Proposed VAT for Oman

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.