Oman's latest Royal Decree introduces sweeping amendments to the Income Tax Law of 2009 and was formally published on 26 February 2017.
Whilst the full text of Royal Decree 09/2017 (the Amendment) is being reviewed in more detail, here are a few details we are able to share in relation to key provisions:
Corporation tax – the impact
The Amendment increases the standard corporation tax from 12 per cent to 15 per cent.
The minimum tax-free threshold of OMR 30,000 has been scrapped.
Rather surprisingly, these provisions will be applied retrospectively as of 1 January 2017, suggesting that the government may have been trying to publish the Amendment prior to the start of 2017.
Any tax breaks?
There is a carve-out for companies (specifically aimed at the SME segment) that fulfil certain criteria, including but not limited to those:
having annual revenue of OMR 100,000 or less;
who employ 15 employees or fewer; and
with share capital of OMR 50,000 or less.
These companies will benefit by paying corporation tax of only 3 per cent.
There are further tax breaks offered to companies fulfilling further criteria, which will be exempted from paying corporation tax at all. Further guidance on this is expected.
Withholding tax – the story so far
In a move that signals one of the most significant amendments to withholding tax in Oman, the Amendment introduces new types of income, which will now be subject to withholding tax at the rate of 10 per cent.
In addition to the existing categories relating to royalties, payments for research and development, use of computer software and fees for management, withholding tax will apply to fees for the performance of services, payments of dividends, or interest. These extensions to the withholding tax regime came into force on 27 February 2017.
What is significant is that the text of the Amendment suggests that all interest payments by borrowers or issuers of securities to lenders and/or investors outside of Oman will be subject to withholding tax from 27 February 2017.
Similarly, all dividends paid by Omani companies to their foreign shareholders will be subject to withholding tax.
The Amendment applies only to those companies and entities that are subject to the Income Tax Law. Accordingly, companies located in Free Zones in Oman will, on the face of it, not be subject to these amendments.
Certain parties may also benefit from the terms of any double taxation agreements or treaties with Oman.
It remains to be seen whether further guidance will be issued as to how the Amendment affects existing cross-border financing and corporate structuring arrangements.
Who is resident in Oman?
In terms of corporate structuring arrangements, further clarity is needed as to what constitutes a non-Omani resident and in-depth analysis of the double tax treaties between Oman and other countries should be carried out. We intend to provide more information on these important factors as the new framework becomes clearer.
Potential impact on cross-border financing
The impact on cross-border financing will be seen through the gross-up provisions one would typically expect to see. The provision will usually indicate that, if there is a mandatory withholding by operation of law (as would arise by virtue of the Amendment), then the Omani entity shall "gross up" the payment so that the receiving party is made whole and receives the net amount free of such deductions. Similar provisions are found in debt capital market, project financing and general syndicated lending transactions as standard. Borrowers and issuers of debt securities who have agreed to such gross-up provisions will need to consider whether they are required to find a further 10 per cent or more to service their existing repayment obligations to meet their contractual obligations as well as the payment to the Secretariat General. Payments by borrowers or issuers to, inter alia, document banks or agent banks might also be caught in a similar manner for withholding tax under the Amendment.
The Amendment makes various other changes to the Income Tax Law. These include, inter alia:
a general increase in reporting obligations;
more severe penalties for breaching those obligations – both fines and imprisonment;
the treatment of donations and calculation of expenses; and
a new chapter on the treatment of taxable income in Islamic financing transactions (which provisions come into force on 1 January 2018).
The Amendment reflects the government's promise to promote a fiscal policy designed to increase revenue generation for the country. Given the impact of the budget deficit and lower for longer oil prices, these amendments to the existing tax regime are timely and were expected some time ago.
What do your supply contracts say about responsibility for taxes and withholding taxes? Will your suppliers now seek to pass these increases on to you?
Do your key contracts include change of law or economic stabilisation clauses and could there be any triggers for an event of default or an option for you or a counterparty to terminate a contract?
Does your company receive, and pay for, services from suppliers outside of Oman? Pay dividends to foreign shareholders?
Does your company pay interest on loans to lenders or investors outside of Oman and is this likely to be a notifiable event to your lenders or investors?
Has your company enjoyed any tax exemptions, deductions or discretionary treatment in the past?
Is your corporate governance structure robust enough to manage the risks of potential fines and personal liability?