On 18 October 2020, the Sultanate of Oman published its VAT law. The entry into force of VAT in Oman will be 180 days as of the publication of the Law. It is expected that the Executive Regulations will be published in December 2020 and that registrations will open in January 2021, around three months before the introduction of VAT in the Sultanate. Oman will be the fourth GCC State to introduce VAT, after UAE and KSA on 1 January 2018, and Bahrain on 1 January 2019. Qatar is expected to be next, and Kuwait the last (if ever).
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 the Omani VAT Law. We have set out below nonetheless the main characteristics of the Omani VAT law in a nutshell, drawing a few comparisons with the other GCC States.
Overall design of Omani VAT
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 KSA 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. UAE adding a place of supply rule for supplies of services related to goods, which is absent in the 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 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.
Impact 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, i.e. 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 currently at 43 USD per barrel. 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 around 87 USD per barrel to balance its books.
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.
It’s a cliche, “if you fail to plan, you plan to fail”, but it carries some truth. While it constitutes the easy argument for sales hungry consultants, those with more intimate knowledge of current VAT matters with businesses in the GCC, know that there are a great deal of undisclosed tax liabilities and ongoing litigation (especially with the UAE’s Federal Tax Authority given the very high penalties applicable in the UAE).
As the timeline above indicated, businesses have roughly six months to prepare. Not enough time for some, and too much time for others. Having a chat with a firm experienced with VAT implementation will already help in preparing. Businesses in Oman should also have a chat with businesses in the other GCC States and learn from their experiences.
The main milestones to be written into the responsible’s agendas:
- December 2020: Publication Executive Regulations
- January 2021: Opening Registrations
- April 2021: Implementation of VAT
- 30 June 2021 (expected): Filing of the first VAT return
In terms of the Mandatory Registration Threshold, like in 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 (see article 55 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, he needs to register. He needs to conduct also the forward looking test. If any of the two tests pushes him over the Registration Threshold, he needs 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 Tax 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.
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.
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.
Omani 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
- 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 the process also zero rating foodstuffs (on a list to be determined - 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. It did not zero rate fishing boats. 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).
Oman also zero rates supplies of goods or services in Special Economic Zones and subjects them to the same treatment as such treatment applicable for customs duties suspension.
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 travelers
- Special needs goods
Oman 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”. It remains to be seen whether Oman will adopt a regime similar to the other GCC States which taxes fee based income and exempts income based on a spread. 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
Oman has choses chosen the following options:
- Exempt health care
- Exempt education
- Exempt bare land
- Exempt the resale of residential properties
- Exempt residential lease
- 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. It is probably the only situation in which Oman substantially differs from the other GCC States, although KSA has made public education out of scope of VAT (with no grounds in the domestic legislation, and in violation of the neutrality principle).
Interesting is also that residential houses will be subject to a 5% VAT rate. As we have seen recently in 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.
As seems to have become customary upon the implementation of VAT, the VAT Law 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, 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, the law 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.
Strict procedural provisions
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 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 the Excise Tax Law, 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 5,000 OMR (approx. 13,000 USD) to 20,000 OMR (approx. 52,000 USD). 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 he has permission from the Tax Authority and appoints a replacement.
A range of penalties from 1,000 OMR (approx. USD 2,600) to 10,000 OMR (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. 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 return and invoices
The VAT Law does not prescribe the minimum information for invoices. It defers this to the Executive Regulations. 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”
- Supplier name, address and VAT number
- Date of issuance of the invoice
- A sequential number
- Date supply is made
- Customer name and address (not the VAT number of the customer!)
- Description and quantity of goods or services
- Taxable amount and unit price
- Tax rate
- Amount of VAT charged in OMR
The Executive Regulations will confirm or infirm this list and will likely confirm that tax invoices in English are acceptable. Tax invoices and other records need to be kept for 10 years.
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 UAE and not KSA and Bahrain, where the latter 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.
Just as in KSA, amendments can be made by the Tax Authority itself, and do not need to pass by the Cabinet (like e.g. in the UAE). Changes can therefore be effected much faster and easier. KSA for example has amended its VAT law already at 4 occasions in the last 2.5 years.
Other tax reforms in Oman
Oman has been a sleepy tax jurisdiction up until recent years, with little reforms. 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 KSA, a set of withholding taxes, we expect the legislative framework to be subject to further reform.
What to expect from the Oman Tax Authority
Oman is a friendly, slow paced country. The punitive provisions in the VAT Law bring a different tone though. The consultant written provisions will unfortunately create a fear with tax payers. Especially tax payers from more mature jurisdictions are more used to a cooperative tax administration, which allows for easy corrections of mistakes and which favors 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 change in behavior and approach.
Preparing for the introduction of VAT
We have listed below listed our top 10 lessons for the three GCC Member States which have implemented VAT:
- Do not apply a quick and dirty fix
- Lots of the provisions of the Laws and Regulations were subject to interpretation and debate
- Executive Regulations have some detail, but tax payer guidance sector wise was welcome to avoid misinterpretations in the framework
- Short tax periods (e.g. monthly) are sometimes challenging to manage
- VAT implementation projects were either started too late or poorly managed
- Helplines and call centers were initially understaffed and undertrained
- Access to VAT expertise was difficult for SMEs
- There were a considerable amount of wrong registrations, requiring new registrations or amendments in VAT grouping registrations
- Dealing with Deemed Supplies, input tax deduction and VAT reporting were challenging tasks
- IT issues were common, with configuration mistakes, wrong tax codes, non compliant ledgers and invoices.
Next stop will be the publication of the Executive Regulations in December 2020, where all of the above will be further detailed.
COVID19 had a profound impact on economies globally. KSA responded to the impact by increasing the VAT rate from 5 to 15% and take a number of economic measures to stimulate the private sector. The KSA tax authority, the General Authority of Zakat and Tax, also took a number of initiatives.
The GAZT initiatives contained several measures in respect to Zakat, CIT, VAT and Excise Tax. They included amongst others deferrals of import VAT, and additional delays to submit tax returns. One important feature though was that it contained a Tax Amnesty.
The Tax Amnesty is essentially a penalty waiver program under which tax payers can correct their position without being penalised. Such programs have proven to be hugely successful in other jurisdictions .
The initial deadline to make use of the Tax Amnesty was 30 June. Many tax payers took advantage of the deadline and managed to disclose their positions without penalties.
The deadline for the Tax Amnesty was subsequently extended to 30 September 2020 and is now set to expire in 10 days. It is likely that this is the last chance to benefit from this initiative, before GAZT steps up compliance enforcement.
Under the Tax Amnesty, all Zakat, CIT or mixed Zakat and CIT paying entities would not be penalized for any failure to file, pay, or register late, provided they correct their positions before the end of the deadline and pay the taxes due.
Some important penalties are for example:
- Penalty for late VAT registration : 10,000 SAR
- Late payment penalty for VAT : 5% to 25% of the liability in the tax return with an additional 5% for each month after this tax due
- Late payment penalty for CIT: up to 20K SAR per tax return and 1% for every 30 days.
Given the impact of the latest Ministerial Decision amending the Income Tax By-Law , the Tax Amnesty has gained in importance. The change applies retroactively to 1 January 2020.
The amendment to the By-Law removes the limitation to consider a KSA company up to the second level of indirect ownership to determine its liability under Zakat or CIT. Such structures were already controversial and looked at closer by GAZT. It considered that in some cases tax payers “manipulated” share holdings to unlawfully obtain a (generally lower) Zakat liability instead of CIT. It treated such cases as tax evasion.
Disclosing such a structure and paying the dues without penalties can only be done anymore for the next 10 days. The same holds for any other situation of non compliance in KSA.
Tax payers should act now, before GAZT steps its enforcement once the Amnesty Period ends.
Get in touch with our KSA tax team via firstname.lastname@example.org or email@example.com to know more.