Last year, the Omani government amended its withholding tax regime to bring within its scope payments of (i) dividends, (ii) interest and (iii) fees for the provision of services. As of February 27, 2017, a 10 percent withholding tax applies to the mentioned payments made by Omani residents to non-residents. Prior to that date, withholding taxes applied only to specific categories of payments including (i) royalties; (ii) management fees; (iii) consideration for the use of or the right to use computer software; and (iv) consideration for the conduct of research and development services.
More recently, inconsistent positions taken by the Omani tax authorities regarding the withholding tax on fees for the provision of services have created uncertainty among Omani businesses and non-resident service providers. Initially, in a clarification published through "Frequently Asked Questions" (FAQs) by the Omani tax authorities shortly after the introduction of the new withholding tax in 2017, it was stated that withholding taxes would not apply to payments made in consideration for the provision of services rendered wholly outside of Oman. Earlier this year, though, that clarification was withdrawn suggesting that the place of performance of services would be irrelevant for withholding tax purposes.
On March 4, 2018, the Omani tax authorities issued a letter in which they confirm their position that services provided by foreign persons to residents of Oman will be subject to Omani withholding tax, wherever the services are performed.
Under the new rules and Omani tax authorities' formal guidance, payments for services performed wholly outside of Oman will attract a 10 percent withholding tax in Oman. Normally, service providers resident in a country with which Oman has concluded a double tax treaty would see such withholding tax reduced to 0 percent, provided certain conditions are met.
Implications for investors investing in Oman
The imposition of withholding taxes on payments which were previously not subject to Omani withholding tax may add to the overall tax burden of the Omani businesses or the non-resident investors and service providers. In cases where contracts include gross-up clauses, the new tax burden will be borne by Omani businesses in the form of higher borrowing and services costs.
To the extent that the withholding taxes cannot be passed on – for example because existing arrangements did not anticipate such taxes and renegotiation to include gross-up clauses is not possible – non-resident investors and service providers operating in Oman will be adversely affected by the new withholding taxes.
For existing inbound investments into Oman, previously tax-free cross border structures may now suffer 10 percent Omani withholding taxes, depending on the circumstances. For non-residents operating in a territorial regime where taxes paid in Oman and the associated foreign tax credits cannot be used in their home countries, these taxes will become an outright cost.
This is particularly the case as, historically, many overseas investors have structured their investments into Oman and the Gulf region through the United Arab Emirates (UAE). Since there is no double tax treaty in place between Oman and the UAE, the new withholding taxes may end up becoming a permanent business cost.This is likely to be critical for US multinationals, for example, that are anticipating a move to a partial territorial system following the US tax reform.
Protection available to investors under Oman's double tax treaties
Businesses facing additional tax cost as a result of the new withholding tax exposure in Oman may need to reconsider their investment structures into Oman and the region, taking into account lower withholding tax rates that are available under some of the double tax treaties concluded by Oman. In some cases, such tax treaties provide for a reduction of Omani withholding taxes to 0 percent. For example, the double tax treaty between the Netherlands and Oman seems very effective as it provides for an exemption from withholding tax on dividends, interest and service fees paid by an Omani resident to a Dutch resident, provided certain conditions are met. Where a full exemption from withholding tax is not available, certain double tax treaties may still provide for a reduced withholding tax rate.
In order to qualify for double tax treaty relief, certain conditions and requirements generally need to be met. These conditions and requirements are becoming more complicated with the introduction of anti-treaty shopping rules such as the principal purpose test (PPT) and/or limitation on benefits (LOB) clauses in bilateral tax treaties, as well as under the OECD Multilateral Convention. Because Oman is a member of the OECD's BEPS Inclusive Framework and is committed to implementing these minimum standards, the availability of Omani tax treaties will be conditional on taxpayers meeting either the PPT or the LOB or both.
Businesses that are considering the use of alternative structures to manage the new withholding tax exposure in Oman need to take into account these new anti-treaty shopping rules. Under the PPT, for example, Omani tax authorities may deny tax treaty benefits if it is established that one of the principal purposes of the relevant transaction or arrangement was to obtain tax treaty benefits. In this context, structures that are founded on commercial objectives, with business motives and operational substance at their core, are more likely to pass the enhanced standards under the new anti-treaty shopping rules.