Taxing times — a glimpse into Oman’s evolving tax systems
ASHOK HARIHARAN *
Tax reforms have played a pivotal role in supplementing non-oil revenues of Gulf Cooperation Council (GCC) economies as GCC policy makers are compelled to take a fresh look at longer-term structural reforms. Today, the tax landscape in the Sultanate continues to evolve to keep pace with global developments.
Income tax was first introduced in 1971, when Oman opened its doors to foreign oil companies for exploration. Whilst this was limited to oil exploration, with a tax rate of 55 per cent, a comprehensive income tax law was enacted in the country in 1981. Until 1993, however, taxes were limited to foreign companies/sole proprietorships and local companies with mixed (foreign and local) ownership. Since 1994, Oman has been the only country in the GCC imposing income tax on all businesses, including those fully owned by Omani citizens. Tax rates have evolved from a varying rate depending on the level of taxable profit to the current fixed rate for all tax payers.
As far as indirect taxes are concerned, customs duty was the primary levy. Until the late 1990’s, Oman had its own legislation which levied a five per cent customs duty on imports. Thereafter, in order to mobilise revenues, the Sultanate imposed duty at 10-15 per cent on certain commodities with a provision to impose protective duty at 20 per cent. In December 2001, the GCC countries, including Oman, agreed on a common external customs tariff of 5 per cent. In January 2003, a customs union was established to enable free trade within the union.
Today, once again, taxation in Oman is experiencing a renaissance in the wake of the recent financial crisis caused by low and volatile oil prices. Both excise tax and value added tax (VAT) are expected to be introduced in 2019. VAT alone is expected to generate 1.5 -2 per cent of the gross domestic product (GDP) (2.5-3.5 per cent of non-oil GDP) with the potential to generate pay-offs both in the short and long term.
Shifting the tax structure away from direct tax and toward consumption tax is recommended for many Organisation for Economic Co-operation and Development (OECD) countries and is already a trend in many developing countries. Bias toward the latter is often based on the premise that the imposition or increase in indirect tax entails a protracted negative effect on private consumption that largely affects only liquidityconstrained consumers. With respect to the former, reduction in the corporate income tax rate brings about a permanent, more pronounced pick-up in private investment that is supported by an increase in corporate profits in the medium-to-long term.
Gradual introduction and scaling of these new taxes in the region and in Oman seems inevitable. As Oman prepares for implementation, it is important for tax payers to understand the consequence of local and international developments on Oman’s tax regime. This is the first in a series of articles in which we will explore the current landscape and upcoming changes.
*The author is Partner and Head of Tax, KPMG Lower Gulf