In an effort to improve its finances, which have been marred by low oil prices, Oman is planning to come up with the most extensive tax reforms till date as part of its commitment to balance the budget by 2020. 

Industry captains believe that the tax proposals, which are most likely to be issued in the first quarter of this year, may include increasing corporate tax from 12 per cent to 15 per cent, doubling taxes on tobacco products, alcohol, energy drinks and other such products and the removal of RO30,000 tax-free threshold.

Apart from these the government also envisages getting rid of almost all tax exemptions given under the current law, barring those for manufacturing activities and some free trade zones in the sultanate. The government also plans to widen the ambit of withholding tax and is looking at even bringing ministries and government departments under it so that they could become more efficient in spending.

Earlier in 2015, the government announced its intention to increase corporate tax, which was reiterated in 2016. But hurdles during the legislative process have delayed the implementation. The government announced that it is going to amend the income tax laws this years while presenting the budget, which according to industry insiders is a clear sign that it is committed to go ahead with the proposed amendments.

“The government's objective is to expand the non-oil revenue base. To this end the corporate tax rate is expected to be increased and withholding tax base widened to include other elements. In addition tax exemptions will be significantly minimised. The introduction of value added tax (VAT) as part of the GCC initiative effective 2018 will significantly increase tax revenue,” says Ahmed Amor al Esry, managing partner, EY Oman.

He adds, “All these developments point to the growing importance of taxation as a revenue source for the government. Associated to this development is employment opportunities that will be generated for Omanis as the Secretariat General for Taxation is expected to increase its staff strength significantly.”

According to Mubeen Khan, chairman of the Muscat chapter of the Institute of Chartered Accountants of India (ICAI), income tax rate in Oman, even at the proposed 15 per cent, is still one of the lowest in the world.

“The average income tax rates across the world is around 30-34 per cent. It is only in GCC countries and especially in Oman that income tax rates are very low. And Oman has one of the simplest tax laws compared to that of any other country in the world,” says Khan.

On the impact of hike in tax rates on business, Khan says “Even if the taxes are implemented I don't think there would be any adverse impact. Some sectors such as trading and services might be affected, but the government is careful to not to harm the manufacturing sector.”

Legislation tussle

According to industry insiders, the finance ministry has proposed to increase corporate tax across all sectors to 15 per cent. The proposal was cleared by Majlis A’ Dawla without any objections after which it was introduced and discussed in Majlis A' Shura.

The lower house proposed that certain sectors should be taxed higher. It suggested an increase in tax rates for oil and gas companies from 12 per cent to 35 per cent and to increase the tax rate for liquid natural gas (LNG) production companies from 12 per cent to 55 per cent (the same rate as for oil exploration and production activities).

As there was a disagreement between two houses, according to rules and procedures, both bodies had to meet and vote to settle the matter. The vote was held in mid 2016 and it was decided that there would be different taxes for some sectors. But the finance ministry had concerns that higher rate of taxation could adversely impact future foreign investment flows in the country. This led to further discussions and deliberations over the issue which delayed the implementation process.

There were a lot of apprehensions in the country's business community about the proposed changes as it might give a wrong signal to potential investors. And even if a recommendation is made by both houses of the parliament, to become a law, it needs to be ratified by a Royal Decree.

According to Esry, Oman is transitioning to a new economic model which should pave way for things to be done differently.

A diversified economy with extensive private sector participation - an ambition whose road map is being shaped by the National Program for Enhancing economic diversification (or Tanfeedh).

He says, “To support the programme a number of initiatives are being executed in parallel.

This includes a public private partnership (PPP) framework to be issued in 2017. The PPP model will pave way for a number of projects to be executed thus reducing the government’s financial burden.

“In addition a new Foreign Capital Investment Law is expected to be issued in 2017. The law will help in creating a favourable investment atmosphere in Oman as a number of restrictions in the existing law will be removed. This includes allowing 100 per cent foreign owned subsidiaries.”

Industry captains, however, are maintaining that the government will announce the amendments soon but are not sure what the exact rate of taxation would be. However various departments and stakeholders are still discussing the probable impact of higher taxation on foreign investment inflows.

“We have heard in the last few years about a new Foreign Direct Investment Law and a new Company Law being issued which will attract more foreign and domestic investment. We have heard in the past few months about the proposed Public Private Partnership law. We have also been hearing for the past eighteen months or so about the proposed amendments to the income tax law. All these legislative changes are important  for attracting investment and in the case of the income tax law. to enhance the government’s revenues,” says Ashok Hariharan, partner and head of tax – Lower Gulf, KPMG.

He says, “We do not know the reason for the delay in introducing the amendments to the tax law but we can assume that the government has been deliberating the recommendations of the State Council that included differential tax rates for different sectors. The Ministry of Finance in its budget statement has confirmed that the amendments to the tax law will come through in 2017 but have not been considered for the purpose of the 2017 revenues. We hope the government fast-tracks these legislative changes to provide clarity to businesses.”.

According to Hariharan, the government's proposal is to increase the rate of income tax from 12 per cent to 15 per cent with some relief potentially being given to SMEs.

Since the amendment hasn’t come so far, the government has not anticipated any increase in revenue for this year. But in their budget statement they have clearly said that they are going to bring changes in the income tax law and even if they bring changes in 2017, at best it will be effective from 2018 only.

Corporates will pay taxes on profits earned in 2017 by the end of year or early next year. Most of the companies have January-December financial year, so they will pay tax only in 2018. So by January next they will know how much tax they need to pay and they will pay it in March.

“There could be changes to widen the scope of withholding tax provisions and reduce the scope of income tax exemptions. Whilst most businesses have reported lower profits in 2015 and are expected to do so

also in 2016, the proposed tax law changes, most of which will have an impact on the government’s tax revenues for 2018, would at least compensate its loss of tax revenues due to lower profits to some extent,” Hariharan says.

Troubled finances

Despite recovery in oil prices, the government wants people to be used to an environment where it doesn’t make a significant contribution to the overall economy. And one of the key aspects of their planning is to become more efficient in spending.

In 2016,  government spending stood at RO12.6bn against a budgeted expenditure of RO11.9bn, compared to the actual spending of RO13.5bn in 2015. As the oil prices remained much lower than the government's expectation, budgetary deficit swelled to RO5.2bn in 2016 compare to RO4.5bn in 2015.

“Assuming an average price of brent crude of US$52 per barrel, GCC’s budget deficit will likely be around five per cent in 2017. We are projecting Oman’s budget deficit at about eight per cent of GDP in 2017,” says Giyas Gokkent, senior economist at International Institute of Finance,  a Washington-based research institute.

He adds, “Most countries in the region are registering fiscal deficits at current oil prices. As a result, GCC budgetary spending is expected to decline in 2017, led by lower spending in Saudi Arabia. However, the pace of spending cuts will be less than in 2016.”

Echoing a similar sentiment, Hariharan says, “The government wants to continue to reduce expenditure and is clearly giving a message to the business community not to depend too much on government spending for their projects.

“The government will continue to do what is the minimum required from them. Economic development has to take place with the active participation of

the private sector. This is where Tanfeedh and privatisation programmes  will be the keys to success. The government will have to provide the right investment framework for these initiatives to succeed. The private sector is indeed keenly awaiting the new PPP law so that it can have its business plans finalised.”

According to Esry, “I think the government is being cautious. Though there is expectation that following the OPEC deal to cut production, oil prices will remain at US$50 per barrel and above, there is no certainty that this will prevail throughout 2017 and beyond.”

Last year, the government pegged the budget keeping oil prices at US$45 per barrel in mind, however actual realisation was much lower than this as by the end of 2016. On an average Oman get around US$40 per barrel. However this year, oil prices have been trading above US$55 per barrel but government has decided to plug loop holes in budget rather than spending more to generate economic activities.

According to Khan, “Now the government has to think of sustainable ways to run the country, and across the world that sustainable way is taxation.

“The government is looking to raise around RO350mn through income tax in the budget and in 2018, they would be looking at raising another RO300-350mn through VAT. This is how Oman wants to move towards a sustainable future economy where it would be less dependent on oil and gas revenue.”

© Business Today 2017