COUNTING UP

Oman 2015 | EXECUTIVE GUIDE | REVIEW: LEGAL

Deloitte offers an outline of Oman's economic progress and explains tax and administration issues for investors.

During the past decade, Oman has laid down significant reform programs aimed at developing and diversifying the economy and enhancing the competitiveness through increased government spending on key sectors and stimulating private investment in prominent sectors. The stable growth seen in 2013 and 2014 is expected to continue into 2015, supported by both an increase in oil production and the government's fiscal policies with the non-oil sector set to boast expansion.

The Omani economy's solid performance in 2013-2014 was reflected in a report issued by Standards & Poor (S&P) rating agency to maintain its outlook for the Sultanate as “Stable" going into the new year and affirming Oman's long and short term sovereign credit ratings at A. Oman's economic growth strategy is based on the development of simple industrial chains, particularly in basic manufacturing and allied activities as well as other industries that will benefit the Sultanate's position and offer a competitive advantage in the region. Within the export categories, the only increase recorded during the first half of 2014 was in the non-oil exports which grew by 3.3%, totaling OMR1.85 billion compared with OMR1.79 billion recorded during the same period in 2013 according to the National Centre for Statistics and Information (NCIS).

Along with its growing oil exports and revenue, the non-hydrocarbon sectors in the country are also turning to become growth drivers as a result of modernization of oil recovery techniques and opening of new exploration fields to foreign investor firms. The mineral industry in Oman, for instance, is on a strong growth path. Oman's mineral resources include chromite, zinc, limestone, gypsum, and silicon among others. A large number of investors have been drawn into the sector as it is considered a major industry in Oman, contributing significantly to the country's GDP. Several industries have been developing around the mineral sector as part of the national development process, which as a result, has boosted the employment opportunities for a young Omani workforce as well as the contribution to the nation's GDP. The growth in non-oil exports is due to the increase in the value of mineral product exports by 4.6%, rising from OMR510 million by the end of June 2013 to OMR534 million by the end of June 2014.

The industrial sector has been the foundation of Oman's long-term diversification strategy as it is expected to meet the country's social development needs and generate significant employment opportunities. Sectors such as tourism and gas-based industries, banking and finance, healthcare and insurance, agriculture, retailing, infrastructure, and aviation are other key components of the government's diversification strategy. One of the best methods of achieving sustainable development and increased private investment is the increased investment in infrastructure. Accordingly, the continuous development of Oman's infrastructure and the availability of investment funds for such development projects is a determining factor for the future growth of the economy. Government spending during the past few years on infrastructure projects such as roads, railways, airports, seaports, hospitals, and health centers has been significant. These infrastructure projects are expected to generate tremendous economic activities and employment opportunities.

DEVELOPMENT OF SMES

Over the past few years Oman has witnessed greater focus on the growth and the development of Small and Medium Enterprises (SMEs), which contributes around 16% of Oman's GDP, to compete in the international arena, beyond purely the domestic markets. According to the latest available statistics, the population of Oman constitutes almost 50% of the Omani youth and at the current levels of population, the government would be required to create employment opportunities for an overwhelming 50,000 youth every year. It is vital that the government develops and supports schemes to enable young Omanis to create self-opportunities by venturing into their own businesses.

With this strategy, the Ministry established the Public Authority for Small and Medium Enterprises Development (PASMED), an independent body which was created to encourage young entrepreneurs and to provide them with the necessary support in terms of technical, financial, training, and marketing and management has also helped. The relatively low density of SMEs is getting translated into opportunities for the Sultanate's young entrepreneurs, as supporting these small businesses has been a major priority for the government. The Government of Oman has created channels through which it can offer financial support to these businesses during the initial startup period. The program offers loans at more favourable interest rates than those in the market. Therefore, in 2012, the Ministry of Commerce and Industry (MOCI) has created an SME Development Fund under the management of the National Company for Project and Management. In 1998, another organization, the Sharakah Fund for Development of Youth Project, founded by Royal Decree is a fund aimed at helping the youth to execute their business ideas and is working toward achieving the same goals.

The private sector is becoming increasingly involved in SME financing. The Al-Raffd Fund in conjunction with Oman Development Bank and other financial institutions was initiated to unify the resources for financing and development of the SME sector. Bank Muscat has financing designed specifically for SMEs. In addition to financing, the private sector has also organized workshops and seminars for SMEs. It is a fact that SMEs constitute a sizeable portion of the corporate sector and the government has its focus on development, streamlining, and strengthening the SME sector by undertaking initiatives and providing support. Although the government's initiatives and strategies are challenged by the ever increasing number of job seekers joining the market force, both the public and private sectors are making an important contribution to complementing the initiatives of the government, and to supporting the development of the SME sector and encouraging young Omanis to start their own enterprises.

IN-COIUNTRY VALUE (ICV) STRATEGY

One of the primary objectives of Oman's Vision 2020 was the development of growth strategies and reform programs aimed at diversifying the country's oil and gas sector and the development of a broader based industrial sector. According to the available statistics, over $100 billion worth of investments are expected into Oman's oil and gas sector during the years 2013 to 2022, which are expected to generate an additional $64 billion ICV opportunities during the same period. Therefore, the ICV strategy has an enormous potential for diversifying the local economy and creating more job opportunities for young Omanis.

ICV is the term used to refer to the total spend retained in the country to aid in job creation, development of human resource capabilities, and the establishment of industries locally to stimulate productivity. ICV has been growing in importance in Oman, particularly in the oil and gas sector. ICV aims at enhancing the value of goods, services, and skills in the sector and stimulating local production and manufacturing in order to reduce the imports of goods and enhance the provision of services in Oman. This will reduce the need to depend on external experts and improve the skills and capabilities of Omani nationals by increasing their contribution to the activities of the oil and gas sector.

The Government's drive to develop its ICV strategy has seen a positive impact in a successfully concluded ICV Business Opportunity Conference in December 2013, which revealed the “ICV Development Blueprint Strategy" for the oil and gas sector and allied industries. The Blueprint Strategy identified certain supply chain developments in the oil and gas industry for Omani businesses which include creation, expansion or enhancement of industries, products, or activities requiring development of raw materials, manufacturing, assembly, blending, and fabrication, and it is expected to potentially create numerous job opportunities. A fundamental pre-requisite to economic development and growth is the availability of skilled and competent labour. The Blueprint Strategy, therefore, also focuses on the development of a specialized workforce and skills through various training programs (both short term and long term).

DEVELOPING LOCAL HUMAN RESOURCES

Human resources development has been given a renewed prominence and focus and Omanization as a national objective is regulated and monitored in the public sector and, most recently, also in the private sector. The government, along with various industry segments, has initiated training and development programs to enhance the skills and competencies of nationals in various fields and to promote the employment of nationals in the private sector. Human resource development has recently been seen to be one of the key strategies adopted to achieve the objectives of the Omani economy, aiming to bring about development in quantity and quality in the areas of education and vocational training to ensure that the productivity is consistent with the needs of the labor market of the workforce at specialized skilled levels. The aim has been to match the supply of local labour with market requirements. It is intended to see Omani nationals playing a leading role in all areas of employment—both in trade and the professions. A key prerequisite to a successful Omanization program is the proper focus and the prioritization of education and training. The primary focus is to ensure that expat managers adequately train their Omani staff to ensure a successful and smooth transition of their managerial and operational responsibilities. It is worth noting that the number of Omanis working in the private sector who are insured and active increased by 4.4% to the end of 2Q2014.

The government, in coordination with the relevant Ministry, is making tremendous efforts and introducing new strategies into the education sector to enhance the skills of the youth. It is worth noting that Oman is in a process of forming a national university, the University of Oman, which will cater for higher education in the country which will raise the quality of learning and education to meet international standards.

A BRIGHT FUTURE

In a mid-sized, open economy in which the biggest driver of growth so far has been oil, managing the transition to a more diversified economy will not be easy. Fortunately, Oman's government has taken several steps in terms of efficient economic planning and the implementation of various social development initiatives that should contribute to the success of the Omani economy. Other factors that have contributed to Oman's success include the significant rise of foreign investment in many sectors as a result of the competitively low tax rates in the region. In addition, the development of the SME sector, education, health, and infrastructure cannot be ignored. Despite the various challenges within the region and the country, Oman's economy is set on the right path of sustainable growth, development, and diversification.

TAXATION IN OMAN

Oman has promulgated a new income tax law, which became effective from January 1, 2010, with the supporting Executive Regulations taking effect from January 2012. One of the noteworthy changes brought into this law was the elimination of the differential higher income tax rate charged on foreign companies when compared to Omani companies and establishments, and the introduction of a unified rate of 12% applicable to all tax payers. The reduction in tax rates and the amendment to the definition of “permanent establishment," which is now in line with the Organisation for Economic Cooperation and Development (OECD) and the free trade agreements entered into by Oman, have encouraged and increased foreign investment in Oman. In addition, the law also saw a shift from a territorial system of tax to a global system of tax.

Corporate Taxation

Principal Business Entities

These are joint stock companies (general or closed), limited liability companies (LLC), partnerships (general or limited), joint ventures, and branches of a foreign company. An Omani LLC may be established with Omani share capital participation. Non-Omani nationals willing to engage in a trade or business in Oman, or to acquire an interest in the capital of an Omani company, must obtain a license from the Ministry of Commerce and Industry. Under the current rules, Omani nationals must hold at least 30% of the capital of an Omani company. However, as an exception under the US Free Trade Agreement signed between Oman and the US, American incorporated companies can register a limited liability company with 100% foreign ownership without the involvement of a local partner.

Service PE Rule

Taxable Income

Taxable income is gross income for the tax year after deducting expenses and/or making adjustments for disallowed expenses or exemptions.

Taxation of Dividends

Dividends received by a company from a domestic company are not taxable, but dividends received from an overseas foreign company are subject to tax.

Capital Gains

Capital gains derived from the sale of fixed assets and acquired intangible assets are taxed at the same rates as ordinary income. There is no special tax treatment of such gains. Gains from the sale of local listed shares, however, are exempt.

Foreign Tax Credit

The tax authorities may allow a credit for foreign taxes paid on a case-by-case basis. For certain taxes paid overseas, a credit may be granted up to the amount of the Omani tax liability, regardless of whether Oman has concluded a tax treaty with the source country.

Incentives

The law provides a five-year exemption on income generated by companies engaged in conducting certain activities as its main activities. This exemption is subject to the approval and may be renewed for an additional period (not exceeding five years).

Social Security

The employer must contribute an amount equal to 11.5% of the gross salary of its Omani employees for social security (covering old age, disability, and death) and for industrial illnesses and injuries. The contributions are required for Omani employees between the ages of 15 and 59 who are permanently employed in the private sector.

Withholding Tax

Oman does not levy withholding tax on dividends and interest. Foreign companies that do not have a PE in Oman and that derive Omani-sourced income through management fees, royalties, consideration for the use of or the right to use computer software and the consideration for R&D are subject to a 10% withholding tax on the gross amount, which is to be withheld by the Omani entity and remitted to the tax authorities.

Anti-Avoidance Rules

Pricing between related entities should be on an arm's length basis. Thin capitalization rules require a debt-to-equity ratio not exceeding 2:1 for interest to be deductible. Related party transactions must be disclosed.

Administration and Compliance

Tax Year

The tax year is the calendar year, which taxpayers generally are expected to use as their accounting year in drafting financial statements (a different accounting year is acceptable if followed consistently). On start-up, taxpayers may be able to use an opening account period of 12 months or a maximum period up to 18 months. Accounts should be maintained in OMR, but also may be maintained in foreign currency, subject to the approval of the Secretary General of Taxation.

Filing Requirements

Companies must file a provisional tax return within three months following the end of the accounting year and make a payment of the estimated tax. An annual income tax return, accompanied by audited financial statements, must be filed within six months of the end of the accounting year, and any tax due must be paid at that time.

Penalties

Failure to present a declaration of income to the office of the Secretariat General for Taxation may lead to an arbitrary assessment and penalties. Delay in the payment of income tax results in additional tax calculated at 1% per month on the outstanding amount. The tax authorities may impose other penalties in the event of noncompliance, including an additional assessment.

Personal Taxation

There is no personal taxation in Oman.

Social Security

Omani private sector employees who are between 15 and 59 years of age must contribute 7% of their monthly salary for social security purposes (old age, disability, and death).