Updates from KPMG in Oman include important details about Oman’s new tax treaties with Portugal and Spain and a recent administrative ruling in which the Tax Committee accepted accounting standards as the basis for calculating taxable income. KPMG in Oman also presents highlights of the Central Bank of Oman’s Financial Stability Report and expected enforcement action related to Oman’s new Wage Protection System.
On 2 July 2015, Oman ratified the new tax treaty signed with Portugal on 28 April 2015. Once Portugal has ratified the treaty and ratification instruments are exchanged, the treaty will have from 1 January of the following year. Details of the treaty were recently published, and highlights are as follows.
The treaty provides for maximum withholding tax on dividends at the rates of:
The treaty provides for a maximum withholding tax on interest at the rates of:
Because the Oman income tax law does not impose withholding tax on dividends or interest payments, these provisions will not affect outbound payments from Oman.
The treaty provides for a maximum withholding tax on royalty payments at the rate of 8 percent on royalties (defined to include payments for the use of, or the right to use, industrial, commercial or scientific equipment). This will reduce withholding tax on outbound royalty payments from the 10 percent domestic withholding tax rate.
The treaty extends the definition of permanent establishment (PE) to deem a PE to exist where a person (who is not otherwise a dependent agent) habitually maintains a stock of goods or merchandise, from which goods or merchandise are delivered on the foreign enterprise’s behalf.
In calculating a PE’s profits1, the treaty protocol provides specific guidance on contracts for survey, supply, instillation or construction of industrial, commercial or scientific equipment or premises, or of public works. The protocol clearly states that the profits of any PE should calculated by reference only to that part of the contract that is effectively carried out by the PE (and not total contract revenue).
That being said, when calculating the taxable profits of the PE, the protocol permits each state to apply its domestic tax law and regulations. In the case of the Oman income tax law, this could restrict the deductibility of PE’s indirect costs to 3 percent of the PE’s revenue (increased to 5 percent and 10 percent in certain cases).
The protocol further states that payments for technical services2, or for management, consultancy or supervisory services, would be taxable as either business profits or income from independent personal services. . With no further guidance available on this point, KPMG in Oman assumes this statement aims to clarify that such payments do not fall within the definition of royalty payments.
A general ‘entitlement to benefits’ condition in the protocol would restrict treaty benefits where the income recipient is not the beneficial owner, or where the main purpose (or one of the main purposes) of the arrangements is to access the treaty’s provisions. This condition also makes it clear that the treaty will not prevent the application of either country’s domestic anti-avoidance rules.
The Oman – Spain Income Tax treaty (2014) (“the treaty”) has been ratified by Oman and Spain, and the treaty is subject only to the notification procedures, between the two States. The treaty will come into force three months after both notifications have been made and shall have effect:
KPMG in Oman presented some of the highlights of this treaty in a previous article. Now that the English text of the treaty is available, KPMG in Oman summarizes these additional key details:
In a recent administrative ruling, the Tax Committee accepted accounting standards as the basis for calculating taxable income.
The taxpayer in this case generates electricity through a power plant that the taxpayer constructed and operates, providing electricity to the state power authority under a 15-year power purchase agreement (PPA).
Initially, the taxpayer accounted for the power plant as a fixed asset of its business, subject to accounting depreciation, while recognizing all of the components of PPA tariff revenue through its income statement, as they became due in each year. The taxpayer then adjusted its taxable income for the differences between accounting depreciation and tax depreciation.
Following a change of the taxpayer’s ownership on 1 February 2007, the new management gave consideration to Interpretation 4 of the International Financial Reporting Interpretations Committee, which came into effect for accounting periods beginning on or after 1 January 2006, to provide guidance on those arrangements which, although not in the nature of a lease, should be regarded as a lease, or as containing a lease.
It was decided that the arrangements should be regarded as a lease, and would be accounted for (under IAS 17 Leases) as a finance lease, with effect from 1 January 2007. Accordingly, fixed assets were de-recognized on the taxpayer’s balance sheet and a finance lease receivable was recognized with effect from 1 January 2007. The taxpayer prepared its tax return for the period ended 31 December 2007 on the basis of its audited, IFRS-based income statement for the period, reflecting the finance lease classification.The tax authority rejected the change in accounting treatment and sought to re-calculate taxable income as if the power plant were still a fixed asset of the taxpayer’s business.
The tax authority’s challenge was based partly on the fact that the PPA did not classify the arrangements as a finance lease. Looking to the legal ownership of the power plant, the tax authority asserted that the taxpayer should continue to claim tax depreciation and recognize taxable revenue on the historic basis. The tax authority also asserted that a change in tax treatment could not be effected in the absence of any change to the income tax law.
On considering the taxpayer’s appeal, the Tax Committee decided in favor of the taxpayer that:
The Tax Committee’s decision in this case final and should be binding on the tax authority in future cases.
The May 2015 Central Bank of Oman Financial Stability Report considers the macro financial scenario of Oman. The highlights of the report are as follows:
The Ministry of Manpower’s Wage Protection System (WPS), introduced in January 2014, aims to ensure timely payment of wages to workers and help the ministry keep an electronic record of salary payments. The WPS requires the private sector to make wage payments only through authorized banks and financial institutions, and to pay wages within 7 days of the end of the month worked. The WPS is intended to track employers who violate the law, protect workers’ rights and help avoid salary disputes.
For the government, the WPS aims to provide a comprehensive, real-time database of accurate and reliable information on private sector wages that contributes to the development of statistical studies and economic planning. The WPS can also be used to monitor private sector companies’ compliance with labor-related policy, such as Omanization policy, and to identify the employment of illegal workers.
However, nearly 18 months after the WPS was introduced, KPMG in Oman has learned that only 50 percent of the expatriate workers are receiving their salary through banks. Further, only a few companies have linked their wage distribution system to banks.
As a result, the government will likely to put more focus on enforcing compliance with this system so it achieves the intended aims. This will result in stricter monitoring of domestic and multinational companies operating in Oman to ensure those that have not adopted the new system take the needed steps to do so immediately.
1 See Article 7, Business Profits.
2 Under Article 7 or Article 14.
3 Under Article 29.
4 Under the Article 25 Mutual Agreement Procedure.
5 Included in the definition of permanent establishment at Article 5.