A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 14, Issue 2 April 2012

Oman Update

The long awaited Executive Regulations to the Income Tax Law has been issued by Ministerial Decision No. 30/2012, which will apply to tax years commencing from 1st January 2012. The comprehensive Executive Regulations comprising of 154 Articles relating to application of the various provisions of the tax law and tax compliance requirements, will significantly impact the tax obligations, procedures and exposures in Oman. The Executive Regulations promote clarity and transparency in the application of the Oman Tax Law. The major corporate tax implications consequent to issue of the Executive Regulations are summarized below.

  • Dependent Agent
    An agent shall be deemed to form a Permanent Establishment (PE) for a foreign company in Oman on fulfillment of following conditions:

    1. If he is dependent on the foreign company economically or legally.
    2. If he habitually exercises the authority to act and conclude contracts in Oman in the name of the foreign company within the limit of the activity practiced.
    3. In the case of agency of a foreign insurance company, he must have the authority to collect insurance premium or insure against risks.

    Consequent to this Executive Regulation, foreign companies which presently do not have a PE in Oman but transact their business in Oman through a dependent agent, would now be liable to tax in Oman.

  • Allowance of expenses as deductible expenseExpenses shall be allowed as a deductible expense only if they have been:
    1. Actually incurred
    2. Related to the tax payer’s business
    3. Necessary for production of gross income of the company
    4. Recorded in the accounting records of the company
    5. Supported by documents

    Expenses incurred should be proportionate to the value of services received / benefit received as decided by the Secretary General for Taxation.

  • Deducting contributions paid to the Pension fundExecutive Regulation has laid down following rules to be complied with by the companies on the contribution to Staff Pension Funds to be allowedas a deductible expense.Pension Fund set up in Oman:
    1. The Pension Fund shall be independent of the tax payer and the fund money shall be kept separately from the tax payer’s money, and shall be invested in the fund’s own account.
    2. Amount paid as contribution to the Pension Fund shall be calculated in accordance with the rules and regulations adopted by the Fund.
    3. The tax payer shall submit to the Secretary General of Taxation, the  rules and regulations of the Fund as well as the license issued thereto and the Fund’s financial statements certified by an Auditor locally registered in Oman.

    Pension Fund set up outside Oman:

    1. The Fund should be established in accordance with the laws and rules applicable in the country in which it was established.
    2. The tax payer shall submit to the Secretary General of Taxation certified copies of the following:
      • License issued to the Pension Fund
      • Social Security Plan administered by the Pension Fund.
      • Rules and regulations relating to setting up and managing of the Pension Fund
  • Allowance of bad debts as deductible expense
    1. The debt shall have arisen due to a business transaction carried out by the tax payer which was necessary for production of gross income.
    2. The amount of debt should be included in the accounting records.
    3. Specific procedures should have been carried out by the tax payer for different categories of debts as per the Executive Regulations
    4. In case of debts over OMR 1,500, the establishment, Omani company or PE should have:
      1. Lodged a claim for the bad debt before the liquidator – in the case of dissolution and liquidation of the indebted company.
      2. Taken legal action for realization of the debt and initiated other procedures as stipulated in Executive Regulations.
      3. Obtained an order in favour of the tax payer by the competent judge, for the payment of the debt.

    Consequent to this Executive Regulation, many companies may find it difficult to claim bad debts as deductible expense, particularly for debts above OMR 1,500 which will be allowed only if legal action has been initiated to recover the debt or a claim has been lodged with the liquidator of the company.

  • Deduction of sponsorship fees
    1. Sponsorship agreement should have been entered into.
    2. The tax payer should have actually incurred the sponsorship fee during the tax year, which shall not include commission paid or payable for purchase of merchandise or goods.
    3. Deductibility shall be restricted to 5% of taxable income, calculated before deducting sponsorship fee but after adjusting the carry forward loss from  preceding years.
  • Deducting commission of authorized agent in case of insurance companiesConditions and limitations stipulated in Executive Regulations are in line with the present tax law.
    1. The foreign company and the agent shall abide by the obligations under the Insurance Companies Law.
    2. The amount of commission paid to the agent allowed to be deducted as a deductible expense shall not exceed 25% of the net premium collected.
  • Deduction of remuneration and perquisites to the owners and for rent paid
    1. Conditions stipulated for payment of rent and remuneration including perquisites to the proprietors/ partners/ members/ directors are largely in line with the present ministerial decisions. The rent agreement has to be registered with the Municipal Authorities for the rent to be allowed as a deductible expense.
  • Deduction of interest on loans
    1. Interest expenses must be incurred for business purposes, should be charged in the financial statements and be incurred for carrying on business activities.
    2. In case of establishment (sole proprietor), interest expense will be allowed only if it relates to amounts borrowed from banks registered in Oman and is not used to finance or raise capital.
    3. In case of interest on loan paid/payable by Omani company to related parties, the interest deduction shall be allowed subject to debt to equity ratio of 2 : 1.In computation of equity, besides paid up capital, legal reserve, retained profits and general reserve will also be considered.
    4. Deduction for interest on loan provided by Head Office or related party shall be allowed only if the loan agreement has been made between the Head Office and the branch on an arms- length basis. The Head Office should have actually borrowed the amount from a bank / third party and given this as loan to the branch, and the loan should have been utilized for financing the business operations of the branch.
    5. Certain other specific conditions have to be satisfied for deductibility of interest on loan in case of establishment/Omani company and PE which has been laid down in the executive regulations.

    The Executive Regulation intends to curb the practice of using debt instead of equity to fund business operations. This Executive Regulation will adversely affect those companies who have debt to equity ratio over 2 : 1 and have borrowed at market rate of interest from related parties to fund their operations. Further, interest charged by the Head Office to the branch on loans given by them will not be allowed as a deductible expense unless the above conditions are fulfilled.

  • Head office overheads
    1. Head office expenses / overheads shall not be allowed as a deductible expense if it is incurred by a PE in Oman for supervision and control.
    2. Head office expenses will be allowed only if they are necessary for the production of the gross income of the PE in Oman and they are recorded in the audited financial statements of PE in Oman.
    3. Allowance of Head Office overheads incurred for and allocated to Oman PE is restricted to
      1. 3% of the gross income of the PE during the tax year;
      2. 5% of the of the PE’s gross income in the case of banks and insurance companies;
      3. 10 % of the PE’s gross income in the case of major industrial companies using modern and sophisticated means of productivity or adopting scientific research methods or offering technical assistance or using patents that require exchange of information and technical expertise.
    4. The Executive Regulations has annulled the “average of three years” clause in the present tax law, which was more beneficial to the tax payers.
    5. Further in case of Double Tax Avoidance Agreement (DTAA) entered between government of Sultanate of Oman and government of certain countries, administrative expenses as per DTAA is required to be fully allowed if certain conditions are fulfilled, and in such a case the above restriction of 3%, 5% or 10% of the gross income may not apply.
    6. In case of a GCC Company branch, the GCC Economic agreement requires that there should be no discrimination in business conducted amongst GCC states.  Accordingly, as per the ministerial decision, GCC branch companies are required to be treated at par with Omani companies.  As such, it would be interesting to see whether restriction on deductions applicable to branches of foreign companies would also apply to branches of GCC companies.
  • Leasing companies: Financial leasing
    1. Amount of expenses incurred by the lessee during the lease period shall be allowed provided the asset is accounted in the books of the lessee as a finance lease in accordance with the provisions of the relevant International Accounting Standard.
    2. The relationship between the lessor and the lessee shall be considered to be that of a lender and borrower.
    3. Amount received by the lessor from the lessee shall be treated as income from lease as per the International Accounting Standard.
    4. Depreciation shall not be allowed to be deducted in the books of the lessor in case of finance leases.
  • Corporate tax exemption:Conditions laid down for obtaining exemption from tax for the first five years are largely in line with the current practice followed, however, in case of extension of the tax exemption period for the next five years, following additional and very stringent conditions have been laid down:
    1. The net profit made by the establishment or Omani company during the exemption period after deducting any loss incurred shall not exceed during the period of exempted business activity 50% of the paid up capital at the commencement of the exemption period as per the audited financial statements.
    2. The establishment or Omani company shall achieve during the last two financial years of the exemption period a 10% increase in the average ratio of Omani to non-Omani employees above the ratio prescribed for the sector by the Ministry of Manpower.  Further, such percentage  shall be evenly distributed between the various administrative levels, such as senior management, professional and engineering, and secondary works.
    3. Minimum investment in the fixed assets by an establishment / Omani company should be OMR 1.5 million, whereas earlier it was OMR 750,000.

    Consequent to these Executive Regulations, it would now be much more difficult to get tax exemption extended for a further period of five years.

  • Rules for exemption from submitting the tax returnsThe establishment or Omani company which fulfills the following conditions shall be exempted from submitting tax returns in any accounting period related to a tax year.
    1. The capital at the end of the accounting period as registered in the commercial Register shall not exceed OMR 20,000
    2. The gross income realized shall not exceed OMR 100,000
    3. Average number of employees during the abovementioned accounting period shall not be more than 8 persons.
    4. The exemption from submitting tax returns shall only take effect by a decision from the Secretary General or his authorized representative upon a request by the establishment or Omani company, after ensuring fulfillment of all the conditions specified in the Executive Regulations.

    This Executive Regulations is a positive step in the right direction as it will relieve a number of small organisations from the hassles of filing tax returns and audited financial statements with the tax department, which will encourage individuals to become entrepreneurs and be more focused on their business activity.

  • Rules for exemption from submitting the financial statements with the final returnsThe Secretary General may exempt any establishment or Omani company from submitting the audited accounts prepared for any accounting period relating to a tax year on fulfilling the following conditions:
    1. The capital of the establishment or Omani company as recorded in the commercial Register at the end of the accounting period shall not exceed OMR 50,000.
    2. The gross income realized shall not exceed OMR 300,000
    3. The average number of employees during the abovementioned accounting period shall not be more than 10 persons.
    4. The exemption from submitting tax returns shall only take effect by a decision from the Secretary General or his authorized representative upon a request by the establishment or Omani company, after ensuring fulfillment of all the conditions specified in the Executive Regulations.

    This Executive Regulations will relieve number of small organisations from filing audited financial statements with the tax department. Further, it will also relieve the tax department from carrying out tax assessments of thousands of small establishments/ Omani companies from whom negligible amount of tax was being collected, and be more focused on large companies. However, one needs to see the actual implementation of these Executive Regulations i.e. whether the tax department would carry out further investigation and seek various information, details and supportings, or close tax assessments based on final returns. If this happens, then the very objective of this relaxation would be defeated.

  • Procedures for assessment:
    1. As per the abovementioned regulations, the Secretary General for Taxation has the right to conduct an examination at a tax payer’s premises during its working hours following a notification specifying the date and duration of the examination to be submitted to the taxpayer at least 10 days prior to the date of the examination.
    2. The tax payer will have to produce documents, accounts, records and statements for a period not exceeding 10 years for inspection.

[The above note, prepared by the PKF member firm in Oman, should not be construed as conclusive tax advice as it is based on a limited extract of an unofficial translation in English. Professional advice should be sought before acting on the above note.]