Royal Decree 9/2017 issued on 19 February 2017 and published in the Official Gazette on 27 February 2017 introduces a number of changes to the Oman Tax Law. This article will summarise the major amendments.
Effective for all financial years beginning on or after 1 January 2017, the general tax rate has been increased from 12% to 15% to be calculated in respect of any taxable income of any enterprise, Omani company or permanent establishment for any tax year. Companies are subject to the new tax rate beginning in their respective 2017 tax years; e.g., a company adopting a financial year from 1 April to 31 March will be subject to the new tax rate from 1 April 2017.
The tax-free threshold of OMR 30,000, previously applicable to all taxpayers, has been removed. To support small businesses, the new Law introduces a specific lower tax rate of 3% which applies only when all the following conditions are met by the relevant taxpayer:
- The taxpayer must be an Omani sole proprietorship, partnership or limited liability company with a registered capital of no more than OMR 50,000 at the beginning of a tax year. Although the purview of these provisions is not explicitly limited to fully Omani-owned companies, the capital requirement automatically excludes foreign investment companies, which under the Foreign Capital Investment Law must have a minimum capital of OMR 150,000. Exceptions to this rule may include fully owned GCC companies, US companies established under the Free Trade Agreement, and companies registered at Knowledge Oasis Muscat and Engineering Consultancy Companies, as these may all be registered with a minimum share capital of OMR 20,000.
- The gross income of the taxpayer shall not exceed OMR 100,000 for any tax year.
- The average number of employees during the tax year shall not exceed 15.
- The taxpayer shall not carry out business in air and sea transport, banking, insurance, mining and public utility concessions. Other excluded activities may be added to this list in the future.
Tax exemptions, previously available for an indefinitely renewable period of five years to companies engaging in activities such as industry, mining, tourism, agriculture and fishing, medical care and education, have now been restricted and will apply only to industrial companies. The term has been reduced to five years only (non-renewable). The amendment is effective from 27 February 2017. The newly introduced provisions will not affect exemptions that have already been granted.
Another amendment, which will undoubtedly have far-reaching consequences, relates to the new provisions regulating withholding tax (“WHT”). The WHT previously applied only to specific categories of services provided by foreign companies without a registered entity in Oman; these included (a) royalties; (b) research and development; (c) software licences; and (d) management fees. The scope of the WHT has now been extended to all services provided by a foreign person without a taxable presence in Oman and availed in Oman. As the term “foreign person” is not defined in the Law, the WHT applies to both foreign corporations and individuals and covers all services, including those provided under existing contracts. WHT is payable upon payment for the service, by deduction to be made by the Omani paying entity, who is responsible for the payment of the relevant amount to the Tax Authority within 14 days from the end of the month in which the payment to the foreign person is made. The WHT rate is 10% calculated on the gross amount. Although Government entities (Ministries, Public Authorities, etc.) do not fall under the definition of “taxpayer,” the Law provides specifically that WHT will be due also on payments made by Government entities.
Issues will arise, inter alia, with respect to mixed contracts including the supply of goods and the provision of related services (e.g., the supply of equipment and its installation). In such cases, we understand that the value of the contract will need to be split and WHT will have to be paid on the amount relating to the services. Arguably, WHT may also apply to a wide range of payments including directors fees payable to non-resident directors, re-insurance contracts with foreign re-insurers and a wide array of other contracts. Finally, Free Zone companies, although income tax-exempt, will have to deal with WHT on services provided to them.
The same concept and the same tax rate will apply to interest payable to financial institutions abroad and to dividends payable to foreign shareholders in companies registered in Oman. With reference to dividends, it has been clarified that WHT applies only to dividends relating to shares in joint stock companies, and not in limited liability companies. The Arabic language, like various Romance languages, uses different words to describe shares in a joint stock company and in a limited liability company. The text of the Law clearly refers to shares in joint stock companies only.
The WHT applicable to interest and dividends applies from 27 February 2017 (and therefore does not apply to payments which are due before that date and properly documented, e.g., by invoices bearing a date). The effective date for WHT on services is not entirely clear as the relevant provisions are shown both in the clause defining “income” (which sets out 1 January 2018 as the effective date) and the clause describing the WHT (which sets out 27 February 2017 as the effective date).
The new tax provisions on WHT will need to be read in conjunction with any existing Double Tax Treaty between Oman and the country of origin of the foreign service provider.
Other notable amendments:
- Financial statements must comply with International Financial Reporting Standards (this requirement was previously applicable only by reference as quoted in Royal Decree 77/86);
- Tax returns must be filed electronically;
- New provisions have been included to deal with Islamic finance, to be treated on a par with standard financial transactions; and
- Donations can now be made in kind and are allowed to be deducted on the basis of a specified value determination system.
A separate article will deal with the stricter penalties introduced by the Law.
In conclusion, the Government of Oman is aiming to expand the pool of taxpayers, until this date very limited in comparison with the number of corporate entities registered with the Ministry of Commerce and Industry, and to increase tax revenues. Nonetheless, there is a possibility that some of the new provisions, such as the wide scope of the WHT, may lead to possibly unintended consequences such as the increase of costs for local businesses and the reduction of the returns of foreign investors in relation to investments in Oman, which may make such investments less attractive.