Why a VAT?
Oman is the largest oil and natural gas producer in the Middle East that is not a member of the Organisation of Petroleum Exporting Countries, otherwise known as OPEC. In the past 50 years Oman has enjoyed a lucrative revenue stream from its taxation of oil and gas, accounting for more than 70% of the Oman Government’s revenue, with a current tax rate of 55% on the sale of petroleum products. The Omani Government’s Vision 2020 plan, the final part of which is the five-year plan covering the period 2016 to 2020, aims to reduce Oman’s reliance on oil and gas production by diversifying into the services, transportation, industrial, tourism and financial sectors of the economy. This coupled with dramatic drops in the oil price in the region of 40% from its peak in 2015, and a significant budget deficit for the Oman Government, signalled the need to diversify the taxation revenue regime, remove the subsidies for petrol and roll back subsidies for domestic oil and gas consumption. The introduction of a value added tax (VAT), from somewhere between mid-2017 and the beginning of 2018, in Oman will form part of a broader taxation strategy to be introduced by the Omani Government for Oman to resolve the revenue shortfall and assist in the diversification of the economy. The intention is that the VAT in Oman will be derived from a framework agreed by all GCC member states (Member States) as part of a regional VAT strategy (GCC VAT Agreement).
What is a VAT?
A VAT is a tax imposed on most transactions in the production and distribution process. Over 150 countries worldwide have implemented a VAT (or the equivalent Goods and Services Tax). This consumption-based tax is ultimately paid by the customer in the end price for goods and services, though businesses involved in the production and distribution process are assigned the responsibility of collecting the tax, as and when the goods and services are produced and distributed. It differs from a sales tax in that a sales tax is only imposed on the final sale to the customer. The VAT tax rate in Oman is likely to be in the region of 3 to 5%. Businesses may deduct the tax paid on the inputs from the output tax (or VAT) charged to the customer. The input tax cannot be recovered for goods and services used in the production or distribution process where those goods or services are either tax- exempt or used for non-business purposes. The VAT is distinct from the corporate income tax in Oman which is levied upon the business itself.
GCC framework for the VAT
The VAT in Oman will be derived from a framework agreed by all Member States as part of a regional VAT strategy. The unified approach of the six Member States in respect of the VAT enables the economies of the Member States to compete with one another in the supply of goods and services, without creating distortions across the GCC, caused by either the structure or the implementation of the VAT being different in each Member State. The Member States intend to agree a unified VAT tax framework following which each Member State will implement its own VAT law on the basis of the GCC VAT Agreement agreed by the Member States. It is intended that the agreed framework is likely to address issues such as the scope of the VAT (which will include both goods and services), the place and the time of supply rules, valuation rules and rules applicable to input tax exemptions, intra-GCC supply of goods and services, interpretation and application. The UAE Ministry of Finance (UAE MOF) has advised through their website, on 20 June 2016, that the VAT is likely to be 5% and will require companies with an annual turnover in excess of a yet-unconfirmed amount to register for the VAT. The threshold aims to protect small businesses. It is likely that Oman will have a similar VAT rate and threshold.
When will a VAT be introduced?
A VAT is likely to be introduced from 1 January 2018 across the GCC, though some sources advise it may be as early as mid-2017. The six GCC countries intend to agree a framework for a unified customs and VAT law, and discussions are currently taking place between the ministries of finance from each of the six GCC Member States. It was originally anticipated that the GCC VAT Agreement would be finalized by 30 June 2016 but with this date upon us it is likely the GCC VAT Agreement will be finalized in the months ahead. Provided the GCC VAT Agreement is agreed by the Member States by the end of June or close to the originally proposed date, this will allow sufficient time for the business communities in each of the Member States to prepare for the implementation of the VAT by the start of 2018. Most businesses, and the respective governments in each Member State, will require at least 18 months, if not more, to establish payment and collection systems, respectively, for a VAT. The UAE MOF has advised through its website, on 20 June 2016, that the VAT will be introduced in the UAE on 1 January 2018 and, accordingly, timelines are likely to be similar in Oman.
Ratification of a VAT agreement
Ratification of the GCC VAT Agreement will not occur until all Member States have adopted the agreement, failing which each Member State may elect to implement its own VAT. Implementation of the national VAT law in Oman will occur only once the GCC VAT Agreement is ratified in Oman.
Prior to execution of the GCC VAT Agreement at the GCC Annual Submit in December of 2016, the GCC VAT Agreement must undergo several approvals from various governmental bodies in Oman. Once executed, the Ministry of Foreign Affairs (MOFA) has certain obligations to fulfill in order for execution of the GCC VAT Agreement to occur. As any VAT law to be implemented in Oman would fall within the authority of the Ministry of Finance (MOF), MOFA will be obliged to liaise with the MOF and the Ministry of Legal Affairs (MOLA) to review and assess the GCC VAT Agreement and provide its recommendation as to whether it complies with Omani law, and also to consult with the State Consultative Council. MOFA will only execute the GCC VAT Agreement once approval is received from MOLA and MOF.
Once executed, MOFA must submit the GCC VAT Agreement to the State Consultative Council comprised of the Council of State (Majis A’Dalwa) and the Consultative Council (Majlis A’Shura), in addition to the Cabinet of Ministers upon which they will provide their recommendations. Following receipt of approval, MOFA will submit the a GCC VAT Agreement to the Diwan of the Royal Court for the Sultan’s approval to ratify the GCC VAT Agreement. The GCC VAT Agreement will be ratified in the form of a Sultani Decree and published in the Official Gazette. However, this does not mean the GCC VAT Agreement will be implemented as the VAT law. A Sultani Decree enacting the provision of the GCC VAT Agreement (and any variations or additions to the GCC VAT Agreement) will be promulgated separately as a VAT law.
Promulgation of a VAT law in Oman
To implement the VAT law, the MOF and MOLA shall draft, amend and review the VAT law together. Other governmental bodies may need to review the draft. The MOLA-approved draft is then sent to the State Consultative Council who will provide its amendments the draft law. Amendments are incorporated and sent to the Cabinet of Ministers who also review and suggest amendments to it. The Cabinet of Ministers-approved draft is then sent to the Sultan for his approval and the Sultani Decree is published in the Official Gazette upon which the VAT law will come into effect (unless an effective date is otherwise prescribed).
Timeframes
Timeframes for the process and execution, ratification or promulgation of a VAT law (or any law) are not prescribed by law, although one would assume, given the financial imperatives for Oman surrounding the implementation of this law, that the process would be expedited. In practice, it is very difficult to predict with any certainty how long each governmental body will take to review and approve a VAT law. Additionally, the administrative processes to be established within the companies to be registered for VAT, as well as the administrative processes to be established by the Oman Government for the collection of the VAT, are significant and time-consuming processes.
Wednesday, June 29, 2016
Proposed VAT for Oman
Legal Updates - June 29, 2016
Ministerial Decision 139/2016 – listing new regulations related to registering commercial activities
In a move aimed at reducing barriers to foreign investment, the MOCI issued a new decision abolishing the minimum capital requirement for establishing a company in Oman. Under the new law, it will be left up to the investors to decide upon the amount of initial company capital.
Article 1 of the decision states that institutions and commercial corporations can be registered without any minimum capital requirement and without providing any certificates or documents pertaining to capital. This applies to all, except joint-stock corporations. This seeks to do away with the previous minimum capital requirement, which was considered high by foreign investors.
Article 2 states that the registered institutions and commercial corporations must present financial data related to their capital, along with any other data requested by the MOCI, within the first four months after the end of its business year. The MOCI will apply the financial disclosure system starting next year.
The MOCI has said that the decision aims to facilitate procedures, as laid down by the Ministry, making it easier for investors to conduct business, whether they are Omanis or foreigners.
Monday, June 27, 2016
Obtaining a Licence to Operate an Engineering Consultancy Office in Oman
Sultani Decree 27/2016: The Law Regulating the Work of Engineering Consultancy Offices has been issued, replacing Sultani Decree 120/94. There are two major features of this law: 1) it introduces a new section on penalties, and 2) it differentiates between individuals licenced to operate an office to provide services in one field of engineering (an “Engineering Office”) and those licenced to operate an office to provide consultancy services across multiple fields of engineering (an “Engineering Consultancy Office”).
An individual wishing to obtain an engineering consultancy licence in Oman must satisfy the following criteria:
A. the individual must be an Omani national;
B. the individual must be committed to working full-time in the engineering office or the engineering consultancy office;
C. the individual cannot work in a profession or job unrelated to the licence granted to them, and should not have a direct or indirect interest in commercial or construction activities related to their engineering projects;
D. the individual must hold a bachelor degree in one engineering specialty or the equivalent thereto;
E. the individual must be competent and eligible; and
F. the individual must have a sound reputation and not convicted of a crime related to honor or trust, unless rehabilitated.
Wednesday, June 22, 2016
Procedural Requirements for Obtaining Income Tax Exemption Status – Part 2
In a previous article, we discussed the procedural requirements that companies need to comply with to be eligible for an income tax exemption under the previous law issued by RD 47/1981 (as amended).
This article deals with procedural requirements that companies need to comply with to qualify for income tax exemption under the new Income Tax Law issued by RD 28/2009 (as amended) effective from 1 January 2010.
Ministerial Decision 30/2012 (“New Tax Law”) sets out the rules and procedures that apply with regard to a company seeking an exemption from corporate income tax.
Firstly, in order to qualify for income tax exemption status, a company must comply with the conditions laid down in Article 81 of the New Tax Law. These conditions are essentially the same as the conditions set out in the previous law, except for the following additional conditions that have been added to the new regime:
Wednesday, June 15, 2016
Liquidated Damages vs Penalty Clauses in Oman
Readers may be aware that, in common law jurisdictions, a liquidated damages clause may be void as a penalty if the amount payable under such a clause does not represent a genuine pre-estimate of the actual damages for breach of contract. Article 267 of the Civil Code (RD 29/2013) in effect provides something similar. The Article provides:
- If the subject matter of obligation is not a sum of money, the contracting parties may determine the amount of compensation in advance by making a provision of same in the contract or in a subsequent agreement.
- In all cases, the court may, upon the application of either of the parties, amend such agreement to make the compensation equal to the damage, and any agreement to the contrary shall be null and void.
Wednesday, June 8, 2016
Telecommunications in Oman – Access and Interconnection
The mandatory provision of interconnection and, in certain cases, access is a common requirement in regulated telecommunication markets internationally. In April 2016, the Telecommunications Regulatory Authority of the Sultanate of Oman (“TRA”) issued the Access and Interconnection Regulation (the “Regulation”). This comprehensive Regulation is expected to open the Omani market to additional telecommunication licensees and/or re-sellers on the basis that its main purpose is stated to be the development of investments in the telecom sector and the creation of sustainable competition within the sector.
Under the Regulation, all telecommunication companies providing their services to the public in the Sultanate have an obligation to provide interconnection and access to certain physical infrastructure and other facilities to requesting parties and wholesale customers. Access and interconnection must be provided on an equal and non-discriminatory basis.
Thursday, June 2, 2016
Oman Office Update
Curtis is pleased to announce a new arrangement with expanding Omani litigation firm Mehdi Al Lawati Law Office (MALO). Effective from 2 June 2016, the new association is exclusive to Curtis.
The lawyers at Curtis and managing partner of MALO, Mehdi Al Lawati, know each other well, having already worked closely for over a decade. Experienced lawyer Mehdi Al Lawati has excellent relationships with the firm's clients in Muscat and is an integral part of Curtis' litigation and arbitration offering to clients.
Curtis' disputes capability will be further enhanced by the arrival at MALO of seasoned litigation lawyer Jamal Al Amri, who is licenced in the Primary and Appeal Courts in Oman.
News of Curtis' enhanced local litigation capability comes on the heels of the promotion of partner Simon Ward to Head of Disputes in the firm's Muscat office.
Bruce B. Palmer, Curtis' managing partner in Oman, commented "Running a market-leading disputes practice means constantly developing and growing the offering to clients. We are very happy with the arrangement and with Simon's promotion and look forward to Curtis' continuing excellence in the disputes field."
