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

VOL 18, Issue 2 April 2016

OMAN UPDATE

BUDGET 2016

PRELUDE 
The Oman State Budget 2016 has adopted a cautious austere approach, in clear departure from the fiscal expansionary policy followed in the last decade, as the country braces itself to the harsh realities of a significant drop in oil prices coupled with the geo-political situation. The Budget clearly signals the government’s firm resolve to deal with the challenges posed by weak global oil prices head-on. The Budget focuses on curtailing non-essential expenditures and reducing subsidies, whilst ensuring continued support to major development projects, revenue diversification and welfare of nationals. The government is keen to develop the non-oil sectors, such as manufacturing, transportation and logistics, tourism, and mining and fisheries, and develop a conducive investment climate to enhance private sector role in driving economic growth.

Oil and gas revenues
The total budgetary revenues are estimated to substantially decrease by about 26% to OMR 8.6 Billion, of which oil revenues and gas revenues constitute 72% of total revenues. Oil and gas revenues are expected to decline by about 33% to OMR 6.15 Billion, based on an average oil price of US $ 45 per barrel vis-a-vis US $ 75 per barrel considered in the budget for 2015 and average actual oil price of US $ 52 per barrel in 2015.

Non-oil and gas revenues
The non-oil and gas revenues at OMR 2.45 billion represent 28% of total revenues, and the government has indicated various measures to enhance these as spelt out below:

  • Raising corporate income taxes –tax rates are proposed to be increased from 12% of taxable income to 15% of the taxable income. Further, it is also proposed to remove the initial tax free statutory deduction of OMR 30,000.
  • Limiting corporate income tax exemptions.
  • Widening the scope of withholding taxes, which may additionally include withholding taxes on dividends, interest and service charges (in addition to existing withholding tax on Royalties, Consideration for research and development, Consideration for the use of, or right to use,computer software, and Management fees).
  • Regulating custom duty exemptions.
  • Strengthening tax collection procedures and control mechanism.
  • Increasing municipality transaction fees for real estate and tenancy agreements from 3% to 5%.
  • Phased increase in electricity and water tariffs.
  • Increase in visa and labour card fees.
  • Increase in municipality fees, fees for driving licenses, car registrations, etc.
  • Proposed implementation of GCC-wide VAT scheme.

Budget expenditure

  • Despite the significant reduction in budget revenues, budget expenditures have been reduced by only 16%, to OMR 11.9 billion, and a number of stringent measures have been indicated to substantially curb government expenditure. Current expenditure, at OMR 8.68 Billion, constitutes 73% of budget expenditure, almost equal to the total budgeted revenues.
  • Defense and security expenditure has been reduced by 8%, along with reduction in expenditure on oil and gas production by 14%.
  • Government subsidies are budgeted to be reduced by a significant 64%, to OMR 400 Million, only through increase in prices of petrol and diesel, and higher water/electricity tariffs for commercial/industrial consumers in a phased manner.
  • Development Expenditure is reduced by 18% to OMR 1.35 Billion.

Budget deficit
The budget deficit projected at OMR 3.3 Billion is substantially lower than the actual deficit of OMR 4.5 Billion projected for 2015, and constitutes 38% of budget revenues and about 13% of estimated Gross Domestic Product (GDP). The Budget deficit is planned to be financed 46% from strategic finance reserves, 36% through foreign and domestic borrowings, and 18% from grants. However, based on adequate strategic reserves and low debt to GDP ratio of only 4%, Oman is in a position to tide over the challenges posed by low oil prices and slowing global economic growth.

(This article is compiled by Mr. Zarir Patwa, a Partner in PKF L.L.C., the PKF member firm in the Sultanate of Oman.)