Managing the Crisis: Financial restructuring from a tax perspective

Doha: As the COVID-19 pandemic continues to bring unprecedented challenges through its economic and financial impacts, the IMF revealed its updated projections of the global economic growth to stand at -4.9 percent in 2020, which is 1.9 percent below the April 2020 forecast. 

In the Middle East and Central Asia region, while growth is projected at –4.7 percent in 2020 according to the IMF, GCC countries are expected to see a rebound in their GDP in 2021 at a 2.5 percent pace, which will be among the highest economic recoveries.

However, until this recovery is confirmed, businesses in the region must face the effects of the current economic downturn and try to minimise its impact on their cash flows and working capital. Businesses may sustain losses but not a lack of cash flow.

Depending on the business model an organisation adopts, there is a set of tax considerations that are relevant in order to manage working capital. In many respects, the requirement to adapt brought about by the present situation will give rise to an opportunity for businesses to accelerate decisions which will be of benefit long-term, enabling them to operate in a more efficient and agile manner, reduce cost and mitigate risk.

Confirming its commitment to support its firms, particularly in crisis times, the Qatar Financial Centre (QFC) has introduced the following tax measures: an extension of the tax filing deadline by up to two months by simply invoking the COVID 19 pandemic as a reason; a waiver of the Late Payment Charge by reducing its rate from 5 percent to 0 percent effective until August 31, 2020; and a waiver of the charge on qualifying QFC entities that elect for the 0 percent Concessionary Rate if the election is made in 2020. 

QFC firms may also use several features of the QFC tax regime to efficiently manage their working capital. 

As a general principle, the QFC regime allows firms to carry out restructuring transactions in a tax neutral manner such that any profits that are achieved as a result of these transactions are disregarded for tax purposes.

This feature is extremely relevant in a crisis context, where companies need to restructure their operations and organisation to mitigate the impact of the crisis.

In difficult times, companies tend to optimise their resources and move around their cash to use it where it is needed most. This transfer of cash can be made in different ways, including through loans, dividends, interest, fees, and others. The tax treatment of outbound payments is therefore extremely important in this case.

In the QFC, dividends are exempt from tax. Also, payments to non-residents are eligible for a concessionary treatment. This allows QFC firms to efficiently manage their working capital and cash flow needs without incurring additional tax costs.

Overall, the approach to tax compliance within an organisation should be risk focused, aligned with the key strategies of the organisation and use technology wherever appropriate. This will drive down the cost of compliance but allow businesses to do more with less and increase effectiveness. By adopting such an approach, this will position the business to be ready for future changes and growth.

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.