KPMG in Oman summarizes developments regarding Withholding tax and Transfer Pricing.
Withholding tax developments
In our previous edition, we had highlighted the development with respect to withholding tax on services with the Oman tax authorities withdrawing the FAQs on their website which mentioned that withholding tax on services would not apply if the services are fully rendered outside Oman. Their changed view was that withholding tax would apply on services, irrespective of the place of performance. The Oman tax authorities have now clarified vide a letter issued to some of the accounting firms in Oman that withholding tax will apply on all services rendered by foreign suppliers irrespective of the place of performance of the services. Income is considered to be realized in Oman so long as the person utilizing the services is in Oman unless the services relate to the service recipient’s permanent establishment outside Oman. This interpretation is consistent with the tax authorities’ view on the withholding tax applicable on other income realized in Oman which is subject to withholding tax (royalties, research and development, management services and use or right to use software).
The tax authorities are in the process of getting the Executive Regulations issued which will hopefully provide further clarity. These are expected next month. KPMG has in the meanwhile assisted companies in seeking specific written clarification from the Oman tax authorities on applicability of withholding tax on several payments including on interest rate swaps, interest on deposits, interest on loans for liquidity purposes between banks within one year and interest on convertible bonds. We note that the Oman tax authorities are accommodative in providing clarification on the applicability of withholding tax on cross border payments depending upon the facts and circumstances of each case.
Our discussion with the tax authorities on payments towards freight charges to offshore service providers indicates that these should not be subject to tax withholding in Oman.
Transfer pricing dispute
Under the Oman tax laws, transactions between related parties are required to be undertaken at arm’s length price; however the legislation has not formally prescribed methods to justify such arm’s length.
KPMG recently represented a case before Oman Tax Authorities involving ‘low-value’ intra group services. The Omani company under a centralized organization structure was receiving services from its UAE based parent company, in the form of general accounting, legal, HR and IT related support, and the tax authorities were historically disallowing 50% of these charges on the ground that such charges were excessive in nature being a related party transaction.
For the year under consideration, a case was made before Oman Tax Authorities that the services does qualify as ‘low-value’ intra-group services. Applying the 2017 OECD Transfer pricing guidelines on ‘low-value’ intra-group transactions, it was submitted there was no requirement to meet the ‘benefit test’ in such cases both in terms of having a formal transfer pricing documentation undertaken as well as maintenance of supporting documents with regard to these services. In the instant case, parent entity had undertaken transfer pricing documentation which confirmed that the Omani company along with subsidiary companies of the same group were remunerating the parent entity at cost plus 5%. After several discussions with Oman tax authorities, it resulted in reduced disallowance thereby showing willingness of the Oman tax authorities to consider globally accepted transfer pricing principles.
Given Oman has recently committed itself to the four minimum standards including CbC as part of the OECD BEPS project, it needs to be seen how soon local tax laws will be amended to have the formal transfer pricing documentation included.