Oman – 2015 budget measures drive growth, new tax treaty with Japan

Oman – 2015 budget measures drive growth...

Oman’s 2015 budget seeks to stimulate growth in the face of plunging global oil prices. Oman also signed a new tax treaty with Japan, which entered into force on 1 January 2015.

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A budget for driving growth

Even though Oman’s 2015 budget was delivered amid a steep decline in global oil prices, the Oman government commits to continue to support critical projects that aim to diversify the economy and stimulate economic growth.

These commitments include continuing investment at Duqm, as well as the start of the Sohar–Al Buraimi section of the national railway and several major road projects. The budget also provides for several significant tourism projects, including a number of hotel developments and the Oman Convention & Exhibition Centre in Muscat.

Falling interest rates are expected to encourage investment activity, while falling global commodity prices are expected to reduce inflation to 2.0 percent for 2015 (compared to 2.2 percent for 2104 and 3.1 percent for 2013).

Real growth for 2014 is expected to hit 4.4 percent and increase to 5% in 2015, which includes a budgeted growth of 5.5 percent in non-oil activities.

While taxes and fees have been used as one means to plug the gap caused by falling oil and gas revenues, the budget acknowledges a number of options to fund the deficit, for example, through the privatization of several state-owned companies in 2015 through 2017, and borrowings, including the potential issue of Islamic bonds.

Total revenues to reduce by 0.9 percent

Despite the recent downturn in oil prices, the total estimated revenues for 2015 are only expected to reduce by 100 million Omani rial (OMR; or by 0.9%) to OMR11.6 billion (2014: OMR11.7 billion). Actual revenues for 2014 are expected to total approximately OMR13.9 billion, mainly due to a higher-than-budgeted oil price for a significant part of the year.

Oil and gas revenues are expected to reduce by around 5 percent but at OMR9.2 billion, they still constitute 79 percent of total revenues (2014: RO 9.7 billion; 83 percent of total revenues). The 2014 budget was based on an average oil price of 85 US dollars (USD) per barrel. The 2015 budget does not disclose the budget price per barrel. However, KPMG in Oman calculates that, should the cost of production remain roughly constant, the 2015 budget would reflect a price in the region of USD80 per barrel, based on indicated production of 980,000 barrels per day (2014: 945,000 barrels per day).

The 2015 budget does not disclose a break-even price (2014 budgeted break-even price: USD105 per barrel). However, the overall budget deficit of OMR2.5 billion represents only a slight increase in the 2014 budget deficit of OMR1.8 billion, and oil production is expected to increase slightly in 2015 to 980,000 barrels per day. Thus, presumably, therefore, the breakeven price would not increase significantly in 2015. The actual realized price for 2014 has not been disclosed (2013: USD109 per barrel).

Revenues from taxes and fees projected to increase by 28.5 percent

Revenues from taxes and fees are budgeted at OMR1.3 billion for 2015, representing a significant increase of 28.5 percent over 2014 (budgeted at ORM1.0 billion).

Revenues from income tax are expected to rise by 25 percent to OMR500 million in 2015, from OMR400 million in 2014 – a significant increase compared to previous budgets (2014: 14 percent budgeted increase; 2013: 3 percent budgeted increase).

The increase in income tax revenue will reflect income tax collections made in 2015 but relating to 2014 and previous years. The Ministry of Finance presumably expects that part of this increase will relate to tax assessments for older tax years that are expected to be completed in 2015. Therefore, taxpayers may expect greater scrutiny of their tax returns during 2015.

While there has been some debate around the introduction of new taxes and a possible increase of the income tax rate, there have been no announcements to date. Any changes that are introduced during the year would only be reflected in tax collections in future years.

There is a noticeable increase in revenues from non-Omani labor licenses to ORM245 million in 2015 (from ORM150 million in 2014). This seems to reflect an increase in the labor license fee rather than in the number of labor licenses being issued.

Customs duties are increased by 22 percent to OMR330 million in 2015 (from OMR270 million in 2014). This is consistent with the planned investment in major projects and the increase in imports that would be expected to deliver these projects.

New Japan-Oman tax treaty

On 10 January 2014, the governments of Oman and Japan signed a new double tax agreement in Muscat. The treaty came into force on 1 September 2014 and has effect from 1 January 2015.

Under the treaty, the maximum rates of withholding tax are:

  • 10 percent on dividends (5 percent in certain specific cases)
  • 10 percent on interest, subject to exceptions
  • 10 percent on royalties.

The protocol to the treaty states that the provisions of Article 7 (Business Profits) do not prevent each country from applying their own domestic tax provisions when determining the taxable income of a permanent establishment in their country. This is particularly significant in Oman, where the domestic tax provisions on the tax-deductibility of head office costs are relatively restrictive.

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