Summary of New Income Tax Law of Oman

June2009BDOJawadHabib

 SummaryofNewTaxLawofOman

ThemuchawaitednewtaxlawtitledIncomeTaxLawofOmanpromulgatedbyRoyal Decree28/2009becomeseffectivefrom1January,2010.Thenewtaxlawprovidesclarity on several provisions included in old tax law, eliminates disparity on the tax rates chargedtolocalandforeigncompanies,confirmsthetaxpracticesbeingfollowedbythe taxdepartmentandharmonisesthetaxlawanddoubletaxavoidancetreatiesentered betweenOmanandmanyforeigncountries.

Taxableentities:

The taxable entities that are subjected to tax are; Omani proprietorships, Omani companies and permanent establishments (pe). The term pe refers to foreign entities (includingpersons)carryingoutactivitiesinOman,eitherdirectly orthroughadependantagent.Thenewtaxlawhasintroduceda 90daysthresholdlimitofstayinOmanapplicabletoaperiodof twelvemonthsforcreationofpeforforeignpersonsengagedin activitiesofservices.Underthenewdependantagentpeconcept, the activities of a dependant agent could create a pe for the foreignprincipalincertaincases.

Snapshot
12% tax rate for all taxpayers, including foreign entities. 90daysthresholdlimitfordeterminingpeforforeign entities. Leasingfirmsqualifyforloanlossprovision. Taxdepreciationcalculationsimplified Capitalgainsonconversionofsoleproprietorshipcan beexcluded. Preincorporationexpensestaxdeductible. Compliance/payment due date falling on holiday shiftedtonextworkingday. 10yearstimelimittocompletetheassessmentwhen noreturnsarefiled. Provisionfortaxcreditpaidoverseas. Adjustment made for related party transactions eligibleforreciprocaltreatmentinother.

Taxableincome:
Thenewtaxlawhaseliminatedtheterritorialconceptoftaxable incomeandconfirmstheglobalsystemoftax.Underthenewtax law,Omaniproprietorshipsandcompaniesareliabletotaxonall theirincomeswhereverearned. The term taxable income specifically includes income earned duringthepreincorporationorprecommencementofbusiness, whichisdeemedtoaccrueonthedateofcommencementofthat business. It specifically provides for taxability of capital gains wherever earned.Thisisalsoapplicablewhenape(foreignentity)disposes of its operations in Oman, the resultant capital gains would be liabletotax. Royalties included under taxable income defined as (1) consideration for the use or right to use of (a) intellectual or proprietary right either for artistic, literary or scientific work, including computer software, cinematograph films, or films or tapes or discs or any other media used for radio or television broadcasting,(b)patent,trademarks,drawings,modelandsecret process or formula, (c) industrial, commercial or scientific equipment, (2) consideration for information concerning industrial,commercialorscientificexperience,(3)consideration for granting rights to work mineral or other sources of natural wealth.

Taxrates:
As per the old tax law, Omani and GCC registered proprietorships/companies were taxed at 12% on taxable income of over RO. 30,000 and nonGCC foreign companies were taxed at progressive income tax rates of up to 30%. Thenewtaxlawremovesthedisparityintaxratesbetween foreign and local taxable entities. The new tax law provides forauniformtaxrateof12%foralltaxableentitieswithan initialtaxfreeexemptionofRO30,000.

Taxregistrationandnotification:
It is now mandatorily required for all tax payers to register withthetaxdepartmentwithinthreemonthsfromthedate of incorporation or assuming pe status (in case of foreign entities) and notify within two months any changes in address,nameandlegalstatus.Anypersonwhoundertakes procedure for sale of movable properties or real estate relating to any tax payer in public auction is required to notifytheSecretariatGeneral,thedatefixedforsuchauction atleast10daysbeforetheauctiondate. 1

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 SummaryofNewTaxLawofOman

PrincipalOfficer:

ForeignCurrencyConversionRate:
Theaverageexchangerateofbuyingandsellingprevailingon the period ending date as published by the Central Bank of Oman needs to be adopted to covert the amounts into Rial Omani, in case the books of accounts are maintained in currencyotherthanOmaniRials.

The principal officer who is responsible for discharging the obligationsimposedonataxableentityandtheownerorpartner orchairmanormanagerorliquidatororbankruptcymanager shallbetheprincipalofficerincaseofaOmaniproprietorshipor company, while in relation to a pe, the owner or manager or agent of the owner of that pe is the principal officer. The provisionofconsideringtheagentastheprincipalofficermight attractcertainimplicationsandresponsibilitiesontheagent.The newtaxlawspecifiesthattheprincipalofficermaynotbeabsent formorethan90daysduringanytaxyear.

TaxAdministration:
The Secretariat General has the right to demand from any personforwhomanincomehasaccruedorarisenorrelating to any other tax payers, the name, address and other information relating to such income. The requested informationneedstobesubmittedwithinthetimespecified in the request letter. Designated employees of the Secretariat General shall have the judicial enforcement powers.

Communicationandduedates: Unless proved otherwise, the notice served through post by the
SecretariatGeneralshallbedeemedtohavebeenreceivedatthe specifiedaddressonthenextdayfollowingtheendofaperiodof fifteendaysfromthedateofsendingitbypost. If the due date for compliance or payment, falls on a public holiday, the deadline for submission/payment is postponed to the next official working day. The new tax law provides for deliveryofnotices,returnsandaccountsandotherdocumentsby electronic means, as per the procedure to be determined by an ExecutiveRegulation.

Accountingperiod:
Theoptionofselectingtheaccountingperiodendingother thanon31Decemberstillcontinues.Thefirstperiodmaybe less than a period of 12 months or extend to more than 12 monthstoamaximumperiodof18months.Thesubsequent accounting period generally ends on expiry of 12 months, unless, before the expiry of this period, the business of the Omani proprietorship or a pe is ceased or in case of an Omanicompany,itisliquidated.

Withholdingtax:
Withholding tax is a tax charged on certain specified payments accruing or arising in Oman to foreign companies which do not haveapeorsuchincomedoesnotconstituteapartofthegross incomeofthatpe.Thespecifiedpaymentsare,a)royalties,b) consideration for research and development, c) consideration fortheuseoforrighttousecomputersoftware,d)feesinreturn formanagement. As per the new tax law, the taxpayer who has paid or credited (credited to parties account as per old law) any of the specified payments is responsible to deduct 10% tax from the gross amount paid or credited and the remittance should be made to theSecretariatGeneralnotlaterthan14daysfromtheendofthe month following the month in which that amount is paid or credited,whicheverisearlier.

Exemptions:
Onlydividendsearnedbyanytaxableentityfromsharesor contribution in another Omani company and gain from disposal of securities listed in the Muscat Securities Market areexemptfromtax.Thus,underthenewlawitwouldno longer be possible to make a claim that dividends received fromoverseascompaniesarenottaxable. Higher education institutions, private hospitals, schools which previously enjoyed exemption from tax for an unlimited period are now eligible for exemption for a maximumperiodof10years.Thenewtaxlawisalsosilent on the tax exemption for public utility projects. These were previouslytaxexemptbasedonmeetingcertaincriteriaand procedures.

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SummaryofNewTaxLawofOman

Deductions:
Therehasbeennochangeintheprincipleorbasisofdetermining expenses deductible in arriving at the taxable income. The conceptoflimitingthedeductionstoactualexpenseswhollyand necessarilyincurredtogeneratethegrossincomestillcontinues. Expensesrelatingtoexemptedincomearenottaxdeductible. The new tax law specifically provides for deduction of the following: Non capital expenditure incurred during the preincorporation periodbyOmaniproprietorshipsandcompanies. Costofacquisitionorexpensesrelatingtodisposalofgoodwill, commercialnameortradenameoranysimilarasset,provided thatsuchdisposalismadewithintheaccountingperiodending inthattaxyear. Therulesandproceduresfordeductibilityofinterestchargedby related parties, remuneration to the proprietor, directors and shareholders and rent paid by an Omani proprietorship to the proprietorshallbeasperanExecutiveRegulationexpectedtobe issued in the coming months. Provisions for unexpired risks, unsettled claims and contribution to emergency funds are tax deductible for insurance companies. Provision for loan losses is taxdeductibleincaseofbanksandfinancialinstitutionsregulated undertheBankingLaw.Headofficeoverheadsincaseofape,is deductibleaspertherulesspecifiedbyExecutiveRegulation.Any similar charges allocated by affiliates will now form part of the head office over head and therefore not available for deduction asadirectexpense.ItiswidelyanticipatedthatintheExecutive Regulationwhichisexpectedinduecourseonthedeductibilityof head office overhead, the artificial capping of the allowance to theaverageoftheallowancegiveninthepreviousthreetaxyears willberemoved.

Depreciation:
Thestraightlinebasisofcomputationofdepreciationunder theoldtaxlawhasbeenmodifiedtosimplifythecalculation of depreciation on capital assets deductible for tax. Capital assetforthepurposeofdepreciationmeans;buildings,ships, aircrafts, intangible assets and machinery and equipment in respect of which depreciation is allowed. Machinery and equipment include; computer software, installations, furniture, fixtures, and fittings and vehicles and excludes shipsandaircraft.Assetwisecalculationofdepreciationon straight line basis continues to apply for buildings, ships, aircrafts and intangible assets. Depreciation is allowed on the above, only if, the asset continues to be in use for businessattheendofthataccountingperiod. The new tax law includes pooling of asset concept for depreciationonmachineryandequipment.Therearethree poolsandeachassetfallingundermachineryandequipment hastobeallocatedtoarespectivepoolandthedepreciation on each pool is calculated on reducing balance method. To calculatedepreciationfortheyear,anopeningwrittendown valueplusadditionofassetsminussaleproceedsofdisposals ofassetsistakenasassetbaseofthatpoolanddepreciation rate is applied on it. For the category of Machinery and equipment,therewouldbenoneedtocomputetaxablegain or loss on disposal separately, since the sale proceeds are consideredincomputationofdepreciation. There has been no change in depreciation rates except for computers, which now qualify for 33.33% p.a. depreciation whilst depreciation for drilling rigs has been reduced from 33.33% to 10% p.a. Depreciation of 4% p.a. for buildings is continues whereas the taxable entities now chose to depreciate buildings used for hospitals and educational institutionsat100%p.a.inataxableyear. Intheeventthebusinessceasesornoneoftheassetinthe poolremains,theassetbaseasreferredaboveismorethan the disposal value, the excess amount is considered as balancing allowance and if the disposal value is more than theassetbase,theexcessisconsideredasbalancingcharge andtheremainingdepreciationbaseforthatpoolofassetis consideredasZero.

GainorLossondisposalofCapitalAssets:
The gain or loss from the disposal of capital assets other than asset which are allocated to pool of assets (Machinery and equipment) is subjected to tax as balancing charge (gain) or balancingallowance(loss). Whendisposalvaluerelatestoallassetsdisposed,theSecretariat General may apportion the disposal value between the various items of the assets for computation of balancing charge/allowance.Thedateofsaleofacapitalassetshallbethe date on which the procedure for the transfer of ownership is completedorthedateofdeliveryoftheassetsold,whicheveris earlier.

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SummaryofNewTaxLawofOman

Capital Gains from disposal of business by a OmaniproprietorshiptoanOmanicompany:

The new tax law provide for an option (special provision) to the Omani proprietorship to exclude capital gains from the taxable income arising from the disposal of business to an Omani company provided that; a) the business of the proprietorship is transferred to an Omani company in consideration for shares in thatOmanicompanyofferedtotheproprietorandsuchtransfer includes capital assets subjected to depreciation, b) both the proprietorship and the Omani company together make submissionwithin6monthsfromthedateofendofthetaxyear and before the proprietor disposes the shares offered to him in theOmanicompany. Under the above circumstances, such disposal of business shall notbeconsideredasdisposalforcomputingcapitalgainsandall suchdepreciation,balancingallowances/chargesshallbemadein the computation of taxable income of the Omani company as if theOmaniproprietorshiphadcontinuedtocarryonthebusiness.

RelatedPartyTransactions:
Itisthenormalpracticethattransactionsentereddirectlyor indirectly with related parties are closely scrutinized by the Secretariat General and adjustments are made in the computationoftaxableincome.Thenewtaxlawdefinesthe term related parties and specifies the rule and procedures for making adjustments in the computation of taxable incomerelatingtorelatedpartytransactions. Therelatedpartyrelationshipisestablishedbetweenthetwo parties,ifbothpersonsareassociatedwitheachother,orif onecontrolstheotherorbotharecontrolledbytheathird personoroneisrelativeoftheotheruptothethirddegree, whether it is direct, indirect or a relation by marriage. A person is considered to have control over the other, if he entitled directly or indirectly to control over the other personsbusinessandcommercialmatters. If the related party transactions result into lower taxable incomeorhigherlosses,theactualtermsofthetransactions are ignored and the taxable income shall be computed by assuming the terms on which the transaction would have beenenteredintobyindependentpersons. Whenadjustmentaremadeduetorelatedpartytransaction, theSecretariatGeneralmaycomputethetaxableincomeof theotherrelatedpartytothattransaction,onthesamebasis adopted in respect of that transaction, provided that a written request is submitted to the Secretariat General by theotherrelatedpartywithinaperiodofnotmorethan12 monthsfromthedateoftheassessment.

business, it is required to notify the Secretariat General of the cessationofbusiness,notlaterthansevendaysfromthedateof cessation. The return for that year is required to be filed at the datespecifiedbytheSecretariatGeneralandthetaxdueonthe basis of the return is payable on the date specified by the SecretariatGeneral.

Taxreturns: WhenaforeignpersoncarriesonbusinessinOmanthroughmore than one pe, a consolidated return is required to be submitted, whichshallincludethetaxableincomeofallthepes. Where a business establishment or pe ceases to carry on

Paymentoftax:
Theliabilityofthepaymentoftaxfallsontheownerofthe Omani proprietorship or the owner of the pe or an Omani company.Partnersofjointventuresshallbejointlyliablefor thepaymentdue.TheSecretaryGeneralhastheauthorityto extend the time specified for payment of the tax due and payable or allow for tax payment in installments as per the procedures and conditions which will be determined in an ExecutiveRegulation. Any tax due and not paid by the due date shall attract additional amount of 1% per month and the Secretary General may grant relief from the whole or part of the additional tax in accordance with Executive Regulation. Any request for tax refund needs to be submitted by the tax payertotheSecretariatGeneralwithintheperiodof5years fromthedateoftheassessmentthatbecomesfinal.

Assessment: Allthetaxreturnssubmittedaresubjecttoassessmentwithin5

yearsfromtheendofthetaxyearduringwhichthefinalreturnis submitted. The Secretariat General can issue an assessment in thenameoftaxpayerresponsiblefordeductionandremittance in the event withholding tax which is due has not been paid withintheduedate. ThenewtaxlawprovidestheauthoritytotheSecretariatGeneral for revising and reissuing assessment within 5 years from the dateoffirstassessment,iftheassessmentincludesobviouserror oromissionorifitisinsufficient. The new tax law limits the period to complete the assessment relating to taxable entities who fail to file tax returns within 10 yearfromtheendoftaxyear.

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DoubleTaxAvoidanceTreatiesandcreditfor foreigntaxpaid:

CarryforwardandsetoffofLosses:
Thenewtaxlawrequiresthatwhenaforeignentitycarries onbusinessesthroughmorethanonepe,thelossofanyof those pe for any tax year is allowed to carry forward only afterbeingreducedbythetaxableincomeforthattaxyear ofotherpeownedbythatforeignentity.Lossesareallowed tobecarryforwardforamaximumperiodoffiveyearsand areoffsetagainstfutureprofits,exceptthelossesrelatingto the first 5 years of exemption period are allowed to carry forwardindefinitelyuntilfullyutilized.

The agreements signed by Oman with several countries for avoidanceofdoubletaxationandthepreventionoffiscalevasion with respect to taxes on income shall prevail, notwithstanding anything contrary to the provisions of new tax law or any other law. Foreign taxes paid on overseas income are not tax deductible. However,foreigntaxespaidbyOmaniproprietorshipsandOmani companies are eligible for a tax credit up to maximum of the Oman tax that would otherwise be payable on such income. In order to take tax credit, the tax payer is required to submit an application to the Secretariat General when the tax is due in Oman on such income but not later than two years from the endingdateofthetaxyearduringwhichtheforeigntaxispaid.

Snapshot
Overseasincometaxable. Capitalgainssubjectedtotax. Noexemptionforpublicutilityprojects. Dependant agent pe concept and obligations on agentonbehalfofprincipal. Consolidatedtaxreturnsforpesofsameowner. Preincorporationincometaxable. Specified payments not related to pe subject to withholdingtax. Thincapitalizationruleeffective. Gainsongoodwillandtradenameistaxable. LimitonHOoverhead,salariesandrenttoowners. Mandatorytaxregistration. Deemedreceiptofnotice. Revisionofassessmentwitherrorsorincomplete. Principalofficermaynotbeabsentformorethan90 daysinyear. Transactions for tax avoidance subject to adjustment.

Objection:
Thetimelimittofileobjectionundertheoldtaxlawwas45days fromthenotification(dateofreceipt)ofassessment.Howeveras perthenewtaxlaw,theobjectionmustbefiledwithin45days from the date of serving (posting) the assessment order. The timelimitforconsiderationofobjectionhasbeenincreasedfrom previous3monthsextendableforfurther3monthshasbeennow extendedto5monthsextendabletofurther5months. Theoldtaxlawprovidedfordefermentofpaymentofentiretax relatingtoataxyearforwhichanobjectionhasbeensubmitted. As per the new tax law, the deferment of payment of tax is allowedonlytotheextentoftaxrelatedtothedisputedtaxable incomeortaxamount,providedthatanapplicationissubmitted in writing within 30 days of submission of objection and the undisputedtaxamounthasbeensettled.

Offencesandpunishments:

Thenewtaxlawhasmadethepenaltiesandpunishmentsmorestringent.Followingnoncomplianceoractionsattractpenaltyand/or punishmentthatmayincludeimprisonment.Thepenaltymaybeimposedonthetaxpayerortheprincipalofficerofthetaxpayeror bothofthem. Failuretosubmitprovisionalorfinalreturn. Failurebytheownerofthebusinessestablishmentorpe Failuretodeclarecorrecttaxableincome. todesignateaprincipalofficer. Failure to submit any statements, information, financial Deliberately obtaining a tax exemption without being statementsoraccountingrecordsoranyotherdocumentwithin eligible. thetimespecified. Intentionally destroying, concealing, or getting rid of any Failureofattendanceatthedateandplacespecified. documents,records,financialstatementsrequestedbythe Abstentionfromansweringanyquestions. SecretariatGeneral.

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