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Since the inception of VAT in the UAE in January 2018, the Federal Tax Authority (FTA) had put in place a strict penalty regime. It was much stricter than its neighbour Saudi Arabia, which implemented VAT at the same time. In terms of the types of penalties, it was not the harshest, since both Bahrain and Oman later imposed prison sentences for what are often considered administrative oversights.
The tax authorities were also very active from the start in 2018, mostly imposing automatic penalties, as our survey back then showed (https://aurifer.tax/news/vat-survey-shows-fta-is-very-active/?lid=482&p=14). However, the authorities also imposed their so-called 2-4-1 penalties for late payment, which were the most impactful. A business making a mistake and being audited would be subject to a fixed penalty of up to AED 5,000, but also a penalty of up to 356% of the unpaid tax. The predicted pushback in terms of litigation followed, as scores of tax payers challenged penalties, on whatever basis they could find. The litigation was potentially mainly in the interest of litigators.
The Federal Cabinet listened to the concerns of tax payers, and now decided to act and to reduce the penalties, but also propose a penalty amnesty for penalties applied under the old regime. Cabinet Decision No. 49 of 2021 amends provisions of the Cabinet Decision on Penalties (No. 40 of 2017) and enters into effect 60 days after the issuance, i.e. 28 June 2021.
In most circumstances, the new regime will be more beneficial. It should be noted as well, that there is still an FTA Decision to be expected to implement the changes.
First off the FTA would like to give all tax payers a clean slate. Tax payers having outstanding penalties under the old regime, i.e. imposed on 27 June 2021 or before, can benefit from a 70% waiver, provided they settle the penalties on or before 31 December 2021. This is surely to add substantial cash to the Federal budget.
What is currently not clear, and might be in the announced FTA Decision, is how to handle penalties against which tax payers have filed a reconsideration, have gone before the Tax Disputes Resolution Committee (“TDRC”), or have gone before the administrative courts. Insofar as we know, the FTA has not been open to negotiated settlements for these types of litigation, but perhaps this is an opportunity for tax payers and the FTA to agree on a settlement, even if they are already before court.
As a comparison, KSA until recently was offering a full waiver of all penalties for voluntary disclosures. The Cabinet has not opted for the same approach, though it offers a partial amnesty.
New penalty regime
What’s new in the new penalty regime then? A number of fixed penalties have been lowered (e.g. late registration, late deregistration, filing incorrect tax return, …). However, the paradigm shift came in the late payment penalties.
Where before, a tax payer was subject to the 2-4-1 penalties, i.e. 2% for paying one day late, 4% for paying a week late and 1% per day after one month, the monthly penalty is now only 4% (in addition to the 2% penalty which remains).
However, and this is probably the most fundamental change, in case of a voluntary disclosure or a tax assessment, the late payment penalty only starts to run as from 20 business days after the date of submission of the voluntary disclosure or receipt of the assessment. While this position was advocated before the UAE Federal Court of Cassation, the highest court had ruled that the FTA was correct in applying a penalty since the time of supply (UAE Court of Cassation 14 October 2020, Appeal No. 227 of 2020). The Federal Cabinet now decided that it is the right approach to start calculating late payment penalties after the submission of the voluntary disclosure, and not as of the initial supply.
In other words, under the new penalty regime, if the tax payer pays within 20 days, there is no late payment penalty due.
That does not mean he is completely off the hook as a proportional penalty is due ranging from 5 to 40% calculated on the difference between the tax calculated and the tax that should have been calculated. The range depends on the period elapsed between the error and the date on which the voluntary disclosure was submitted.
There is a substantial difference in the calculation of the penalty. Where the previously law had ambiguity around what constituted “payable tax”, the new regime is clear that any situation will be penalized where there is a difference between the tax calculated, and the tax that should have been calculated. Especially for tax payers in a constant refund position, this may constitute a higher penalty bill.
In order to compare the effect of the amendments in the regime, let us have a look at a few examples.
Example 1 - Supply in January 2018
Company A in January 2018 made a supply which it had incorrectly zero rated. After reviewing its records, it came to the conclusion that it had not exported the goods from the UAE, but instead sold them on the local market. Company A comes to this conclusion on 15 June 2021. Company A has 20 days to file a Voluntary Disclosure.
It now faces the choice between making a voluntary disclosure under the old regime or under the new regime. The goods supplied had a value of AED 300,000 and the applicable VAT was AED 15,000. This is the first time Company A is subject to a penalty for submitting an incorrect tax return.
Old regime New regime
Fixed Penalties AED 3,000.00 AED 1,000.00
Proportional penalties AED 750.00 AED 4,500.00
Late Payment Penalties AED 45,600.00 AED 0.00
Total AED 49,350.00 AED 5,500.00
It is clear that Company A has a real benefit in waiting for the new regime to be in force. However, as illustrated below, because of the dynamics triggered by the tax amnesty, depending on when the mistake is made, business may need to try and have the penalties imposed before or on 27 June 2021.
Example 2 - Supply in January 2021
Company B in April 2021 made a supply which it had incorrectly zero rated. After reviewing its records, it came to the conclusion that it had not exported the goods from the UAE, but instead sold them on the local market. Company B comes to this conclusion on 15 June 2021. Company B has 20 days to file a Voluntary Disclosure.
It now faces the choice between making a voluntary disclosure under the old regime or under the new regime. The goods supplied had a value of AED 300,000 and the applicable VAT was AED 15,000. This is the first time Company B is subject to a penalty for submitting an incorrect tax return.
Old regime New regime
Fixed Penalties AED 3,000.00 AED 1,000.00
Proportional penalties AED 750.00 AED 750.00
Late Payment Penalties AED 900.00 AED 0.00
Total AED 4,650.00 AED 1,750.00
Waiver AED 3,255.00 N/A
Net AED 1,395.00 AED 1,750.00
Company B has an incentive to voluntary disclose the transaction before the new regime enters into force so that the penalties are imposed under the old regime.
Example 3 - Supply in January 2021
Company C in January 2021 made a supply which it had incorrectly zero rated. After reviewing its records, it came to the conclusion that it had not exported the goods from the UAE, but instead sold them on the local market. Company C comes to this conclusion on 15 June 2021. Company C has 20 days to file a Voluntary Disclosure.
It now faces the choice between making a voluntary disclosure under the old regime or under the new regime. The goods supplied had a value of AED 300,000 and the applicable VAT was AED 15,000. This is the first time Company C is subject to a penalty for submitting an incorrect tax return. Company C is in a constant refund position, and even after correcting the January 2021 supply, it remains in a refund position.
Old regime New regime
Fixed Penalties AED 3,000.00 AED 1,000.00
Proportional penalties AED 750.00 AED 750.00
Late Payment Penalties AED 0.00 AED 0.00
Total AED 3,750.00 AED 1,750.00
Waiver AED 2,625.00 N/A
Net AED 1,125.00 AED 1,750.00
Company C has an incentive to voluntary disclose the transaction before the new regime enters into force. Note that we have observed here that the FTA had not applied penalties under the old regime for these kinds of mistakes. However, we would have expected it to treat an over claimed amount in the same way as an underpaid amount.
Example 4 - Failure to register
Company D in January 2021 made supplies worth AED 400,000 but failed to register for VAT purposes. On 15 June 2021 it discovers it had to register for VAT purposes already back in January 2021.
Old regime New regime
Fixed Penalties AED 20,000.00 AED 10,000.00
Waiver AED 14,000.00 N/A
Net AED 6,000.00 AED 10,000.00
Company D has an incentive to make use of the old regime to register for VAT purposes, before the new regime enters into force.
Audit and enforcement
When we conducted our survey back in 2018, we saw a very active FTA. With the additional resources it has gained over the years, it has conducted a great number of additional audits. Especially refund audits have been very prevalent. More regular audits have happened as well, although these often focused on entertainment expenses and non-compliant invoices. In 2023, transactions conducted in 2018 will be statute barred, so we may see additional activity by the FTA to ensure compliance before that date.
Tax payers have consciously being disclosing non compliant transactions and reporting under the old regime, and were hit with penalties, which then often spilled over into litigation.
Once the liabilities are final, or the court case ruled, the file would eventually end up in enforcement. The advantage the FTA had in litigation is the application of the “pay and claim” principle. If the tax payer lost the case, the litigious amount was already paid.
In situations where there was no Tax Disputes Resolution Committee litigation, the liabilities sometimes remained outstanding (with no additional penalty being added), or for businesses in a refund position, the refund was compensated bit by bit by the penalty amount.
Since 2018, the FTA did take a number of steps to encourage compliance and try and move tax payers towards settling their liabilities.
It had for example suspended the application of the automatic reverse charge mechanism for businesses with a customs number and a VAT number which were linked. The only impact of this decision was negative cash flow.
In addition, in early 2021, the UAE appointed judicial officers which have the powers to seize assets. This was seen as a step up in terms of the enforcement in the UAE.
Rather than stepping up enforcement under its tax procedures law (see our article on the FTP law (https://www.aurifer.tax/news/the-uae-publishes-more-detail/?lid=482&p=19) and on the FTP law lacking director’s liability (https://www.aurifer.tax/news/dawn-of-a-new-tax-era--corporate-perspectives/?lid=482&p=14), the UAE has chosen to make it easier to correct mistakes.
It has taken a substantial turn with the newly implemented policy, which will surely have a very beneficial impact on the tax compliance climate in the UAE. While the penalties are still there as a deterrent, there is now a real motivation in most cases to voluntary disclose and to build a more horizontal and transparent relation with the FTA. The move is without doubt a benefit to businesses, in terms of reduced penalties applied for errors made, and a benefit to the FTA, in terms of increased compliance and perhaps additional revenues from this increased compliance and the amnesty.
The United Arab Emirates (UAE) introduced the Economic Substance Regulations (ESR) in April 2019 to be excluded from the EU’s COCG grey list (European Union's Code of Conduct Group) and not to be classified as a harmful tax jurisdiction by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
Not long after its introduction, UAE launched a new (amended) ESR legislation in August 2020, which was based on the outcome of the review of the no or only nominal tax (NOON) jurisdictions, concluded in June 2019, by the OECD’s Forum on Harmful Tax Practices (FHTP). The new law is more aligned to the international standards stipulated in the BEPS Action 5 and is retroactively effective from 1 January 2019.
The new ESR law introduced exciting amendments, such as: granting exemptions to branches and permanent establishments of foreign entities from meeting the substance test, expanding the scope of the distribution and service centre business, extending its applicability to government entities having a global presence, etc. In addition to this, the new ESR legislation granted substantial powers to the Federal Tax Authority (FTA) to oversee compliance, perform assessments and impose administrative penalties on defaulters.
The Ministry of Finance (MoF) also built a dedicated portal for licensees to submit their ESR notifications and reports to encourage compliance. Through this portal, licensees remain up to date about their ESR obligations, receive enquiries and assessment and penalty notices from the Regulatory Authorities (RA) or the FTA through the same channel.
In response to the ESR submissions made by the licensees for FY 2019, the RA and FTA have been reasonably active in asking for explanations and documentary pieces of evidence to substantiate the exemption status or meeting the economic substance test. In certain cases, the Regulatory Authorities have requested licensees to provide their land lease agreements, minutes of board meetings, outsourcing agreements, and other documentary evidence to prove that it meets the economic substance test. In other cases, the request for information was vague and broad, leaving room for a lot of interpretation. It is also observed that the RA/FTA have not hesitated to levy penalties in cases where the licensees have failed to comply with the ESR obligations.
To resolve technical errors, the support team at the Ministry of Finance (MoF) has been responsive over emails and calls. Additionally, licensees are allowed to rectify/amend the submitted ESR notifications or reports without levying additional penalties (although the deadline may be very short, e.g., five (5) business days).
Despite the available guidance and technical support from the MoF, licensees faced several challenges in meeting the ESR requirements, e.g., identifying the ultimate parent entity and/or ultimate beneficial owners in limited liability partnership structures, calculating the income/expense related to the relevant activities in the absence of prescribed methods, classification of the relevant activities, meeting the branch exemption, etc. Licensees also struggled to meet the substance test that requires them to substantiate the fact that they carry out the relevant activity, i.e., they are directed and managed in the UAE, and they meet the "adequacy test", i.e., they have adequate expenditure, premises and employees to conduct their business operations in the UAE, either themselves or through an outsourcing service provider.
With several factors involved in doing business globally, Multinational Enterprises (MNE's) might fail to meet the substance test in the UAE. Failure in meeting the substance test results in an administrative penalty of AED 50,000 for the first offence and AED 400,000 for a subsequent one. Further, it may also result in other countries taking defensive measures such as denying deductions, imposing withholding taxes on payments to companies or applying controlled foreign corporation rules to subsidiaries in such jurisdictions.
The key takeaway from this discussion is:
- Licensees should evaluate whether they carry out a relevant activity in the UAE and be prepared to demonstrate that their core income-generating activities are in line with the income and profits reported in the UAE.
- Licensees that have failed to meet the ESR requirements for FY 2019 must take all necessary steps to ensure they comply with the ESR requirements for FY 2020 to avoid penalties, sanctions and other measures taken by the foreign tax jurisdictions.
- Licensees must retain all documentary pieces of evidence for claiming an exemption status or meeting the substance test.
- Licensees must be vigilant to provide documentary evidence/explanations to the enquiries they might receive from the RA/FTA during the ESR assessment.
- Successively, licensees must ensure they submit the notification within six months from the end of its financial year and if it is liable to submit an ESR report, it must submit it within twelve months from the end of its financial year.
The implementation of ESR by the UAE is subject to a peer review from January 2021 to ensure the standard is effectively implemented by UAE. As a result, UAE may amend its ESR legislation in the future again.
Round 1 of the ESR was underestimated by the businesses, but the RA/FTA took it seriously. Therefore, as a forewarning for round 2, businesses that carry out one or more relevant activity in the UAE must either consider increasing their substance if not adequate or consider alternative restructuring options, e.g., redomiciliation into another jurisdiction, restructuring, liquidation, etc., to dodge the substance requirements. Tax payers who fail to meet the substance test for a second consecutive year will be exposed to a penalty of AED 400,000, and, what is probably worse, the tax authority of the parent jurisdiction will be informed of the lack of substance in the UAE.
Our previously conducted webinar may help in filling out the notifications and forms. Additionally, consistency in meeting the different disclosure requirements is important, as Ultimate Beneficial Owner filings and the Country by Country reporting may require similar information to be disclosed and these disclosures allow reconciliation with the ESR information disclosed.
Round 2 starts with notifications by end of June 2021 for FY 2020. Tax payers have been warned.
On 18 October 2020, the Sultanate of Oman published Oman Sultani Decree No. 121/2020 Promulgating the Value Added Tax Law. The entry into force of VAT in Oman is 180 days as of the publication of the Decree and therefore 16 April 2021. The staggered VAT registration has started on 1 February 2021 for the first batch of taxpayers in the same way it was implemented in the KSA and Bahrain. Oman will be the fourth GCC state to introduce VAT, after the UAE and the KSA on 1 January 2018, and Bahrain on 1 January 2019. Qatar is expected to be next, and Kuwait the last (if ever). Oman issued its Executive Regulations (ER) on 10 March 2021.
Oman's VAT regime is not an original one, and it did not set out to be. It stays close to the GCC VAT Treaty and to the UAE VAT laws, but it has a few deviations. From the trained perspective of the European VAT expert, or now also to a certain extent the GCC VAT expert, there are not a lot of surprises in Oman Sultani Decree No. 121/2020 and Tax Authority Decision No. 53/2021. We have set out below nonetheless the main characteristics of the Omani VAT legislation in a nutshell, drawing a few comparisons with the other GCC States. You can review our webinar on the topic here.
Having experienced a major economic downturn with the decline of oil prices, the GCC countries have set out to introduce VAT by signing the Common VAT Agreement of the States of the Gulf Cooperation Council (GCC) back in 2016.
Although the Sultanate, alongside Qatar and Kuwait, was procrastinating the implementation of the tax, it finally caved as a result of financial implications of the COVID-19 pandemic. The immense financial expenditure resulting from the pandemic combined with the major decline in oil prices over the past years, have burdened the Sultanate with an increased fiscal deficit of 17.3% of GDP and a central governmental debt of 81% of GDP (Source: IMF Mission Concluding Statement February 2021). The Sultanate has thereby chosen to undergo major public policy reforms in an effort to reinforce fiscal sustainability, starting with the implementation of VAT in April 2021 previously having expanded the scope of excise tax, and extending to the reduction of public expenditure in the long term.
If the said transformation is executed efficiently, the Sultanate will be the first GCC country to operate a comprehensive tax framework comprising of VAT, excise tax, corporate and personal income tax. However, similar to any major tax reform, some aspects are rather ambitious, and the materialization of these plans is highly dependent on a wide range of socio-political factors.
Overall design of the VAT laws
The overall design is really derived from the GCC VAT Treaty. The GCC VAT Treaty is a close carbon copy of the EU VAT directive after 2010 and before 2011. The main difference with the EU is obviously that we do not have any intra-GCC supplies. The interplay with the GCC Common Customs Law will therefore be equally complicated as it has been so far between the three GCC States which have introduced VAT.
Simply put, in Oman, VAT registered persons will charge VAT on supplies of goods and services and imports are taxed, and so are deemed supplies. Exceptions apply. Nothing new under the sun there. The Omani VAT is a European style VAT, and seems to be closer even to Europe than the other three countries so far (e.g., a VAT exemption for schools and healthcare is mandated by the EU VAT directive).
How much of the GCC VAT Treaty still carries any force is questionable, since the KSA has already deviated from it with its 15% VAT rate, none of the GCC states consider each other as Implementing States, and the UAE applies a different forward looking test (30 days instead of 12 months).
There are a great deal of other differences between the states (e.g., the UAE adding a place of supply rule for supplies of services related to goods, which is absent in the GCC Treaty), and those will remain since there is no strong policing mechanism for the Treaty, and neither is there far reaching co-operation between the states. In other words, the divergent practices we have seen in the three GCC States so far, will continue to exist and further diverge, and there is no incentive for convergence. That is regretful for businesses, but it is simply a consequence of the political design of the Gulf Cooperation Council.
Implications on economy and consumption
The underlying principle of VAT is that it should not affect business decisions. While that is true to a certain extent, it does affect consumption. We expect, as we have seen in the three GCC states so far, a spike in consumption right before the introduction of VAT, and a drop right after, with a marked increase in inflation. Over time, the introduction of VAT will be absorbed into the prices. Residents tend to resort to the purchase of a few luxury items before the introduction of VAT, such as cars and jewellery.
The revenues from VAT are estimated at OMR 300m (roughly USD 780m - see https://www.arabianbusiness.com/politics-economics/450045-introduction-of-vat-to-give-omans-economy-780m-boost). The oil price for Brent Crude is 43 USD per barrel at the writing of this text. In order to balance its books, Oman budgeted in 2020 an oil price of 58 USD per barrel. It needs the oil price to be at exceed 80 USD per barrel to balance its budget (Source: IMF Middle East and Central Asia Regional Economic Outlook April 2020).
While VAT is a drop in the bucket for Oman, excise tax had also contributed to improving Oman's fiscal balance. In 2019, tax revenues were up 8% compared to the previous year, amongst others due to the introduction of excise tax. For the 2021 budget, Oman will be able to count on additional fiscal revenues from VAT.
Main provisions of the Omani VAT Law
In terms of the mandatory registration threshold, like in the KSA and Bahrain, and how it is foreseen in the GCC VAT Treaty, there is a forward looking test of 12 months and a backward looking one for the same period, as per Article 55 of the Omani VAT Law. Oman has therefore not chosen to follow the UAE.
The mandatory registration threshold is OMR 38,500. If a business makes sales exceeding that threshold for the last 12 months or it foresees it will in the next, it needs to register for VAT purposes.
In terms of calculating the threshold in relation to the implementation of VAT, a tax payer should calculate the backward looking test by end of October 2020. If the tax payer is above the threshold, they need to register. They need to conduct also the forward looking test. If any of the two tests pushes them over the registration threshold, they need to register.
Non-residents making taxable supplies in Oman for which the reverse charge mechanism does not apply, need to register as of the first Omani riyal of turnover in Oman. They can do so directly, or via a fiscal representative. Hopefully both regimes will be business friendly and Oman will not resort to requesting bank guarantees and the like from foreign tax payers. The OECD has recommended a simplified registration mechanism for non-residents, as putting up too many barriers for non-residents, eventually just leads to non-compliance, given that international cooperation around these issues is still very complex. Article 112, par. 1, 4 allows the OTA to determine other conditions for the fiscal representative.
VAT grouping will also be possible, with supplies between the members of the VAT group remaining outside of the scope of VAT, and its members being jointly liable for the payment of VAT. Interestingly, entities established in Oman's Special Zones are not allowed to join a VAT group and have to register individually (article 125, par. 1, 6 ER). The policy rationale behind this exclusion remains unknown, but likely has to do with the registration process in the Special Zones.
Oman recently obliged businesses to request for a tax card with the Authority, a document similar to a VAT registration certificate, and which is in use amongst others in Qatar. Given the fact that Oman has the details of tax payers already on file, they will hopefully be able to combine these in order to make the VAT registration easier for resident companies, just like in KSA.
In accordance with the guidelines published by the Omani Tax Authority, companies with a commercial registration number are required to register through the online portal. However, the residents with no CRN or non-residents are required to submit the VAT registration application in an excel sheet along with supporting documents through the email address VAT@taxoman.gov.om.
Furthermore, Oman has implemented a staggered registration similar to when VAT was introduced in KSA and Bahrain. Early registration will begin from 1 February to 15 March 2021 for taxpayers whose annual supplies exceed OMR 1 million. This decision was also followed by the publication of a VAT Transitional registration guide which assists taxpayers to calculate annual taxable supplies, help with registration via the online portal and so on. Registered taxable persons will receive a VAT Identification Number of 12 characters (OMXXXXXXXXXX).
Transactions in scope
Transactions in scope of Oman Sultani Decree No. 121/2020 and their corresponding rules stem from the GCC VAT framework. The GCC framework sets the scope of the tax, place and date of supply rules, exemptions and zero rates. The Sultanate did not deviate from its neighbours with regards to the scope of the tax and includes deemed supplies, VAT due on import and instances where the reverse charge mechanism applies.
The place of supply rules also stem from the GCC treaty and are nearly identical to those of the other GCC countries. The place of supply of goods will be the place where the ownership of the goods is transferred. While the place of supply of services will be determined in accordance with actual consumption, with the general rule as per the treaty being the place of residence of the supplier.
A comprehensive representation of the place of supply rules is provided in Articles 20-30 of the Executive Regulations. The Regulations specifically address supply of goods with/without transportation, transportation services, real estate related services, telecommunication services and electronic services.
As aforementioned, minimal differences exist in these rules relative to the GCC treaty and the Implementing Regulations published by the other GCC states. However, further deviation from the treaty is likely to result from the tax Authorities’ interpretation and subsequent guidance as witnessed in the other states. If the nature of such guidance is similar to that of other tax Authorities, we can expect the application of these standard rules to be more complex and extensive.
Exemptions and zero rates
The distinction between exemptions and zero rates is paramount. Arabic speakers sometimes have difficulties distinguishing both, since there is no good Arabic equivalent for the terms. When a supply is exempt, no VAT applies on it, but the taxable person making the supply cannot deduct the input VAT. When a supply is zero rated, no VAT applies, but the taxable person making the supply can deduct the input VAT.
The GCC VAT Treaty requires that member states subject to the zero rate:
- medicine and medical equipment;
- cross-border transportation of goods and persons;
- export of goods to a destination outside the GCC;
- supply of goods to a customs duty suspension situation as provided for in the Common Customs Law and the supply of goods within customs duty suspension situations;
- the re-export of moveable goods that have been temporarily imported in the GCC for repairs, refurbishment, conversion or processing, as well as the services added to these goods
- supplies of services by a taxable supplier residing in a member state for a customer who does not reside in the GCC territory who benefits from the service outside the GCC territory, except where one of the special place of supply rules applies; and
- the supply of investment gold, silver and platinum, and the first supply after extraction of the same metals.
Oman implemented all of the above in Chapter 6 of the Omani VAT Law, in the process also zero rating foodstuffs via a Chairman’s Decision (this is a “may” provision in the Treaty), zero rating means of transport used for commercial transport (also a may provision in the Treaty), rescue airplanes, boats and aid by land.
In addition, it also zero rated the supply of crude oil and its oil derivatives, and natural gas (the Treaty allows for oil and gas to be either standard rated or zero rated). It is important though that both the supplier and customer are taxable, and both must be registered and licensed by the Ministry of Energy and Minerals (article 93 ER). These conditions will impact especially foreign businesses trading in these goods in Oman.
Oman also zero rates supplies of goods or services in Special Zones and subjects them to the same treatment as such treatment applicable for customs duties suspension. Oman’s VAT regime for the Special Zones is stricter than the UAE’s regime for the Designated Zones though, as it requires that the buyer is licensed by the Special Zone Authority.
The GCC VAT Treaty requires that the following supplies are subject to a VAT exemption:
- financial services;
- imports of goods if the supply of these goods is subject to a zero rate or exemption;
- import of goods exempt from customs duties;
- personal luggage and gifts brought by travellers; and
- special needs goods.
Oman Sultani Decree No. 121/2020 implemented all of those exemptions.
The individual member state can deviate from the regime applicable to financial services provided for in the GCC VAT Treaty, foreseeing a fixed refund rate for financial institutions or apply “any other tax treatment”. Oman has adopted a regime similar to the other GCC states which taxes fee based income and exempts income based on a spread (article 79 ER). Such regime is not based on any EU regime.
It gets interesting in the sectors where member states can choose whether to subject supplies to a standard rate, zero rate or exemptions. Member states can do so in the following areas:
- real estate
- local transport; and
Oman has chosen the following options, according to Article 47 of the Omani VAT Law:
- exempt health care;
- exempt education;
- exempt bare land;
- exempt the resale of residential properties;
- exempt residential lease; and
- exempt local passenger transport.
In terms of the applicable zero rates, as indicated above, Oman has opted to apply the zero rate where possible (foodstuffs, means of transport and oil and gas supplies).
Subjecting health care and education to an exemption is a first in the GCC. European VAT experts are used to this situation, since the EU VAT directive mandatorily subjects such supplies to an exemption. It will however mean that many more businesses will be a “mixed tax payer”, making both taxable and exempt supplies. The UK term for this situation is “partial exemption”, and has been in use in the region.
Oman prescribes a direct allocation, followed by a pro rata for mixed expenses (articles 58 and 59 ER).
The application of the exemption is probably the only situation in which Oman substantially differs from the other GCC states, although the KSA has made public education out of scope of VAT (with no grounds in the domestic legislation, and in violation of the neutrality principle). Arguably, this extension seems to be an effort to allow the tax to be more socially accepted and to alleviate the already onerous financial burden on Omani residents.
However, the extension also simultaneously alleviates a major problem with the interrelation of the definition of a taxable person as per the GCC Treaty with businesses providing exempt supplies. Businesses only providing exempt supplies are not required to register for VAT and hence do not fall within the definition of a taxable person. VAT incurred by these businesses is therefore non-recoverable in the GCC countries, creating an incentive to purchase services from suppliers abroad up to USD 100,000 as VAT would not be applicable in those circumstances. As the scope of the exemption is wider in the Sultanate, it provides this incentive for a wider category of businesses and thereby having a greater impact on the economy.
Interesting is also that sale of new residential property will be subject to a 5% VAT rate. As we have seen recently in the KSA, where these are now subject to a real estate transfer tax and are VAT exempt, the VAT regimes applicable to the real estate sector tend to differ from country to country.
Transactions with other GCC states
As mentioned above, the GCC States are in a VAT limbo, where they do not consider each other as implementing states and therefore consider each other as non GCC states. That means that a substantial part of the GCC VAT Treaty does not apply. Oman has not even bothered to implement the special place of supply provisions which apply between GCC member states for intra-GCC supplies.
In terms of the intra-GCC supplies, these will be subject to the same VAT regime as supplies made with third countries.
This means amongst others that supplies of goods made from Oman to another country will be subject to a zero rate, provided the conditions are met. The same thing holds for supplies of services made from Oman to a non-established customer when the service does not fall under one of the special place of supply rules. Hopefully Oman will not adopt the same very conservative position for such services as the other GCC states, and simply allow for a supply of services from Oman to a foreign customer to be zero rated, without further conditions. At this point, we only have a vague definition in article 52, 4 of the Law on exports of services, and no confirmation of the zero rate or further conditions in the ER.
As seems to have become customary upon the implementation of VAT, Oman Sultani Decree No. 121/2020 considers for contracts which remain silent on VAT, that the price is VAT inclusive. This flags to businesses that they should amend their contracts. An amendment to a contract is not always possible and especially with clients which do not have a full right to recover input VAT (e.g., governments or financial institutions), such negotiation may prove difficult.
Trained VAT eyes would not limit the amendments in a contract to simply stating that the price is VAT exclusive, but would suggest a host of amendments meant to protect the tax payer.
For continuous supplies, Oman Sultani Decree No. 121/2020 also states the obvious, which is that supplies which take place after the entry into force of VAT in Oman, are subject to VAT.
For supplies for which an invoice is issued or payment is received before the implementation of VAT, or before registration, and for which the supply is made after, VAT is due on the implementation or registration date.
The GCC VAT Treaty does not have any procedural provisions for each member state. They can therefore develop their own. Often jurisdictions then resort to what they already have, and then just apply that for VAT purposes. In the UAE and Bahrain, the legislators could not fall back on existing procedural provisions. In the KSA, the legislator could, but the procedural provisions were in dire need of reform. Those States therefore developed their own.
Oman has borrowed provisions from Oman Sultani Decree No. 23/2019 on the Promulgation of the Excise Tax, which entered into force previously. It has foreseen a strict regime, mirroring its other GCC member states. The tendency can be seen across government entities, which act in a very punitive way.
A business which deliberately does not register for VAT purposes, is punishable with one to three years imprisonment or with a fine of OMR 5,000 (approx. USD 13,000) to OMR 20,000 (approx. USD 52,000), as per Article 101 of the Omani VAT Law. The same penalties apply, amongst others, when a business deliberately refrains from reporting correct data in its tax return, or when it is found to be evading tax.
Such a very strict regime can be seen in the regime applicable to the responsible person. The person responsible for the business, is also responsible for the tax obligations. In addition, the responsible person is not allowed to leave Oman for more than 90 days a year, unless they have permission from the tax authority and appoint a replacement.
A range of penalties from OMR 1,000 (approx. USD 2,600) to OMR 10,000 (approx. USD 26,000) apply to violations such as failing to appoint the responsible person, failing to submit a tax return, issuing non-compliant invoices, and not keeping regular records, as stipulated under Article 100 of the Omani VAT Law. These penalties can be doubled for repeat offenders.
Interestingly, and perhaps a witness to the Omani accommodating nature, businesses can reach a settlement with the Omani Tax Authority. Reaching such a settlement cancels the assessment and the associated punishment.
The Omani Tax Authority also does not use the “pay first, then claim” principle the UAE uses. This means that, under the current legislation, we can expect that a relatively substantial amount of cases will be brought before the Committees.
VAT returns and invoices
Oman Sultani Decree No. 121/2020 does not prescribe the minimum information for invoices. It defers this to the Executive Regulations in article 144. Oman will have tax invoices and simplified tax invoices, the latter being the equivalents of receipts in continental Europe. According to the FAQ's already issued by the Omani Tax Authority, a tax invoice needs to contain:
- the word “tax invoice”;
- date of issuance of the invoice;
- date of supply;
- a sequential number for the tax invoice;
- supplier name, address and VAT number;
- customer name and address, and TIN if applicable ;
- description of the goods or services;
- quantity of goods
- payment date of advance payment, if any
- total consideration, excluding tax
- applied tax rate
- price discounts, reductions and subsidies offered to customer
- taxable value, and;
- Value of the VAT due in OMR
Tax invoices in English are acceptable. However, as in UAE, the Regulations further specify that an Arabic translation may be requested by the Authority. Tax invoices and other records need to be kept for 10 years, according to Article 70 of the Omani VAT Law.
Tax invoices can be issued in a different currency, but need to be converted according to Central Bank rates. It is regretful that Oman also has not allowed for a contractual or systems override of these rates, as this puts a substantial burden on businesses.
The format of the VAT return is not known yet. Hopefully the format of the VAT return will be closer to the UAE and not the KSA and Bahrain, where the latter countries have adopted a VAT return where the VAT which is reverse charged, does not have to be reported, if the business has a full right to recover input VAT (probably a first globally!).
We do not foresee any additional reporting associated with VAT, at this point.
Way to move forward
Oman has been a sleepy tax jurisdiction up until recent years, with little reforms. Over the last few years though, we have seen the implementation of excise tax, common reporting standards, the introduction of country by country reporting and the implementation of the tax card. Before that we had the signature of the MLI as well, impacting the double tax treaties negotiated by Oman.
Although Oman already has a direct tax framework in place, applying corporate income tax at a rate of 15% and, mirroring the KSA, a set of withholding taxes, we expect the legislative framework to be subject to further reform. Additionally, the implementation of VAT alongside the expected introduction of a personal income tax in 2022 also formulates the notion that the Sultanate is on the right path to diversify its revenue stream via extensive tax reforms.
Finally, Oman is a friendly, slow paced country. The punitive provisions in Oman Sultani Decree No. 121/2020 bring a different tone though. The consultant written provisions will unfortunately create a fear with tax payers. Tax payers from more mature jurisdictions especially are more used to a cooperative tax administration, which allows for easy corrections of mistakes and which favours correcting mistakes through voluntary disclosures. The transformation from the Secretariat General for Taxation, the old Omani tax authority, into the Oman Tax Authority, signals a major change in behaviour and approach, especially where amendments can be made by the Tax Authority itself, just as in the KSA, and do not need to pass by the cabinet (like in the UAE, for example). Changes can therefore be effected much faster and easier. The KSA for example has amended its VAT law already at four occasions in the last 2.5 years.
The next step will be the further publication of the Tax Authorities’ guidance which will display it’s interpretation of the rules and likely approach, allowing for additional comparison to be made between Oman and its neighbouring states.
As aforementioned, the financial constraints resulting from the pandemic has opened the eyes of the GCC countries and drove them to undergo much-needed reforms. Although the VAT initiative was identified in 2016, the unfortunate events of 2020 has pushed Oman to finally join the KSA, Bahrain and the UAE.
Despite the inevitable similarity to the GCC Treaty, Oman Sultani Decree No. 121/2020 retains some degree of autonomy and uniqueness relative to the other states. As expected, this divergence expanded following the publication of the Executive Regulations as it was the case with the other states.
With the publication of the Law and Executive Regulations, it is imperative that the Omani Tax Authority provides comprehensive and clear guidance to taxable persons in order to avoid future complications, and that these taxable persons now finalise preparations for the introduction of VAT in Oman.