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."
Wednesday, May 25, 2016
The Procedural Steps for Enforcing a Judgment in Oman
With regard to disputes, clients often focus on “winning” their cases, that is, successfully attaining a judgment from the court or the arbitrator, without having given much consideration as to enforcing an award and getting paid the amounts that a court or tribunal so orders. Therefore, it is not uncommon in Oman for clients to “win” a judgment but to still have to wait for a separate enforcement procedure to complete before any money is seen. It is therefore important for clients to understand that the underlying court case or arbitration is the first of two limbs with regards to attaining monies. The second limb is that of enforcement.
This article sets out the five practical steps involved within the enforcement process in Oman:
- Step 1: Obtain a Court of Appeal Judgment / Award from an Arbitration Tribunal. If the dispute is being resolved by way of litigation, then you can only enforce a final judgment. For our purposes, a Primary Court judgment is final if thirty days have elapsed since the date the judgment was rendered and no party has appealed to the Court of Appeal. If an appeal is made within the prescribed time frame, then the judgment is eligible for enforcement on the day that the Court of Appeal renders its judgment. If the dispute is being resolved by way of arbitration, then an award by the tribunal must be translated into Arabic by way of a certified translator.
- Step 2: File an Application at the Enforcement Department of the Commercial Circuit of the Court. In simple terms, filing an application at the Enforcement Department is a very simple and flexible process. The Department requires a form to be completed and copies of all judgments (Primary Court and, if relevant, Court of Appeal Judgments) or awards in Arabic. It is good practice to ensure that the document containing the original arbitration clause is also available for inspection by the Enforcement Department, should that be required. No fees are usually paid in this regard.
- Step 3: Check the Notification from the Enforcement Department. The Enforcement Department will notify the opposing party of enforcement proceedings and provide them with a seven-day period in which to file an objection. It is vital for the party that has filed for enforcement to keep attending upon the Enforcement Department, so as to enquire as to whether this step has been completed.
- Step 4: Check any Objections of an Opposing Party. The enforcement can only be stopped if the opposing party files an objection (known as an “Ishtikhal”) within the prescribed seven-day period, or if the Supreme Court has issued a stay order.
- Step 5: Check to See if a Hearing has been Filed in Response to the Ishtikhal. The hearing will determine whether the Ishtikhal is relevant or whether it should be ignored.
Wednesday, May 18, 2016
Enactment of New Laws in Oman
Overview of the Omani Legal System
Oman is an absolute monarchy and all laws are promulgated by the Head of State, His Majesty the Sultan, as Sultani Decrees. Other laws which are subordinate to Sultani Decrees (in the form of Ministerial Decisions and Executive Regulations) are issued from time to time by Ministers as well as the administrative units of the Government of Oman (the “Government”).
There are two types of legislation in Oman, primary and secondary. Primary legislation is promulgated by a Sultani Decree directly from His Majesty the Sultan. Secondary legislation is passed by Ministerial Decisions and the Executive Regulations. All ministers in Oman are appointed by the Sultan. Article 74 of the Sultani Decree 101 of 1996, the Basic Law (“SD 101/96”), provides that all Sultani Decrees and Ministerial Decisions must be published in the Official Gazette. Executive Regulations are sometimes not published in the Official Gazette but issued as an internal regulation for the relevant Government departments to abide by.
Oman has an Official Gazette pursuant to the Sultani Decree 84 of 2011 (“SD 84/11”) in which new legislation is published. The date of implementation of any new legislation is generally the date of issue of the Gazette in which the legislation is published. Article 5 of SD 84/11 provides that the publication shall be considered as presumption for the knowledge of all, and no evidence to the contrary may be accepted. All legislation published in the Gazette is enforceable.
In addition, Oman operates a system of Shari’ah law in accordance with Article 2 of SD 101/96, which states that Islam is the religion of the State and the Islamic Shari’ah is the basis of the law. However, the role of Shari’ah is limited in certain areas and, in practice, has little influence on commercial activities.
When it comes to the enactment of new laws in Oman, Article 72 of SD 101/96 provides that the application of the Basic Law shall not prejudice treaties and agreements in which the Sultanate has entered into with other countries, international institutions or organisations. Article 76 of SD 101/96 further provides that treaties and agreements shall not have the force of law until such time as they have been duly ratified.
The Procedure to Ratify a Law in Oman
There is no fixed procedure for promoting the creation of a new law, whether it be a Sultani Decree or a Ministerial Decision. However, the law in question would have to be sponsored by the relevant Government department and is subject to review by the Ministry of Legal Affairs. Usually, the Government department that is concerned with the subject matter of the law to be enacted shall be the first to draft, amend and review the new law. This process does not have a specific timeframe as Government departments have a discretionary timeframe to look at new Sultani Decrees, unless urgency has been placed on the matter by one of the councils, or due to the fact that the legislation has been brought in due to an international treaty.
Once a draft has been issued by a Government department and that draft has been approved by the Ministry of Legal Affairs, the various other Government departments that may be affected by the subject matter of the proposed new law are then asked to review and recommend any amendments to that draft law. Once approved, the draft law is then sent to the State Consultative Council and the Cabinet of Ministers.
The State Consultative Council has statutory powers to recommend and suggest new legislation for Government departments. The State Consultative Council consists of the Council of State (Majlis A’ Dawla) and the Consultative Council (Majlis A’Shura). The Majlis Al Shura will make its recommendation pursuant to Article 29(a) of Sultani Decree 86 of 1997 promulgating the Law regarding the Council of Oman (“SD 86/97”). The draft is then transmitted to the Majlis Al Dawla, which undertakes a similar exercise (Article 18(d) of SD 86/97). Both Councils will report to the Ministry of Foreign Affairs to provide final recommendation on the new law.
Once the new law is approved by the parties above, it is then sent to the Diwan Royal Court to His Majesty for his approval, which then leads to the Sultani Decree being published in the Official Gazette.
Further, Article 5 of SD 84/11 provides that new laws and regulations shall be applied from the date of their publication in the Official Gazette or its appendixes, unless specified otherwise.
The Timeframe for the Enactment of New Law
There are no formal prescribed time limits for the completion of the process of promulgation of new legislation. In theory, the promulgation of a new law can be completed quickly, if one of the councils has expressed the matter concerning the legislation to be urgent, or due to the fact that the requirement for the legislation has been brought about by an international treaty or GCC agreement.
In practice, however, it would be very difficult to predict as to how long each applicable Government unit will take to review and approve the new law as the timeframe is at the discretion of each applicable Government unit.
Wednesday, May 11, 2016
Islamic Project Finance - Part 2
This is the second part of a series of articles discussing Shari’ah-compliant structures used in project financing transactions. This article discusses the Sukuk (i.e., Shari’ah-compliant capital markets instruments) structure, which is now becoming a popular option for financing infrastructure projects in the Middle East.
Sukuk
Sukuk (plural of Sak) is the Arabic term for financial certificates. The Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”) defines Sukuk as “certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity.”
Sukuk Structures
From a structural perspective, Sukuk can be divided into two types of transactions, namely, asset-based or asset-backed. Asset-based Sukuk issuances are usually referred to as Islamic bonds whereas asset-backed Sukuk issuances are normally referred to as securitisations.
The Sukuk issuer (normally a special purpose vehicle (“SPV”) issues certificates into the capital markets in both kinds of Sukuk issuances (mentioned above). In both the structures, the Sukuk issued represents undivided beneficial ownership interests of the Sukuk investors in the assets of the Sukuk issuer.
Of the two structures mentioned above, the asset-based structure is utilised in project financing transactions. We discuss below the most commonly used asset-based Sukuk structures that are used for project financing, namely, the Sukuk al-Ijarah structure and the Sukuk al-Istisna’a structure.
A. Sukuk al-Ijarah
An Ijarah is a lease contract for the transfer of the usufruct of an asset to another person in exchange for a rent claimed from that person.
The Sukuk al-Ijarah structure employs the principles of Ijarah, whereby the ownership or benefit/usufruct of corporeal assets are transferred from an originator to an SPV, which then leases back the said assets to the originator* for a specific duration.
As a first step, an SPV is incorporated/established, which then issues Sukuk into the capital markets. Each Sukuk holder subscribes to the Sukuk issue of the SPV by contributing cash to the SPV in return for its Sak.
The SPV declares a trust over the Sukuk issuance proceeds in favour of the Sukuk holders. The SPV then applies the Sukuk issuance proceeds to purchase the assets from the originator and pays cash to the originator as consideration for the said purchase. The cash is utilised by the originator for the purposes for which the Sukuk were issued.
Thereafter, the SPV leases the assets back to the originator under an Ijarah contract, whereby the originator (in the capacity of a lessee) makes periodic rental payments to the SPV (in the capacity of a lessor). The periodic rental payments are then passed on to the Sukuk holders as periodic distribution amounts.
The rental payments under the Ijarah contract can be structured in a manner so as to provide the desired return on the Sukuk. The rate of return can therefore be set as a fixed rate or a floating rate.
Under a purchase undertaking, the originator repurchases the assets upon maturity of the Sukuk. The purchase price, being an amount equal to the aggregate face value of all the Sukuk plus any accrued but unpaid periodic distribution amounts, is passed on to the Sukuk holders for repaying their principal. The said purchase undertaking also grants an option to the SPV (acting as the trustee for the Sukuk holders) to require the originator to purchase the assets upon the occurrence of an event of default.
Under a sale undertaking, the originator is granted an option to purchase the assets for a price equal to the aggregate amount of the Sukuk issuance proceeds plus any accrued but unpaid periodic distribution amounts upon the occurrence of specific events.
The SPV (as owner of the Sukuk assets) and the originator (as service agent) also enter into a service agency agreement where the SPV appoints the originator as its agent to manage the assets comprising the Sukuk and carry out the services with respect to the major maintenance, insurance and payment of ownership-related taxes pertaining to the Sukuk assets.
B. Sukuk al-Istisna’a
An Istisna’a is a contract of sale where a commodity is transacted before it comes into existence. It is an order to a manufacturer to manufacture/construct a specific asset for the purchaser in return for a fixed price to be paid up front.
The principles of Istisna’a are used in structuring Sukuk for project financing where an SPV issues Sukuk into the capital markets and uses the proceeds from the Sukuk issuance to pay the originator (in the capacity of a contractor) in exchange for the construction and delivery of the project (i.e., Istisna’a assets) in the future. This structure has therefore become particularly useful in financing the construction phase of a project.
Under a Sukuk al-Istisna’a, upon issuance of the Sukuk into the capital markets and their subscription by the Sukuk holders, the SPV declares a trust over the proceeds of the Sukuk issuance in favour of the Sukuk holders. The SPV (in the capacity of a purchaser) then enters into an Istisna’a contract with the originator (in the capacity of a contractor) where the originator agrees to construct specific assets and undertakes to deliver the said assets to the SPV at a future date. In return, the SPV pays the Sukuk issuance proceeds to the originator as consideration for the construction and delivery of the assets.
Simultaneously with the execution of the Istisna’a contract, the SPV and the originator enter into a forward Ijarah contract pursuant to which the SPV (in the capacity of a lessor) agrees to lease the assets back to the originator (in the capacity of a lessee) under a forward Ijarah (known as al-Ijarah al-Mawsufah fi al-Dhimmah) during the construction period of the project and under a normal Ijarah following the delivery of the assets so that the SPV receives periodic rental payments during the entire tenor of the Sukuk which payments are then passed on to the Sukuk holders as periodic distribution amounts.
The SPV and the originator also enter into a service agency agreement, a purchase undertaking and a sale undertaking for the same purposes mentioned in Section A (Sukuk al-Ijarah) above.
