and gas.
Jack Anderson, author of the report, who is an international tax attorney in the US and the EU, said: "The tax competition today is truly global.

Perhaps the greatest ferment on this front today is in the Gulf, where various governments are trying to broaden their economies beyond oil wealth. [Besides Qatar] other states in the region also are jockeying to try to gain or protect an edge. " In Qatar, according to KPMG's Corporate and Indirect Tax Rate Survey 2007, a corporate income tax rate of 35 per cent is the maximum rate in a progressive rate structure and is applicable to income in excess of QR5 million (Dh5.048m).

However, tax is only imposed on foreign companies operating in Qatar or Qatari companies with foreign shareholders. Companies that are wholly owned by Qatari shareholders or GCC nationals are exempt.

Certain companies established pursuant to an emiri decree may be subject to a specific flat tax rate rather than the standard progressive rates. In the UAE, there are no corporate income taxes at a federal level, but individual emirates have issued their own income tax decrees. Although in theory these emirate-level decrees impose tax on the income of all corporate entities, in practice tax is only enforced on foreign oil companies and branches of foreign banks.

However, there is no guarantee that this will continue to be the case, said KPMG.Although the tax rate applicable to oil companies is generally 55 per cent of operating profits, the amount of tax actually paid by such companies is based on a rate agreed in individual concessions between the company and the respective emirate. Branches of foreign banks are taxed at 20 per cent of their taxable income in the Emirates. Similarly, municipal taxes are also levied in some of the emirates.

While the GCC has long been known for its tax-free environment, the World Bank has advised the region to impose indirect taxes such as VAT as a part of overall fiscal reforms intended to ease reliance on volatile oil sales, as reported in Emirates Business on April 2.

"GCC states need to embark on reforming their financial system because of several factors. Despite the oil boom, there are no signs that oil prices will rise further in the future, especially with the growing investment and current expenditures in member states - oil reserves in such members as Bahrain and Oman are being depleted - and considering the high rates of unemployment and expenditure, resources need to be both rationed and diversified," said Sufyan Al Issa, an adviser to the World Bank's executive director.

If taxes such as VAT are introduced in the GCC, Qatar and the UAE's position may change next year in the index.Comparing the Misery Index of 2008 to that of the first one released in 2000, all but a handful of countries in the index have got better for entrepreneurs.

The US awaits more reform, especially in high-tax jurisdictions like New York City. The bad news is for the countries at the top of the index - mostly in Continental Europe: it means more misery for the most miserable.

The increases are generally coming in individual income taxes and the social security taxes supporting a social system strained because of government inefficiencies and a demographic wave of retirees. Meanwhile, Asia generally lacks the social security tax problem, with China as the exception, said Forbes.

Tax and Misery Reform Index
1 Qatar
2 UAE
3 Hong Kong
4 Georgia
5 Malta
6 Macedonia
7 Cyprus
8 Bulgaria
9 Pakistan
10 Kazakhstan
17 Philippines
18 United States
21 India
41 United Kingdom
62 China
66 France

By Shuchita Kapur
Emirates Business