Monday, November 26, 2018

Arrival of Value Added Tax (VAT) in Oman

Towards the end of 2016, the Gulf Cooperation Council (GCC) member states agreed and signed a Unified VAT Agreement (the “Unified Agreement”) for the introduction of value added tax (“VAT”).  The Unified Agreement sets out the framework through which each individual GCC member state will implement domestic VAT legislation.  The intention was that VAT would be implemented by the GCC states by 1 January 2018.

Implementation so far

The United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA) introduced VAT in accordance with the terms of the Unified Agreement on 1 January 2018.  Both countries enacted a VAT Act together with Implementing Regulations.  Bahrain has recently announced that VAT will be introduced in the country on 1 January 2019 and has published the Arabic version of its VAT law.  Qatar has indicated that it may introduce VAT later in 2019, while Kuwait may potentially delay implementation until 2021.

We understand that the Omani VAT legislation is currently being prepared and that VAT may be introduced as early as 1 September 2019, though it may be delayed until 1 January 2020.

Key terms of the Unified Agreement

Under the terms of the Unified Agreement, VAT will apply to goods and services at the standard rate of five percent.  Although the majority of the VAT compliance requirements are left to the discretion of the member states to be determined in their respective VAT legislations, the Unified Agreement requires businesses with an annual turnover of SAR 375,000 (or its equivalent from any other GCC member state currency) to register for VAT.  Businesses generating half of the turnover threshold may register for VAT on a voluntary basis.

Under the terms of the Unified Agreement, the following must be zero rated (i.e., subject to zero percent VAT rate):  medicine and medical equipment; the transport of goods and passengers (intra-GCC and international) and associated ancillary services; export of goods outside of the GCC; and certain transactions in gold and silver.  Certain food items (e.g. bread, milk), oil and gas including oil derivatives, and the supply of means of transportation for commercial purposes may be zero rated at the discretion of each individual member state.  The member states also have the discretion to exempt or zero rate, as they deem fit, supplies made in the education, healthcare, real estate, and local transport sectors.

The Unified Agreement requires VAT due on import of goods to be paid at the first point of entry in the GCC.  However, in the event that goods imported are exempt or zero rated in the country of importation or exempt from customs, such goods will be exempt from VAT.  Financial services are also exempt from VAT under the terms of the Unified Agreement.

Preparing for VAT in Oman

Although VAT is unlikely to be introduced in Oman until 1 September 2019 at the earliest, it is best to start preparing for the implementation of VAT sooner rather than later.  The UAE did not issue its VAT Implementing Regulations until November 2017, while KSA only issued them in September 2017.  In both instances, companies waiting for the issuance of the Implementing Regulations in order to prepare for VAT realised they did not have enough time to fully comply with the legislation.

It is imperative for companies to review existing contracts which will continue until 1 September 2019 or beyond and determine if the contracts include clauses relating to the payment of VAT.  In the event that such transitional contracts do not have VAT clauses, it may be useful to determine if the counterparty will agree to an amendment to include a VAT clause, and if it is in the company’s interest to do so.  It may also be helpful to identify what portion of the supply will be subject to VAT.

In the event that transitional contracts do have VAT clauses, it is worth considering whether the company will practically be able to collect the amount of VAT chargeable in respect of such contracts, particularly if the payment in respect of such contract has already been made.  For example, in the UAE insurance companies struggled during the transitional period to collect VAT in respect of individual insurance policies where the premium had already been paid.

All contracts expected to continue until 1 September 2019 or beyond should include relevant VAT clauses and the parties should determine who will be responsible for paying VAT.  Companies should also consider the impact VAT will have on cash flow, particularly in instances where customers are invoiced but will not be required to make payment until later (or where a customer usually pays the invoiced amount late).  VAT is payable upon the issuance of a tax invoice, regardless of whether the customer has paid such amount.  This may have a significant impact on a company’s cash flow, and may require reconsideration of payment terms.  Third-party vendors may also be reconsidered on the basis of whether or not they are VAT registered, which will allow the company to deduct input tax.  In the event that a company has many customers outside of Oman, yet within the GCC, the treatment of VAT on supplies to such customers should also be considered.

In the case of group companies, the Unified Agreement provides for a group of companies in the same member state to be treated as a single taxable person (a “tax group”).  The group of companies will need to determine if it advantageous for them to register as a tax group.

On a practical note, companies will need to ensure that their software takes into account VAT pricing and that they are able to issue tax invoices in accordance with the relevant legislation.  For example, in KSA, VAT invoices for amounts over SAR 1000 are required to be in Arabic.  As a result, all companies needed to ensure that they had the relevant software to issue VAT invoices in the requisite form from the day the VAT legislation went into force.


Monday, November 19, 2018

Secondment of Employees in Oman

The Oman Labour Law issued by Royal Decree 35/03 (as amended) does not provide for or recognise the concept of secondment.  However, in practice, it is fairly common for foreign commercial companies to second their employees to local entities pursuant to a secondment agreement with the new company or the local partner.  This facilitates compliance with local law requirements, which require mandatory permits for the secondee to be employed and to reside in Oman.

Over the years, certain conventions have evolved which do not have the force of law, but which most companies follow when seconding employees in Oman.  Below we set out some of the more important of these conventions:

  1. The secondee always remains the employee of the foreign company regardless of any agreement that the local company may be required to enter into with the secondee for the purpose of obtaining employment permits.
  2. The local company “employing” the secondee and the foreign company providing the secondee should enter into a secondment agreement setting forth the terms of secondment and providing essential safeguards for the local company, foreign company, and the secondee.
  3. The local company should act as the local sponsor for the secondee for the purpose of procuring the requisite visa and the residence permit for the secondee and, as the case may be, for the family members of the secondee under the same sponsorship.
  4. The local company should provide the necessary amenities to the secondees (and to the dependants, if agreed) during the secondment in accordance with the agreement between the parties as indicated in the secondment agreement.
  5. The secondees are expected to perform their duties in Oman in accordance with the terms of their secondment and the policies of the local company.
  6. The foreign company is expected to withdraw the secondee immediately in case of misconduct or breach of any provision of the local laws by the secondee.
  7. Any material change to the job profile or designation of the secondee is subject to mutual agreement between the foreign and local companies.
  8. As the provisions of the Omani labour law would apply to all persons employed in the private sector including secondees, sufficient safeguards must be provided in the secondment agreement to exclude the applicability of Omani labour law and the jurisdiction of Omani courts in case of disputes arising from the secondment. 


Monday, November 12, 2018

Replacing London Interbank Offered Rates (LIBOR)

Current background

Following the 2008 financial crisis, liquidity in the interbank loan market fell significantly to the point where over seventy percent of the bank quotations on which LIBOR is set were based on judgements by the panel banks as to their own costs of credit, rather than being based on the interest rates for actual interbank loan transactions.  Not surprisingly, as came to light in 2012, the LIBOR market became subject to manipulation by bank participants.  While UK bank regulators undertook various reforms to address the problem, because liquidity has not returned to the market, concern over the reliability of LIBOR persists.  Consequently, the UK Financial Conduct Authority (FCA), which began regulating LIBOR in 2013, has promoted the phase-out of LIBOR in favour of reference rates based on verifiable market transactions.  The FCA has targeted the end of 2021, a little over three years from now, for the phase-in of new risk-free reference rates (RFR) to be completed.  While it remains possible that LIBOR also will continue to be quoted after 2021, given the uncertainty, floating rate debt, as well as swaps and derivatives, with tenors extending beyond 2021 should include appropriate LIBOR fallback and replacement provisions.

Alternative RFRs

Various currency-specific industry working groups, in coordination with their relevant regulators and central banks, are developing the new RFRs expected to replace LIBOR.  In the U.S., with respect to the dollar, the effort is led by the Alternative Reference Rates Committee (ARRC).  ARRC is an ad hoc committee convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York and is comprised of representatives from leading U.S. banks, industry groups, and regulators, including the U.S. Treasury, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission and Securities Exchange Commission.  ARRC has identified the so-called Secured Overnight Financing Rate (SOFR) as the reference basis for a U.S. dollar RFR.  SOFR is a volume-weighted median of rates on overnight repos collateralised by U.S. Treasury securities.  The New York Fed began publishing SOFR in April 2018, and overnight indexed swaps and futures in SOFR already have begun trading.  Once sufficient liquidity develops, ARRC intends to fashion term reference rates based on SOFR derivatives.

In the UK, the effort is led by the Working Group on Sterling Risk-Free Rates operating under the auspices of the Bank of England.  This Working Group has identified the Sterling Overnight Index Average (SONIA) as the RFR basis for pounds sterling.  SONIA, which is administered by the Bank of England, has long served as the reference rate for sterling overnight indexed swaps.  It represents the mean of interest rates paid on overnight wholesale deposits, where credit and liquidity risks are minimal. 

The challenge posed by SOFR, SONIA, and equivalent RFRs being developed for the euro, yen and Swiss franc is that they all are backward-looking overnight rates and so do not compensate for the forward risk and time value of term lending, whether it be one week, one month, or longer.  LIBOR, by contrast, is forward-looking over several different maturities.  LIBOR compensates for term risk and provides lenders and borrowers certainty as to the cash flows during each interest rate period.  In addition, SOFR is secured by U.S. treasuries and so nearly risk-free, while LIBOR is unsecured and responsive to bank risk generally.  SONIA is similarly low risk.  SOFR and SONIA, therefore, are likely in most circumstances to be lower, less volatile rates than LIBOR, implying that different margins will be required to achieve equivalent effective interest rates.  At this point, while under development, the mechanics, timing and ultimate availability of forward-looking term rates based on the new RFRs remain uncertain.

Implications for current floating rate debt

Although the phase-in of RFRs is not targeted to be completed until the end of 2021, floating rate notes and syndicated loans with tenors beyond that date are already being placed in the market.  It is important, therefore, that new debt instruments include provisions which, as best they can at this point, anticipate the replacement of LIBOR.

While the ultimate nature of the RFRs to be implemented by the end of 2021 is not yet known, it is likely that they will not be economically interchangeable with their corresponding LIBOR rates, and so it is unlikely that the new RFRs can be slotted into existing loans with their margins as currently priced without resulting in unintended value transfers to either lenders or borrowers.  Consequently, it appears the best that can achieved at the moment in new loan documentation to address the risk that LIBOR will become unavailable, unreliable or non-standard during the term of a loan is to include provisions which facilitate amendments undertaken specifically to reset the interest rate reference and margin to accommodate the mechanics and economic metrics of the new RFR.

In the syndicated loan market, the general rule has always been that the unanimous consent of all lenders and the agreement of the borrower is required in order to change the rate of interest.  In the case of conversion to new RFRs, however, because the new metrics will be well established and understood by the time replacement is necessary, and the transition will be undertaken on a market-wide basis, lenders and industry groups appear comfortable with relaxing the lender consent requirement, generally to a majority in interest of the lenders.

In the UK market, the Loan Market Association (LMA), which works to standardise documentation for English law-governed credit agreements, has published a set of provisions addressing the replacement of LIBOR.  These provisions (i) identify the changes in LIBOR or the market, including but not limited to the cessation of LIBOR quotations, which would trigger the relaxed lender consent threshold for interest rate amendments and (ii) delineate the nature and scope of amendments that qualify for such treatment, including the prerequisite characteristics of qualifying RFR benchmarks.

In the New York law-governed syndicated loan market, similar though varied clauses have begun to appear in recent floating rate credit agreements, without any dominant market standards having yet taken hold.  In addition, on 24 September 2018, ARRC published for comment proposed LIBOR replacement provisions for floating rate notes and syndicated loans.  These are similar in format to the LMA provisions, although ARRC also includes provisions which, in addition to replacing the benchmark, would adjust the credit spread in certain cases.


Monday, November 5, 2018

Simon Ward Returns to Curtis as Muscat Managing Partner

We are pleased to announce that Simon Ward re-joined Curtis in October as a partner in the international arbitration and litigation groups, and has also been appointed Managing Partner of the firm's Muscat office. Former Managing Partner Bruce Palmer has agreed to take on an advisory role as Director of Middle East Strategic Planning.

Mr. Ward stands out among Oman’s most experienced arbitration counsel with over a decade of experience in the region. He is currently ranked by Chambers Global as a top Commercial Litigation and Arbitration lawyer for his heavyweight commercial arbitration practice, and has advised on some of the highest-profile commercial arbitration and court cases in the Sultanate.

He was appointed to the Oman Court of Appeal Roll of Arbitrators in 2011 and has acted as both arbitrator and lead counsel before the Omani courts. He has also acted in domestic and international arbitrations under the auspices of the ICC and LCIA, and in Omani/UNCITRAL ad hoc arbitrations.
Before leaving Curtis last year to return to his native New Zealand for family reasons, Mr. Ward had spent nearly five years in our Oman office, including most recently as Curtis’ Head of Disputes in Oman.

You can contact Simon in our Muscat office, or read our full press release here.