On 12 October 2020, His Majesty, the Sultan of Oman, issued Royal Decree No. 121/2020 promulgating VAT in Oman. VAT is expected to be implemented in Oman as of 16 April 2021.
Back in 2008, all six GCC States, i.e. the UAE, KSA, Bahrain, Oman, Kuwait and Qatar initiated discussions on implementing VAT across the GCC. It was not until November 2016 that all six States executed the GCC Common Framework Agreement for VAT. In January 2018, the UAE and KSA introduced VAT, followed by Bahrain in January 2019. The Sultanate of Oman will be the fourth Gulf State to introduce VAT in April 2021. The other two States, i.e. Qatar and Kuwait, are expected to introduce VAT in 2022. Oman’s VAT regime follows the Common VAT Agreement of the States of the Gulf Cooperation Council, but does have a few deviations from what we have seen implemented in the UAE, KSA and Bahrain.
The introduction of VAT will be a significant change for businesses in Oman. VAT has a broad scope and businesses will need to consider the impact of VAT on key areas including all transactions, supply chains, contracts and IT systems.
1. Taxability
VAT at the rate of 5% will be levied on most goods and services, including the importation of both goods and services into Oman and also on free supplies. Some supplies will be exempt, whilst a few will also be zero-rated. Whilst one cannot deduct the input VAT when supply is exempt, one can claim input tax when supply is zero-rated.
Amongst others, Oman VAT Law provides that the following supplies shall be zero-rated:
- Specified food products
- Medicine and medical equipment
- Export of goods and services
- International transport and related services
- Supply of investment gold, silver and platinum
- Supply of rescue aircraft, rescue boats and auxiliary ships
- Supply of crude oil and its oil derivatives and natural gas
Oman VAT Law exempts the following supplies:
- Financial services
- Provision of health care and associated goods and services
- Provision of education and associated goods and services
- Undeveloped lands (bare lands)
- The resale of residential real estate
- Local passenger transport
- Renting real estate for residential purposes
Oman is the first country in the GCC to exempt health care and education services in its VAT law, whereas the other three implementing States, i.e. the UAE, KSA and Bahrain, have zero-rated such supplies. This could potentially increase the cost of such services in Oman.
2. Registration
Oman has decided to adopt a staggered VAT implementation (similar to Bahrain) - dependent on the level of annual turnover of taxable supplies (standard rated and zero-rated). VAT registration will be completed in the following stages.
The mandatory registration threshold is likely to be Omani Rial (OMR) 38,500 (approximately EUR 82,200), whilst the voluntary registration is to be set at OMR 19,250 (approximately EUR 41,100).
3. Filing obligations
Businesses are required to file VAT returns with the tax authority electronically. It is expected that the VAT period will be a minimum of one month and VAT payments and returns need to be filed within 30 days of the end of the tax period. Furthermore, businesses are required to keep VAT records for a minimum of ten years.
4. Penalties for non-compliance
Compared to the other GCC States that have implemented VAT, the penalties provisions in the Oman VAT Law are less harsh.
Consumer Impact
As has been the experience with the other three GCC States, there will be an increase in demand in the run-up to the introduction of VAT and a fall immediately thereafter, with a marked increase in inflation. Therefore, retailers should expect to see consumers pre-order goods and services ahead of the introduction date and will need to stock up to provide for the rush. Typically, the demand for high-value items such as electronics, furniture, luxury items, cars, etc. increases before the introduction of VAT.
What’s Next
Businesses that have not yet begun their VAT implementation projects will need to start preparing by evaluating their current position, available resources and VAT-readiness plan. Being a transactional tax, VAT is expected to have an extensive impact across transactions, business units, departments and the overall business. The VAT Law published appears to be exhaustive (in comparison with other GCC VAT Laws) and could be used by the businesses to initiate the VAT implementation exercise.
Broadly, the VAT implementation would involve the following steps/processes:
1. VAT impact assessment, i.e. identifying the VAT treatment for every business transaction
2. VAT fiscal impact, i.e. ascertaining the financial impact on account of VAT (impact on cash flow, working capital, etc.)
3. IT impact, i.e. ascertaining the impact on the accounting system
4. Process and documentation impact, i.e. defining the processes under VAT
5. Transition management
Based on the VAT implementation in other GCC countries, there have been certain challenges encountered during the process, such as lack of seriousness, delayed start of the implementation project, not appointing an implementation consultant, relying on tax positions being discussed at tax groups or industry forums rather than relying on the Law with respect to specific business scenarios, etc. It is important that Omani businesses consider the experience/learnings from the other GCC VAT implementation to avoid penal consequences.
The Oman Tax Authorities have issued guidance (https://taxoman.gov.om/portal/web/taxportal/vat-tax) on preparing for the implementation of VAT throughout the business. The guide encourages businesses to act early and provides examples of steps that should be taken in order to ensure a successful implementation project. Whilst the guide is brief and does not go into the specific detail of a full VAT implementation change management project, it does indicate that the Oman Tax Authorities expect businesses to undertake sufficient planning in order to be compliant on a timely basis with the law.
Businesses continue to await the publication of the final Oman VAT Regulations in the coming weeks.
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