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Oman – Tax updates

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KPMG in Oman summarizes developments regarding Tax litigation in case of Power Sector companies in Oman, Withholding tax and Base Erosion and Profit Shifting (“BEPS”) inclusive framework.

Tax litigation in case of Power Sector companies in Oman

Finance lease classification

The Oman Tax Law requires all taxpayers to follow International Financial Reporting Standards. There is a specific article in the Executive Regulations to the Oman Tax Law which deals with the tax treatment of Finance lease. The Article provides conditions to recognize an arrangement as ‘Finance lease’ provided it is recorded in the books of account as a finance lease.

A client in the Power Sector classified its arrangement with its customer as a finance lease in view of the provision of IFRIC 4 (Determining whether an Arrangement contains a Lease) and IAS 17 (Leases). Accordingly, the taxpayer did not show the power plant assets in their books and did not claim depreciation. The tax authorities disregarded the finance lease transaction for tax purposes and computed the taxable income on the basis that the lessor should be claiming tax depreciation. The matter went till the Tax Committee (‘TC’) (one level prior to the commercial courts) which decided the issue in June 2015 in favour of the client. The tax authorities challenged the TC’s decision by seeking a review, but the TC re-confirmed its original decision. The TC accepted the tax payer’s contention that the arrangement is in the nature of a finance lease and accordingly the tax depreciation should be allowed to the lessee and not the owner in accordance with the provisions in the Executive Regulations to the Income Tax Law.

However, in the subsequent years, the TC overturned its previous rulings and issued the decision in favour of the Tax Department. It now took a view that the arrangement is not a finance lease in accordance with the Executive Regulations to the Income Tax Law despite there being no change to the arrangement, or any other facts or to the provisions of the tax law and executive regulations. The matter is now pending with the Primary Court.

Interestingly, the tax authorities have in another case disregarded the tax returns which were not prepared based on the financial statements following IFRIC 12 (Service Concession Agreements) and completed the assessment based on the financial statements allowing tax depreciation to the beneficial owner of the asset rather than the legal owner.

These contradictory positions create an ambiguity to the taxpayers who are following finance lease model according to IFRIC 4/IFIRC 12/ IAS 17 with regard to the tax treatment of the finance lease.  

Carry forward of tax losses during exemption period

In case of another Power Sector company, the Company was exempt from income tax for an initial period of 5 years under a special Royal Decree (‘RD’) in Oman. The RD did not have any specific provision on carry forward of tax losses incurred during the exemption period. The Company’s majority shareholding is held by a foreign company. The Company was of the view that under the provisions of the Income Tax Law and the Foreign Investment Capital Law (‘FCIL’) in Oman as they stood at the time the exemption was given, losses incurred during the exemption period should be allowed to be carried forward indefinitely. However, this position was not accepted by the tax authorities. The TC and the Primary Court both upheld the position of the tax authorities. However, the Appeal Court ruled in favour of the Company opining that the losses incurred during the exemption period should be allowed to be carried forward indefinitely. The tax authorities appealed to the Supreme Court on this matter and recently, the Supreme Court issued its decision against the Company’s position. The electricity and water sector law does not any longer provide for tax exemptions and therefore this ruling will not have any impact to companies operating in this sector. The ruling however does provide certainty to the fact that tax exempt companies cannot carry forward tax losses incurred during the tax exempt period unless they are exempt under the income tax law under specific provisions in which case as an exception to the general rule, the tax losses can be carried forward indefinitely. 

Withholding tax developments

On interest

The withholding tax regime was amended in February 2017 to provide for a withholding tax at 10% on offshore interest payments to be made by Omani payers. Following representation from tax payers particularly financial institutions, the tax authorities were seeking to clarify the scope of withholding tax applicable to interest payments. KPMG in Oman had assisted its clients in successfully obtaining clarifications from the tax authorities allowing the Omani payers of interest (to overseas lenders) to put on hold the deposit of such withholding taxes with the Omani tax authorities, until the issuance of the Executive Regulations. Based on recent developments, we understand that the tax authorities have stopped issuing clarifications and expect tax payers to deposit the withholding tax based on the current provisions of the amended tax law.

On dividends

The new withholding tax regime requires withholding tax to be deducted on dividends paid by joint stock companies to foreign persons. Following representations from tax payers there was some indication that relief might be provided to these provisions including a possible deferment of its applicability. In the absence of any such relief being introduced, the tax authorities expect withholding tax provisions to be applied in accordance with the existing tax provisions. Joint stock companies declaring dividends in the coming weeks will therefore need to comply with the withholding tax provisions and deduct tax at 10% on dividends paid to foreign persons and deposit the same within the prescribed time limits.

On services

The new withholding tax regime also introduced tax withholding at 10% on procurement of services by Omani businesses from foreign suppliers. The tax authorities had earlier issued FAQs clarifying that tax withholding will apply only where the services are fully or partly rendered in Oman and would not apply in case where the services are rendered entirely from outside Oman. The tax authorities have now indicated that withholding tax will apply on all services rendered by foreign suppliers irrespective of the place of performance of the services. The FAQs issued earlier by the tax authorities have now been withdrawn from the official tax website. It is also expected that the tax authorities will require businesses to do a periodic reporting of all the service contracts / agreements executed by Omani businesses with both domestic and foreign suppliers.

 

Base Erosion and Profit Shifting (“BEPS”) inclusive framework

Oman recently joined the BEPS Inclusive Framework, being the second country after Kingdom of Saudi Arabia in the Gulf Co-operation Council region to sign the framework. By joining BEPS Inclusive Framework, Oman has committed to implement the four minimum standards of the BEPS Package as follows:

  • Measures against harmful tax practices (Action 5);
  • Model provisions against treaty abuse (Action 6);
  • Transfer Pricing documentation and Country-by-Country Reporting “CBCR”) (Action 13); and
  • Enhancing dispute resolution through Mutual Agreement Procedure (Action 14).

Furthermore, members of the Inclusive Framework agreed to work together on an equal footing to develop further BEPS measures and commit to participate in peer reviews on BEPS measures' consistent implementation. The implementation of tax treaty related measures to prevent BEPS is covered by the multilateral instrument (Action 15) which has not been signed by Oman yet.

Some of the anticipated key impacts on Oman entities are as follows:

  • Increased focus of Omani Tax Authorities on “substance” before providing any treaty benefit to the Tax payer or foreign Company;
  • Currently, Oman tax law contains provisions in relation to Transfer Pricing but the same does not emphasize on any documentation. The provisions mention the fact that the transactions should be at an Arm’s Length price. However, the Omani tax authorities expect the Taxpayer to provide detailed Transfer Pricing documentation during the assessment proceedings. With the increased focus on Transfer Pricing as part of the BEPS measures, and CBCR as one of the minimum standards, it is likely that explicit documentation requirements may be introduced in Oman;
  • Oman will have to work closely with other member countries to monitor implementation of BEPS. This will facilitate the taxpayers to have access to effective and expedient dispute resolution mechanisms under bilateral tax treaties;
  • More detailed disclosures to ensure transparency; and
  • Additional compliance requirements.

Other updates

On 5 December 2017, the European Economic and Financial Affairs Council (ECOFIN) determined a list of 17 non-cooperative jurisdictions for tax purposes (i.e. the EU black list). This list was established based on three (screening) criteria: tax transparency, fair taxation (no harmful tax regimes) and implementation of BEPS minimum standards. In addition to the EU black list, there is a separate ‘grey list’ with 47 jurisdictions which includes Oman. Grey-listed jurisdictions have certain concerns raised on one or more of the screening criteria but have committed to address such concerns by introducing relevant changes in their tax legislation by year- end 2018 (or by year-end 2019 in case of developing countries). As Oman is not black listed, it would not fall within any of the recommended sanctions.