Oman - 2014 Current Fiscal & Tax Trends
By Ahmed Amor & Alkesh Joshi
Posted: 25th September 2014 08:46The Government of Oman’s fiscal budget for 2014 reflects a deficit of US$4.7billion, with tax and duties expected to be the second largest contributor to the exchequer after oil and gas. The Government also expects a 17% increase in tax collections compared to 2013. This clearly underscores the importance of tax collection.
Consequently, the tax authorities in Oman continue to focus on widening the tax base. In doing so, they are increasing their scrutiny on withholding tax (WHT) compliance and the veracity of transfer pricing used between related party transactions.
With the increasing focus on WHT scrutiny and enforcement, it would be useful to clarify the tax position on the responsibility for WHT on certain specific sources of income arising to a foreign company, which has no permanent establishment (PE) presence in Oman.
In this regard, many foreign companies continue to hold the mistaken view that they are not subject to or accountable for WHT because they have contractually agreed that a local buyer shall be responsible for bearing all in-country taxes, including WHT. Notwithstanding such an agreement, Oman income tax laws levy WHT on nonresident foreign companies (foreign companies with no PE in Oman) that derive specified income in Oman. From a tax law perspective, WHT is primarily a tax on the foreign company and not the local buyer, although, WHT should be collected by deduction at source at the time of payment or contractually borne by the local buyer.
The collection process is only a mechanism to facilitate tax collection on the specific payments made to nonresident foreign companies. Tax laws stipulate that the local buyer shall be responsible for tax collection by deduction of the applicable WHT from the payments made to the nonresident foreign company. Where the local purchaser bears the WHT cost, the WHT payable should be calculated by grossing the value of payments made. The local buyer has to settle the WHT applicable on the payments made to the nonresident foreign company within a period of 14 days from the end of the month in which the payment was made or credited to the account of the foreign company, whichever is earlier.
In the event that a local buyer fails to deduct WHT at source, the tax authorities will first pursue the nonresident foreign company that has derived specified income in Oman. In the event that the foreign company fails to pay the WHT due, assessments will be raised on the local company (the buyer), together with fines of 1% for each month of delay.
Clearly, it is advisable for both local and foreign companies doing business in Oman to be aware of their respective WHT obligations. To avoid unexpected and costly tax penalties, it is prudent for companies doing business in Oman to regularly review their WHT positions relating to income earned from Oman. In this regard, EY helps clients with WHT health check reviews and review of contracts with foreign suppliers to determine the Omani tax implications. This will ensure that WHT implications are identified and obligations correctly managed.
Transfer Pricing (TP)
In today’s economy, the supply of goods, intangible assets and services is no longer confined by national boundaries. With so many multinational enterprises (MNEs) engaging in global activities, the transfer pricing of cross-border transactions is a key determinant of the taxable profits reported by MNEs.
Not surprisingly, the tax authorities in Oman are increasingly subjecting the TP of cross-border transactions between related parties to increased scrutiny and challenge. Oman tax laws include specific anti-avoidance measures providing tax authorities with the powers to challenge and overrule transactions, structures and business arrangements that lack commercial substance and economic reality.
Tax authorities in Oman have, in recent years, adopted their own assessment procedures with respect to TP practices. In keeping with this trend, the number of tax audits that focus on TP is increasing considerably. The main focus is on intra-group transaction, including services, profitability ratios and interest rates. The Oman tax authorities are also adapting their TP review strategies and policies and developing better tools, processes and capabilities. They are sharing information between government agencies and adopting leading tax enforcement practices, sharpening their compliance focus and carrying out more sophisticated tax reviews.
For MNEs operating in Oman, the focus needs to be on minimising potential challenges to their transfer pricing policies from the tax authorities and mitigating penalties when these challenges arise. Given that tax authorities are increasingly availing the services of more experienced tax practitioners, searching reviews and increasing imposition of penalties, it is imperative for MNEs to ensure that appropriate documentation of transfer pricing is in place to deal with the inevitable scrutiny of the Oman tax authorities.
EY Oman assists clients in reviewing their TP compliance process to ensure that they are appropriate to substantiate transactions related to Oman and satisfy the requirements of the Oman tax authorities.
For more information and specific advice, please contact EY Oman Tax Partner, Ahmed Amor: firstname.lastname@example.org or Tax Director, Alkesh Joshi: email@example.com