Oman Introduces VAT

The Sultanate of Oman issued Royal Decree No. 121/2020 on October 18, 2020, setting out its regime for a value-added tax (VAT). The VAT Law will come into effect from April 1, 2021, making Oman the fourth Gulf Cooperation Council (GCC) member state to introduce a VAT.

The VAT Law is the first step in Oman’s implementation of the GCC VAT Agreement, which was agreed and signed by the GCC member states in 2016. Oman’s VAT legislation will be comprised of the VAT Law and its executive regulations, the latter of which are expected to be released shortly, providing greater insight into the details of the VAT regime.

Under the VAT Law, supplies of goods or services made may either be taxable at 5% or 0% (so-called zero-rated), or they may be VAT exempt or out of VAT scope.

VAT was swiftly introduced in the United Arab Emirates (UAE), the Kingdom of Saudi Arabia (KSA) and Bahrain. Taking note of that, prudent businesses operating in Oman are already planning for the implementation of Omani VAT and have started reviewing their legal arrangements and contracts.

In this article, a number of potential Omani VAT issues are described, based on the authors’ experience with the introduction of VAT in the other GCC member states:

• importance of contracts and appropriate VAT clauses;
• ascertaining correct VAT treatment;
• VAT registration and gathering information from customers;
• VAT recovery issues and VAT grouping;
• VAT litigation avoidance strategies.

Importance of Contracts

VAT is a transaction-based tax, meaning that the underlying legal documentation (i.e., the contract or terms) detailing the supply of a good or service is generally the start of the review process. Businesses need to review their contracts carefully to determine the Omani VAT impact. First and foremost, does the contract account for VAT (and/or other taxes)? If a contract is silent on VAT, this could mean that the amounts specified therein are inclusive of VAT. To avoid any misunderstanding, such “silent” contracts should ideally be updated. From a commercial perspective, parties may need to (re)negotiate the relevant considerations in order to account for non-recoverable VAT (if any).

Businesses should also review the contracts to determine whether they reflect economic reality. Are the parties to the contracts the actual supplier and recipient of the service or good? This is particularly important in relation to the invoices issued by the supplier and, consequently, the right of the recipient to potentially recover input VAT. With VAT, the (economic) reality in principle supersedes any (wording of a) contract.

One exception to this rule is in case of Islamic finance products (i.e. under contracts which are Sharia compliant). It is anticipated that such products will be treated in the same manner as the equivalent non-Sharia financial products. As such, while a certain transaction may not be considered a loan under Sharia law, such transaction may nevertheless be treated as a loan for the purposes of VAT. Scrutiny is therefore advised with Sharia compliant contracts such as the Murabaha.

In order to apply the correct VAT treatment of the supply of a service or good, the supplier may need to obtain additional information from the recipient. In this respect, contracts and/or terms and conditions may need to be revised in order to collect or store such information and to ascertain the correct Omani VAT treatment of the services or goods supplied.

Ascertaining Correct VAT Treatment

The VAT treatment depends primarily on where a supply of a good or service takes place (or is deemed to take place). With respect to goods, the supply is in principle where the goods are located on the date they are placed at the recipient’s disposal. With respect to services, the place of supply depends on (i) the type of recipient (is the service business-to-business or business-to-consumer?) and (ii) the type of service.

Special rules may apply to certain services such as real estate related services or electronically supplied services (or e-services). Real estate related services and e-services are always deemed to be supplied where the real estate is located and where the recipient is located, respectively. Particularly, overseas business-to-consumer suppliers of e-services should be aware that they will need to register, charge, collect and remit Omani VAT to the tax authorities.

Businesses in Oman which import services or goods may need to account for Omani VAT by means of a reverse charge mechanism. Such VAT would in principle be recoverable if and to the extent the business renders VAT taxable activities.

As mentioned above, different rates may apply. Supplies may either be taxable at 5% or 0% (so-called zero-rated), VAT exempt or out of scope of VAT. The following supplies shall be exempt from Omani VAT:

• financial services;
• provision of health care, and associated goods and services;
• provision of education, and associated goods and services;
• undeveloped lands (bare lands);
• the resale of residential real estate;
• local passenger transport; and
• renting real estate for residential purposes.

In addition, the importation of certain goods will be VAT exempt (e.g., personal items, necessities of non-profit associations and returned goods). The VAT regulations are expected to provide additional guidance on the scope of the foregoing exemptions. As with EU VAT exemptions, in principle an exemption has a limited rather than a broad application so scrutiny is advised.

The 0% VAT rate shall apply to the following supplies:

• supply of foodstuffs;
• supply of medicines and medical equipment;
• supply of investment gold, silver and platinum;
• supplies of international transport and intra-GCC transport of goods and passengers and the supply of related services;
• supply of sea, air and land means of transportation for transporting of goods and passengers for commercial purposes, and the supply of goods and services related to these means of transportation;
• supplying rescue aircraft, rescue boats and auxiliary ships;
• supply of crude oil and its oil derivatives and natural gas.

In addition, the export of goods out of Oman is also subject to a 0% VAT rate. It is noteworthy that Oman implemented all 0% VAT rated supplies mentioned in the overarching GCC VAT Agreement, including foodstuffs (which is an optional provision). As with the exemptions, the exact scope of the foregoing is assumed to be further described in the VAT Regulations.

The correct VAT treatment is particularly important for the recovery of VAT at the recipient’s level. Furthermore, fines and/or penalties may be imposed in case supplies are incorrectly treated for Omani VAT purposes. Fines for non-compliance range from 1,000 Omani rials ($2,600) up to 20,000 Omani rials. As with the other GCC member states, certain acts of VAT non-compliance may be penalized with imprisonment (up to three years).

VAT Registration and Information Collection from Customers

A person carrying on a business in Oman and making taxable supplies of goods or services exceeding the mandatory registration threshold will be required to register for Omani VAT purposes and file periodical VAT returns. The mandatory registration threshold per 12-month period will be set at the Omani rial equivalent of 375,000 Saudi Arabian riyals (approx. 38,500 Omani rials or $100,000). No threshold applies to nonresident persons, which means that businesses established outside of Oman may under certain circumstances be obliged to register for VAT from the first Omani rial charged.

It is expected that the Omani VAT registration system will go live in January 2021. It remains to be seen how accommodating the Omani tax authorities will be towards nonresident taxpayers. Bahrain, the UAE and the KSA have all provided ample (guidance) documentation in both Arabic and English.

As mentioned above, e-services provided by an overseas supplier are subject to VAT if the recipient of such services is located or residing in Oman. A reverse charge mechanism applies in case of business-to-business supplies of e-services, under which the burden of VAT is shifted from the overseas supplier to the Omani recipient. As of April 1, 2021, foreign and domestic e-service suppliers should therefore actively obtain customer information (i.e., VAT number) to determine their customers’ status for VAT purposes (business or consumer).

VAT Recovery and VAT Grouping

Businesses should in principle be able to recover incurred Omani VAT if and to the extent that they render VAT taxable activities. VAT recovery will normally only be possible if the recipient has received a tax invoice which adheres to the Omani VAT invoice requirements. Part of these requirements will be the inclusion of details on the supplier and recipient. As such, any incurred VAT on incorrectly issued invoices (e.g., wrong issuing party, wrong VAT rate and/or other missing requirements) may not be recoverable. Businesses operating in Oman should therefore (preemptively) come up with internal VAT policies to ensure a proper VAT administration and invoicing.

A VAT group is a facility that allows two or more taxpayers to be registered for VAT purposes as a single taxpayer. The VAT group scheme may be particularly of interest to taxpayers with a restricted VAT recovery rate which are part of a group with non-restricted businesses. Inclusion of such payers in the VAT group may provide for (additional) VAT recovery.

In addition to VAT grouping, businesses should carefully review their existing Omani structures and supply chains, in particular with respect to “inactive”/”dormant” holding companies which may incur irrecoverable VAT on a regular basis. There are various ways in which a holding company can strengthen its VAT recovery position.

VAT Litigation Avoidance Strategies

Going forward, businesses operating in Oman should take into account applicable VAT (if any). Although VAT may be recoverable, the recovery itself generally takes a certain period of time. This cash flow aspect should be one of the considerations during the (re)negotiation process, particularly with large supply contracts spanning several years.

The (re)negotiation of contracts, but even more so the absence of novation, may trigger disputes between commercial parties, possibly resulting in litigation. To mitigate or prevent disputes, clear lines of communication and proper record-keeping are required. In addition to contract-related disputes, we also foresee disputes related to invoices, because incorrectly issued invoices can have significant adverse consequences. Businesses should therefore implement and enforce a proper VAT administration (e.g., policies and invoicing).

Lastly, the introduction of VAT may result in tax (court) cases filed by or against the Omani tax authority. Tax litigation may occur when taxpayers are believed to be not in compliance with the VAT law or when the taxpayer’s position with respect to VAT is challenged by the tax authority. Generally, such tax litigation is triggered when the relationship between the taxpayer and the tax authority has turned sour. Preemptively implementing an appropriate VAT administration would ensure businesses operating in Oman start with a clean record.

Planning Points

While some details of the Omani VAT system are still unknown, businesses operating in Oman are already taking steps to address the upcoming changes by:

• Assessing their legal structures and supply chains to identify and highlight Omani VAT risk areas.
• Subsequently, reviewing legal arrangements (contracts and terms) to determine whether they reflect the economic reality and whether they include appropriate tax clauses.
• Revising contracts that are “silent” on VAT (which may be challenging from a commercial perspective).
• Ensuring that new and future contracts contain appropriate tax clauses.

In terms of VAT recovery, businesses should explore various opportunities to enhance their VAT recovery position. Such opportunities may include but are not limited to VAT grouping, revisiting financial arrangements and/or “dormant” holdings.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Ton van Doremalen is a Partner, Head of Tax, Middle East, Daan Arends is a Partner, and Wouter Kolkman is an Associate with DLA Piper.

The authors may be contacted at: ton.vandoremalen@dlapiper.com; daan.arends@dlapiper.com; wouter.kolkman@dlapiper.com