Open and accessible: Changes to tax practices will be the new way forward

As a result of being heavily dependent on oil resources, the sultanate of Oman has actively pursued development that focuses on diversification, industrialisation and privatisation, with the objective of reducing the oil sector’s contribution to GDP to 9% by 2020.

Taxation will be a major factor as Oman moves forward with its plan for development. With a relatively low corporate income tax rate, no personal income tax and no value-added tax (VAT), Oman has attracted significant domestic, regional and global investment across industries. The tax authorities have improved the quality of the tax system, and more changes are under way. The issuance of a new income tax law in 2009 and related Executive Regulations in 2012 were welcomed by businesses as a major step forward.

New Laws

The new income tax law eliminates the territorial concept of taxation and replaces it with worldwide tariffs for companies formed in Oman. It also harmonises the rate for all taxpayers at a flat 12% of taxable income in excess of OR30,000 ($77,700).

The withholding tax regime helps promote long-term inbound investment, since no withholding tax is imposed on outbound dividends or interest payments. The law also provides exemptions for Omani companies engaged in activities deemed important to diversifying the economy, particularly industry, mining, exporting locally manufactured products, fishing and fish processing, education and medical care.

Taxing From Abroad

The only indirect tax applied is a 5% Customs duty of cost, insurance and freight (CIF) value applied to most non-GCC goods. Exemptions apply for certain food items and medical supplies.

Oman has in force or awaits ratification of Double Taxation Agreements with approximately 35 countries including Canada, China, France, Italy, India, Singapore, the UK, South Africa, China and Italy. It also entered a free trade agreement (FTA) with the US and is a party to the GCC-Singapore FTA. These contracts are all aimed at promoting trade and investment between various parties by removing or relaxing certain trade barriers.

Legal Structures

Companies and investors may establish operations in one of the following forms:

• Limited liability company (LLC): Foreign companies and individuals are generally required to have an Omani partner with a minimum 30% share in order to form an LLC. Minimum share capital of OR150,000 ($388,500) is required to register an LLC with foreign participation. GCC companies that are 100% owned by GCC nationals or GCC nationals themselves may establish an LLC without a local partner for approved activities. An LLC must have at least two shareholders. Pursuant to the FTA concluded between the US and Oman, US companies may form a subsidiary without a local partner for some activities.

• Joint stock company: Joint stock companies that do not offer their shares for public subscription are known as limited joint stock companies (SAOC). The minimum share capital required for an SAOC is OR500,000 ($1.3m), and the minimum number of shareholders is three. There is also a 30% local shareholding requirement in establishing an SAOC.

• Branch: A foreign company may register a branch only to execute a contract with the government or a quasi-government body. Branch registration is limited to the duration of the underlying contract. Special dispensation may be given to allow a foreign company to register a branch without a government or semi-government contract if the activity is deemed by the Council of Ministers to be of national importance.

• Commercial agency: Foreign companies without registration may do business through commercial agents. Agency agreements are formally registered with the Ministry of Commerce and Industry under the Commercial Agency Law.

• Commercial representative office: A foreign firm may open a commercial representative office solely for the purpose of marketing and promotion of its products or services. The office cannot sell products or services or engage in other forms of commercial activity. However, it may sponsor or hire employees.

Income Tax Law

The income tax law was promulgated by Royal Decree No. 28/2009 and came into effect on January 1, 2010. It replaces the laws promulgated by Royal Decrees No. 47/1981 and No. 77/1989. In January 2012, the executive regulations accompanying the law were issued by the Ministry of Finance, applying to tax years starting 2012.

Tax Rates

The rate of tax is uniform for all types of business entities, regardless of how they are configured and whether they are owned by locals or foreigners. The income tax law seeks to tax the worldwide income of entities formed in Oman and the Oman-source income of branches and other permanent establishments. The income tax rate is as follows:

• First OR30,000 ($77,700) of taxable income: 0%;

• Above OR30,000 ($77,700): 12%.

Petroleum Income Tax Rate

The tax rate for taxpayers engaged in petroleum exploration is 55% of the taxable income derived from the sale of petroleum. This rate is applied to income determined under the Exploration and Production Sharing Agreement (EPSA) concluded between the company and the government. Under these agreements, Oman effectively pays the exploration company’s tax through amounts withheld from the government’s share of production.

Taxpayers

The law defines “taxpayer” as an establishment, a company or a permanent establishment. An “establishment” is a proprietorship registered with the Ministry of Commerce and Industry (MOCI) that carries on commercial, industrial or professional activities. A “company” includes commercial, civil and legal entities, regardless of the owners’ nationality, purpose of incorporation or nature of activities. “Permanent establishment” refers to a fixed place of business where business is carried out by a foreign person, either directly or with an agent. A permanent establishment includes:

• A place of sale, place of management, branch, office, factory or workshop;

• A mine, quarry or other place of extraction of natural resources; and

• A building site, a construction place or an assembly project. Additionally, a foreign person who provides “consultancy or other services” for a period or periods totalling 90 days or more in any 12-month period will create a permanent establishment, whether or not the services are rendered through a fixed place of business.

Taxable Income

The law defines income as that of any type, whether in cash or in kind, in particular:

• Profit from any business;

• Consideration for research and development;

• Consideration for the use of computer software;

• Rent for real estate, machinery or other property;

• Profit resulting from granting any person a usufruct or right to estate, machinery or any other moveable immoveable property;

• Dividends, interest, discounts received; or

• Royalties or management fees. This means that an Omani company is liable to tax on its worldwide income, although it is entitled to claim appropriate credit for taxes paid to foreign jurisdictions on income that is also taxed in Oman.

The law defines taxable income as income accrued after deducting any expenses and allowing for any deductions, offsets or exemptions. In determining taxable income for a given tax year, actual expenses incurred wholly and exclusively for generating gross income are allowed for tax purposes.

Deductible Expenses

Expenses are treated as deductible only if they are actually incurred, relate to the business of the taxpayer, are necessary for the production of gross income, and are supported by documentary evidence. The following expenses are specifically allowed by the law:

• Expenditures incurred before the commencement of business or registration (subject to limitation);

• Amounts paid to fulfil the dues of employees in accordance with the labour law;

• Social insurance contributions paid to the Public Authority for Social Insurance;

• Approved pension fund contributions;

• Bad debts written off;

• Costs in the acquisition or disposal of assets;

• Depreciation of capital assets;

• Audit fees;

• Sponsorship fees: 5% of taxable income can be deducted, calculated before deducting sponsorship fees and after deducting carried forward losses; and

• Donations paid to approved organisations (limited to 5% of gross income). Additional deductions are allowed for the banking and insurance sectors. Banks can deduct provisions for loan losses on the basis of recommendations by the Central Bank of Oman. Insurance companies can deduct provisions for unexpired risks and unsettled claims, as well as sums paid to the insurance emergency fund.

The Executive Regulations specify rules for deduction of the following expenses:

• Remuneration paid to the chairman and board of directors of a joint stock company;

• Head office charges of a permanent establishment;

• Salaries and similar remuneration paid to a proprietor or shareholder of an Omani company; and

• Rent paid to a proprietor for the use of real property owned by him or her. The following expenses are not deductible:

• Any capital expenditure unless specifically allowed by the income tax law;

• Any expenses incurred if considered not commensurate to services rendered/consideration given;

• Income tax paid or payable;

• Any loss where the cost was recovered or compensated (e.g. under an insurance policy);

• Loss from the disposal of securities listed on the Muscat Securities Market (MSM); and

• Expenses incurred in earning tax exempt income; TAX EXEMPTIONS: The following sources of income are exempted from tax:

• Dividends received from shares, allotments or shareholdings in the capital of any Omani company;

• Profit or gains from the disposal of securities listed on the Muscat Securities Market. Additionally, a number of income-generating activities may be exempted from tax:

• Income accruing to any establishment owned by an Omani individual or company from carrying on activity in the field of shipping;

• Income from air transport or shipping by non-Omani carriers provided there is reciprocal treatment in the home country for the same activity;

• Income from the following activities in accordance with specific laws relating to each activity is exempt for a period of five years and may be extended for a further five years. Exemptions and extensions are not automatic and are granted only after specified procedures are followed. Additionally, these exemptions are available only to Omani companies: a) Industry; b) Mining; c) Fishing, fish processing, farming and breeding; d) Promotion of tourism including the operation of hotels and tourist villages; e) Farming and processing of farm products including animal and agriculture products; f) Export of locally manufactured or processed goods; g) University, college or higher institutes, private schools, nurseries or training colleges; and h) Medical care by establishing a private hospital.

Carryover Of Tax Losses

Tax losses may be carried forward by a taxpayer for a maximum of five years and offset against future taxable income, but they may not be carried back. Net aggregate losses incurred during a tax-exempt period may be carried forward indefinitely or set off against future profits. Losses incurred by a permanent establishment of a foreign company may be carried forward but must be aggregated against income from any other permanent establishments owned by the same foreign company.

Tax Depreciation

Depreciation on capital expenditures is divided into two main categories:

• Depreciation for buildings, ships, aircraft and intangible assets is calculated under a straight line method: a) Buildings constructed with specific material: 4%; b) Quays, jetties, pipelines, roads and railways: 10%; c) Temporary or prefabricated buildings: 15%; d) Ships or aircraft used for business purposes: 15%; and e) Buildings used for hospitals or educational institutions (the taxpayer can choose to depreciate like any other buildings above): 100%. The above rates may be doubled if buildings are used for industrial purposes, excluding buildings used for storage, offices, or accommodation for workers or commercial purposes. Depreciation of intangible assets acquired and used in the business shall be calculated by dividing capital expenditure by the useful life of the asset as estimated by the secretary-general.

Depreciation of the following asset classes is determined on a declining balance or written down value method. A “pooling” concept applies, whereby assets subject to the same rate of depreciation are pooled together in calculating depreciation expense.

Withholding Tax

A 10% withholding tax at source applies to the paid income of foreign persons who receive royalties, management fees, consideration for research and development, and consideration for the use or right to use computer software, provided the income is not attributed to a permanent establishment of the person in Oman. Companies and establishments who make such payments are required to deduct 10% of the invoice amount and remit it to the tax authorities within 14 days from the end of the month following the month in which the payment is made or credited to the account of the foreign person.

The term “royalty” includes consideration for the use of intellectual property, including computer software, cinematographic films, tapes, discs, or other media, patents, trademarks, drawings, etc. It also includes consideration for the use of industrial, commercial or scientific equipment; consideration for information on industrial, commercial or scientific experience, and consideration for granting rights to exploit mining or other natural resources.

Oman does not impose withholding tax on payments of dividends or interest paid to foreign persons.

Tax Administration

The tax year is the calendar year, unless permission is granted to use another year. However, a taxpayer’s initial year may be more or less than 12 months – up to a maximum of 18 months.

A provisional return of income must be submitted in the prescribed form within three months from the end of the tax year. Any tax estimated to be due is remitted with this return. An annual return of income must be submitted in the prescribed format within six months from the end of the tax year. Any unpaid balance of tax is due with the annual return. Failure to pay taxes by the due date attracts interest at the rate of 1% per month until the tax is actually paid.

New tax return forms have recently been issued and require more information to be provided by the taxpayer at the time of filing returns. Taxpayers are required to provide details on remuneration of chairmen and members of the board of directors, profits or losses from disposal of securities listed in the MSM; income earned but not recorded in the accounts; profits or losses derived from disposal of fixed assets; unrealised losses recorded; and others.

Establishments or companies satisfying the requirements below may be exempted from filing tax returns for any accounting period related to a tax year:

• The capital of the establishment at the end of the accounting period as recorded in the commercial register should not exceed OR20,000 ($51,800);

• The gross income realised by the establishment or company during such accounting period should not exceed OR100,000 ($259,000); and

• The number of employees during the relevant accounting period should not be more than eight. The Secretary General of Tax may exclude establishments that have not been exempted from submitting returns as set out above from submitting audited accounts prepared for any accounting period related to a tax year provided that the following are satisfied:

• The capital of the establishment or company at the end of the accounting period as recorded in the register should not exceed OR50,000 ($129,500);

• The gross income realised by the establishment or company during such accounting period should not exceed OR300,000 ($777,000);

• The number of employees during the relevant accounting period should not be more than 10. Assessments: All annual returns of income are subject to assessment by the tax authority. The statutory deadline for assessment of a particular tax year is five years from the end of the tax year during which the return for that year is submitted. In cases of fraud, the time limit for assessment is extended to 10 years. If no return is submitted, the limit for the assessment is 10 years from the end of the year for which the return is due. Objections and appeals: A taxpayer has the right to object to any assessment issued by the Secretary General (SG). The objection document must be prepared in writing and filed with the office of the SG for Taxation within 45 calendar days from the date of assessment. The SG must decide on the objection within five months (extendable by a further five months at the SG’s discretion) from the date of receiving the objection. The tax demanded may be kept in abeyance on request while the objection is pending. No additional tax is payable until the SG issues a decision.

The taxpayer has the right to file a petition against the judgement of the SG with the Tax Committee at the Ministry of Finance within 45 days of the date of judgement. The petition should be in Arabic, however, before filing the petition, the taxpayer must pay the tax demanded or include a request to be granted dispensation from paying the additional tax demanded in the judgement. The Tax Committee may, when the taxpayer furnishes a bank guarantee, grant such dispensation. The taxpayer has the right to appeal against the judgement given by the Tax Committee within 45 days. The appeal is to be filed with the Court of First Instance. The appeal should be in Arabic and the taxpayer must be represented by an authorised lawyer. However, before filing the appeal, the taxpayer must pay a fee to the Secretariat of the Court. The Committee takes one to two years to issue its judgement.

The final judicial authority is the Supreme Court and the petition can be filed with this court within 45 days of receiving decisions from the Court of First Instance. All proceedings in the above courts are in Arabic. Maintenance of records: The law requires accounting records and supporting documentation to be maintained for 10 years after the end of the accounting period to which these records relate.

Related Parties & Transfer Pricing

The law does not provide detailed transfer pricing regulations or guidance on acceptable methods for determining an arm’s length price. The law provides that where related persons enter into transactions that result in a lower taxable income or higher taxable loss than would have been the case had the transactions occurred between unrelated persons, the terms of such transactions shall be ignored in computing the taxable income and the tax authority may adjust the terms.

Thin Capitalisation

If the debt-to-equity ratio exceeds 2:1 in the case of related party debt, interest on the excess debt is not deductible for tax purposes. This rule does not apply to banks and insurance companies, PEs of foreign companies, or proprietary (Omani owned) establishments.

Double Taxation Agreements

Oman has in force or awaits ratification of double taxation agreements with about 35 countries including Canada, China, France, Italy, India, Singapore, the UK and South Africa.

There is no clearly defined procedure for applying double taxation agreements. In practise, a taxpayer seeking to apply an agreement must approach the Omani authorities for advance permission. The authorities may then request a residency certificate for the foreign person, copies of underlying agreements, and other documentation before deciding on the request.

US-Oman FTA

The US-Oman FTA came into force on January 1, 2009. Under the agreement, US investors and their investments in non-restricted sectors are granted “national treatment”, as well as “most-favourednation treatment”, in Oman. National treatment means that, in similar circumstances, US investors and their investments are afforded no less favourable treatment than that afforded to Omani nationals. Most-favourednation treatment means that, in similar circumstances, US investors and their investments are afforded no less favourable treatment than that afforded to nationals of any other country in Oman. In the case of companies incorporated in Oman, the application of national treatment under the FTA increases the US shareholding allowance to 100% and reduces the minimum capital requirement to OR20,000 ($51,800).

GCC & Singapore FTA

Singapore and the GCC have entered into a FTA, which came into force on September 1, 2013. Under the FTA, goods originating from Singapore enjoy comprehensive Customs duty relief when imported into GCC countries. Reciprocal treatment is also granted to goods originating from the GCC that go to Singapore. The FTA also gives a preferential treatment to Singapore citizens, permanent residents, companies or foreign companies based in Singapore in professional services such as legal services, accounting services and engineering services, as well as business services such as construction, distribution and hospital services. The preferential treatment includes an allowance of 100% foreign ownership in the designated service provision businesses.

Other Taxes

Oman does not have VAT or sales tax. Other taxes applicable in the sultanate are Customs duty and the following taxes:

• Municipal tax of 5% on hotel and restaurant bills;

• Tourism tax of 4% on hotel and restaurant bills;

• Municipal tax of 3% on property rental payable by the landlord; and

• Labour tax of OR100 ($261) per expatriate employee per annum payable by the employer.

Custom Duties

Customs duty of 5% of CIF value applies to most non-GCC sourced goods. Exemptions apply for certain food items, medical supplies and related supplies, and higher rates apply to certain goods such as wine and spirits.

Stamp Duties

Stamp duty is applicable on transfer of land and property at 3% of the value.

Social Security Contributions

A 17% social security contribution is applicable to employees who are Omani nationals, but not to expatriate employees. The employee pays a contribution of 6.5% of salary, and the employer pays the balance of 10.5%.

Knowledge Oasis Muscat

Knowledge Oasis Muscat (KOM) is a business zone dedicated and reserved for technology- and knowledge-based businesses. Businesses that may be registered with KOM include design, development, and application of telecommunication, IT, web, new media, e-learning, e-security, animation, environment, IT training, engineering, high level technical support or consultancy and call centres. Enterprises that register with KOM may enjoy certain benefits including 100% foreign ownership, minimum initial capital to set up an entity (OR20,000; $51,800), minimum Omanisation requirement (25%) and highly competitive telecommunication rates.

Free Trade Zones In Oman

At the moment four free trade zones (FTZs) exist: Salalah, Sohar, Duqm and Al Mazunah. These free zones commonly provide certain benefits, for instance 100% foreign ownership, Customs duty exemption for goods imported into the free zones, tax exemption for a certain period and no minimum initial capital. Other benefits given depend on the policy of each free zone.

• FTZ Salalah: Salalah free zone is being developed in multiple phases over an area of 2000 ha. It offers industrial, manufacturing, warehousing, logistics, distribution, research and development, office facilities, retail outlets, resort and residential space.

• FTZ Sohar: Sohar free zone was built on approximately 4500 ha and its first phase of development began in 2010, using a cluster approach. There are three major clusters in the Sohar Port area, namely the hydrocarbons or petrochemicals sector, the metals and minerals sector, and logistics with international terminal operators.

• FTZ Duqm: Duqm free zone is one of the largest free zones in the Middle East. Duqm free zone is a model of an integrated economic development zone which consists of sea port, industrial area, new town, fishing harbour, tourist zone, logistics centre and an education and training zone supported by a multi-modal transport system that connects it with nearby regions. Duqm free zone is administered, regulated and developed by the Duqm Special Economic Zone Authority, a financially and administratively independent government entity.

• FTZ Al Mazunah: Al Mazunah free zone started operations in 2010. To assist with development, the government signed an agreement with the Kuwaiti based company Golden Hala Trading to establish the infrastructure. An investment of an estimated OR680m ($1.76bn) is pledged over the next five years. Focus areas for the free zone’s growth plans are processing, storage and shipment of products from the Dhofari agricultural heartland, along with the industrial vehicles and automobile trade.

Currency Exchange Control

Oman’s currency is freely traded and is pegged to the US dollar at a rate of OR1:$2.59. Oman does not impose exchange controls and investors are permitted to bring rials in and out of Oman, as well as any equity, debt capital or rewards such as dividends, interest and royalties.