The Secretariat General for Taxation in Oman recently declared withholding tax to be applicable on all payments for services made to foreign persons without permanent establishments in Oman, irrespective of the place of performance. This clarification materially alters the previous position held by the SGT following the recent tax reforms made pursuant to Sultani Decree 9/2017, where soon after it was clarified that services rendered wholly abroad by foreign persons would not be subject to withholding tax.
The Government of the Sultanate of Oman, represented by the Ministry of Finance, introduced significant changes to the Income Tax Law (promulgated by Sultani Decree 28/2009) in 2017, by promulgation of Sultani Decree 9/2017 (the Amendments).
The Amendments affected a number of aspects of taxation in Oman, such as increasing the rate of corporate tax from 12 per cent to 15 per cent, scrapping the tax-free threshold of OMR 30,000, along with broadening the scope of withholding tax (WHT).
Prior to 27 February 2017, WHT in Oman was applicable only to: (i) royalties; (ii) management fees; (iii) consideration for the use of or right to use computer software; and (iv) consideration paid for research and development by Omani establishments, and permanent establishments (the Taxpayer) to foreign persons without a permanent establishment in Oman.
However, with the introduction of the Amendments, WHT was extended to dividend payments declared and paid by Omani joint stock companies to their foreign shareholders, interest payments due and paid by the Taxpayer on loans from foreign-based lenders and payments for services to foreign persons at a rate of 10 per cent.
Clarifications issued by the Secretariat General for Taxation (SGT)
FAQs were published on the SGT's website shortly after the introduction of the Amendments, clarifying various aspects of the Amendments which were causing some confusion in the marketplace. Amongst other clarifications, the FAQs stated that WHT would not be applicable on payments made by the Taxpayer for services provided by foreign persons that were rendered entirely outside of Oman. However, this clarification has recently been withdrawn by the SGT, indicating that WHT is payable regardless of the place where services are rendered.
The scope of WHT appears, therefore, to have been extended (or arguably not reduced as previously thought) in respect of services provided by a foreign person wholly outside of Oman to Omani businesses.
The degree to which the clarification issued by the SGT in the FAQs regarding services provided wholly outside of Oman can be relied upon by Omani businesses and foreign service providers up to the point of its withdrawal remains uncertain. This means that the prior clarification may be deemed to have had no effect at all, or possibly that the SGT may exercise some forbearance in respect of WHT not withheld for the period the clarification was published on its website.
This will obviously pose commercial concerns for Omani businesses and foreign service providers alike who have not been withholding tax in accordance with the Amendments – having relied upon the FAQs. The SGT have indicated verbally to this office that the removal of the clarification will not have retroactive effect. However, this cannot be relied upon as a matter of law. Moving forward, we recommend that the current interpretation is complied with to avoid potential violations of the Income Tax Law.
Double taxation treaties (DTTs) – potential relief?
It should be noted that DTTs entered into by the Sultanate of Oman and various recipient countries can provide some relief from WHT obligations. Indeed, the situation created by the withdrawal of the above clarification concerning the applicability of WHT to the provision of overseas services, and the potential for the commercial ramifications accruing as a result, makes the DTT framework more relevant than ever.
The above reflects current practice and interpretation of the new reforms introduced by the Amendments. It is expected that the government will provide further guidance through the issue of Executive Regulations (which are still awaited).
Dentons' Muscat office has more than three decades of experience in advising corporates and individuals on legal issues in Oman. For any points of clarification on the 2017 tax reforms, please do not hesitate to contact us.
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