On October 18, 2020, the Sultanate of Oman issued Royal Decree No. 121/2020 setting out its regime for a value added tax (VAT).
The VAT Law will come into effect from April 1, 2021, making Oman the fourth Gulf Cooperation Council (GCC) member state to introduce a VAT.
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The VAT Law is the first step in Oman’s implementation of the GCC VAT Agreement, which was agreed and signed by the GCC member states in 2016.
Oman’s VAT legislation will be comprised of the VAT Law and its executive regulations, the latter of which are expected to be released shortly, providing greater insight into the details of the VAT regime.
Under the VAT Law, supplies of goods or services made may either be taxable at 5 percent or 0 percent (so-called zero-rated), or they may be VAT exempt or out of VAT scope.
VAT was swiftly introduced in the United Arab Emirates (UAE), the Kingdom of Saudi Arabia (KSA) and Bahrain. Taking note of that, prudent businesses operating in Oman are already planning for the implementation of Omani VAT and have started reviewing their legal arrangements and contracts.
This alert discusses important VAT issues based on our firm’s experiences assisting clients in the region in relation to a VAT regime’s introduction:
- Importance of contracts and appropriate VAT clauses
- Ascertaining correct VAT treatment
- VAT registration and gathering information from customers
- VAT recovery issues and VAT grouping
- VAT litigation avoidance strategies
1. IMPORTANCE OF CONTRACTS
VAT is a transaction-based tax, meaning that the underlying legal documentation (ie, the contract or terms) detailing the supply of a good or service is generally the start of the review process. Businesses need to carefully review their contracts to determine the Omani VAT impact. First and foremost, does the contract account for VAT (and/or other taxes)? If a contract is silent on VAT, this could mean that the amounts specified therein are inclusive of VAT. To avoid any misunderstanding, such “silent” contracts should ideally be updated. From a commercial perspective, parties may need to (re)negotiate the considerations to account for non-recoverable VAT (if any).
Businesses should also review the contracts to determine whether they reflect economic reality. Are the parties to the contracts the actual supplier and recipient of the service or good? This is particularly important in relation to the invoices issued by the supplier and, consequently, the right of the recipient to potentially recover VAT.
In order to apply the correct VAT treatment of the supply of a service or good, the supplier may need to obtain additional information from the recipient. In this respect, contracts and/or terms and conditions may need to be revised in order to collect or store such information and to ascertain the correct Omani VAT treatment of the services or goods supplied.
2. ASCERTAINING CORRECT VAT TREATMENT
The VAT treatment depends primarily on where a supply of a good or service takes place (or is deemed to take place). With respect to goods, the supply is in principle where the goods are located on the date they are placed at the recipients’ disposal. With respect to services, the place of supply depends on (i) the type of recipient (is the service business-to-business or business-to-consumer?) and (ii) the type of service. Special rules may apply to certain services such as real estate related services or electronically supplied services (or e-services). Real estate related services and e-services are always deemed to be supplied where the real estate is located respectively where the recipient is located. Particularly, overseas business-to-consumer suppliers of e-services should be aware that they will need to charge, collect and remit Omani VAT to the tax authorities.
Businesses in Oman which import services or goods may need to account for Omani VAT by means of a reverse charge mechanism. Such VAT would in principle be recoverable if and to the extent the business renders VAT taxable activities.
The correct VAT treatment is particularly important for the recovery of VAT at the recipient’s level. Furthermore, fines and / or penalties may be imposed in case supplies are incorrectly treated for Omani VAT purposes. Fines for non-compliance range from OMR1,000 (US$2,600) up to OMR20,000 (US$52,000). As with the other GCC member states, certain acts of VAT non-compliance may be penalized with imprisonment (up to three years).
3. VAT REGISTRATION AND INFORMATION COLLECTION FROM CUSTOMERS
A person carrying on a business in Oman and making taxable supplies of goods or services exceeding the mandatory registration threshold will be required to register for Omani VAT purposes and file periodical VAT returns. The mandatory registration threshold per 12 month period will be set at the Omani rial (OMR) equivalent of SAR375,000 (approx. OMR38,500 or US$100,000). No threshold applies to non-resident persons meaning that businesses established outside of Oman may under circumstances be obliged to register from the first OMR charged.
As mentioned above, e-services are subject to VAT if the recipient of such services is located or residing in Oman. A reverse charge mechanism applies in case of business-to-business supplies of e-services, under which the burden of VAT is shifted from an overseas supplier to the Omani recipient. As of April 1, 2021, foreign and domestic e-service suppliers should therefore actively obtain customer information (ie, verified VAT number) to determine their customers’ status (business or consumer).
4. VAT RECOVERY AND VAT GROUPING
Businesses should in principle be able to recover incurred Omani VAT if and to the extent they render VAT taxable activities. VAT recovery will normally only be possible in case the recipient has received a tax invoice which adheres to the Omani VAT invoice requirements. Part of these requirements will be the inclusion of details on the supplier and recipient. As such, any incurred VAT on incorrectly issued invoices (eg, wrong issuing party, wrong VAT rate and/or other missing requirements) may not be recoverable. Businesses operating in Oman should (pre-emptively) come up with VAT policies to ensure a proper VAT administration and invoicing.
A VAT group is a facility that allows two or more taxpayers to be registered for VAT purposes as a single taxpayer. The VAT group scheme may be particularly of interest to taxpayers with a restricted VAT recovery rate which are part of a group with non-restricted businesses. Inclusion of such payers in the VAT group may provide for (additional) VAT recovery.
5. VAT LITIGATION AVOIDANCE STRATEGIES
Going forward, businesses operating in Oman should take into account applicable VAT (if any). Although VAT may be recoverable, the recovery itself generally takes a certain period of time. This cash flow aspect should be one of the considerations during the (re)negotiation process, particularly with large supply contracts spanning several years.
The (re)negotiation of contracts, but even more so the absence of novation, may trigger disputes between commercial parties, possibly resulting in litigation. To mitigate or prevent disputes, clear lines of communication and proper recordkeeping are required. In addition to contract-related disputes, we also foresee disputes related to invoices because incorrectly issued invoices can have significant adverse consequences. Businesses should therefore implement and enforce a proper VAT administration (eg, policies and invoicing).
Lastly, the introduction of VAT may result in tax (court) cases filed by or against the tax authority. Tax litigation may occur when taxpayers are believed to be not in compliance with the VAT law or when the taxpayers’ position with respect to VAT is challenged by the tax authority. Generally speaking, such tax litigation is triggered when the relationship between the taxpayer and the tax authority has turned sour. Pre-emptively implementing appropriate VAT administration would ensure businesses operating in Oman to start with a clean record.
CONCLUDING REMARKS AND NEXT STEPS
While some details of the Omani VAT system are still unknown, businesses operating in Oman are already taking steps to address the coming changes by:
- Assessing their legal structures and supply chains to identify and highlight Omani VAT risk areas.
- Subsequently, reviewing legal arrangements (contracts and terms) to determine whether they reflect the economic reality and whether they include appropriate tax clauses.
- Revising contracts that are “silent” on VAT (which may be challenging from a commercial perspective.
- For new and future contracts, ensuring they contain appropriate tax clauses.