KPMG

38 Business Today FEBRUARY 2015 www.businesstoday.co.om

I N T E RV I EW

ESSENTIAL TIPS FORBETTER BUSINESSKPMG Middle East's new tax guide helps investors understand the laws related to setting up businesses in the MENASA region

By Maheswaran P

ASHOK HARIHARAN Partner & Head of Tax, Middle East and South Asia, KPMG

The Middle East, North Africa and

South Asia (MENASA) region is

one of the most attractive desti-

nations for companies across the

globe mainly because of lower

taxes and huge economic poten-

tial. But most companies are not

fully aware of the local laws

governing foreign businesses and

taxation.

To assuage any fears and to

avoid confusion among compa-

nies willing to invest in the region,

global auditing firm KPMG

recently launched its MENASA Tax

KPMG-Interview/E1:BusinessToday 1/28/15 3:57 PM Page 1

Guide 2014-15. Ashok Hariharan,

partner and head of Tax, KPMG

Middle East and South Asia

region speaks to BusinessToday

about things that need to be con-

sidered when setting up a busi-

ness in Oman and how taxation

has changed in the country over

the years.

How will the MENASA Tax

Guide help investors?

The tax guide is intended to help

investors understand the laws

relating to setting up businesses

and taxation in 19 countries that

fall under the MENASA region.

Before a business is set up, it is

important to have an understand-

ing amongst others, of the invest-

ment laws, the commercial laws

and the tax laws.

Whilst in Oman and the rest of

the GCC region, there is only lim-

ited taxation, in the wider

MENASA region there are differ-

ent types of taxes including cor-

porate tax, personal tax, VAT and

transfer taxes. In the guide, we

have summarised the framework

of doing business in each of the

countries and identified key tax

provisions and regulatory modali-

ties, which need due considera-

tion by corporates operating in

the region.

What are some of the most

important things to consider

when setting up a new busi-

ness in Oman?

Whenever anyone sets up a busi-

ness anywhere (including Oman),

there are certain aspects they

need to look into. The most

important one is to undertake a

feasibility study for the project.

This will need understanding of

the country, the political stability,

ease of doing business, incentives

provided by the government and

availability of infrastructure such

as industrial estates or special eco-

nomic zones.

One needs to assess the avail-

ability of financing and skilled

labour. Finally one will undertake

an assessment of revenue

and cost for the project including

various taxes applicable to under-

stand whether it is viable

economically to invest one’s

capital and lenders' money in

the project.

One also needs to undertake a

legal and tax due diligence for the

proposed investment. The invest-

ment may either be in an existing

or a greenfield project. The differ-

ent forms of doing business

including legal structures for the

proposed investment, the need to

setup a local company, require-

ment to have local ownership, or

listing in the stock market need to

be determined. One needs to

consider whether there are any

legal requirements for employing

local work force and if there are

any foreign exchange restrictions.

In Oman it is possible to oper-

ate as a 100 per cent foreign

owned company in free trade

zones (FTZ) or special economic

zones (SEZ) like Duqm, Sohar and

Salalah. It is also possible to have

100 per cent foreign ownership

outside the FTZ/SEZ in certain cas-

es with the approval of the Coun-

cil of Ministers. Otherwise, there

would be a need to have 30 per

cent local ownership.

Oman is the only country that

allows majority foreign ownership

automatically. In most of the oth-

er GCC countries only 49 per cent

foreign ownership is permitted

except in FTZs. There aren't too

many taxes in Oman to be consid-

ered. You only have the corporate

income tax which is 12 per cent.

Interestingly, Oman's tax rate is

the third lowest globally.

Do you need a dedicated

team/individual to handle tax-

ation laws or can it be a part

of finance?

It is important that somebody

in-house is responsible for taxa-

tion even if it is not a full time

resource and even if the company

has an external tax adviser. This

because the ultimate responsibili-

ty for compliance rests with the

company. Besides, it is important

to have a dedicated person

who could liaise effectively with

the tax advisers to ensure that the

company gets the right advice.

What are the most important

requirements for a new busi-

ness going through their first

audit?

Oman had taken a prudent step

in this direction way back in 1986

by making it mandatory for com-

panies operating in the country to

comply with IFRS (International

Financial Reporting Standards).

Further, companies have to get

their financial statements audited

by an auditor based in Oman. The

Central Bank of Oman also

requires all lenders to obtain

audited financial statements from

their borrowers within four

months after the end of the finan-

cial year. This has been done to

ensure that the lending banks

gets sufficient information on a

timely basis about the financial

performance of the borrowers.

For tax purposes you need

to file your tax returns supported

by audited accounts within

six months of the end of the

financial year.

Oman's new tax law came

into effect in 2010. So over the

years how has taxation

changed in the country and

what has been the impact of

www.businesstoday.co.om FEBRUARY 2015 Business Today 39

You should be aware of the legal

rules that will be applicable to Your

business particularlY if You are not

used to doing business in that countrY


40 Business Today FEBRUARY 2015 www.businesstoday.co.om

the current tax framework on

businesses in Oman?

Oman issued the new tax law in

2009 and it became effective

from 2010. The new law has

brought uniformity in tax rates.

Earlier foreign branches used to

pay taxes at 50 per cent rates;

then it came down to 30 per cent.

Now it is uniform for all compa-

nies at 12 per cent.

Another significant change

introduced in 2010 was the shift

from a territorial system of tax to

a global system of tax. Earlier only

profits earned in Oman were

liable to tax. This meant that

Omani companies which had

businesses outside Oman were

not liable to tax on their overseas

income. Now Omani companies'

global income has been brought

under the tax bracket.

However, tax credits are given

to companies liable to pay tax in

overseas countries. For example if

an Omani company pays taxes in

the US then it will be able to get

credit in Oman for the taxes paid

in the US. This is a unilateral relief

given in the tax law. However, this

tax credit is limited to the Omani

tax rate. You may pay tax at

30 per cent in the US but will only

get tax credit at 12 per cent.

Effectively there is no double tax-

ation. But if you are doing busi-

ness in the UAE where there is no

tax then you have to pay tax on

the profits earned from the emi-

rates too without getting any

credit.

Another important aspect is

the withholding tax. Oman was

probably the first country in the

region to introduce withholding

taxes of ten per cent on certain

categories of income realized by

foreign companies not having a

permanent establishment in

Oman, way back in 1996. In the

recent tax law, Oman enlarged

the scope of withholding tax to

specifically cover payments for

using softwares. For example, if

you buy or download a software,

normally it comes with intellectual

property rights where the owner-

ship remains with the software

provider. Such payments are

subject to a withholding tax of

ten per cent.

Companies should be should

also be aware of the effective tax

rate. The 12 per cent rate is the

legal tax rate. However, the effec-

tive tax may vary depending on

the tax rules which may not allow

deduction for certain expenses.

For example, if the accounting

profits are RO100 certain expens-

es may not be allowed as deduc-

tions. This may increase the tax-

able profit to RO120. So the tax

payable will be RO14.4 which

translates into an effective rate of

14.4 per cent.

What is the law on transfer

pricing in Oman? Can you

elaborate on that?

Transfer pricing is the tax rule

regarding the amount a company

should pay to its related parties or

associated companies for services

or goods purchased or sold. If

there is a multi-national group

based abroad that has a sub-

sidiary in Oman there may be a

temptation for the group to shift

its profits from the Omani

subsidiary to the foreign country if

that country has a lower tax

rate. Transfer pricing rules are

made to ensure that this doesn't

happen and the transaction

between two parties remains at

arms length.

Earlier in the region, tax rates

were very high with Oman, Saudi

Arabia and Kuwait charging as

much as 45 to 55 per cent on

profits. This resulted in taxpayers

seeking to reduce profits in these

countries. The tax authorities in

Oman have been focusing on

transfer pricing since the 1980s.

But Oman, however, does not

have formal transfer pricing rules.

This is good and bad. It gives you

a flexibility with the onus on the

I N T E RV I EW

In the guide we have summarised

the framework of doing business in

each of the 19 countries that fall

under the MENASA region. We have

identified key tax provisions and

regulatory modalities which need

due consideration by corporates

operating in the region


www.businesstoday.co.om FEBRUARY 2015 Business Today 41

taxpayer to show that the transac-

tion with a related company is at

arms length. In the absence of

formal rules, however there is

uncertainty on whether your

transfer price will be accepted by

the tax authority.

We have seen a more rigorous

audit of related party transactions

in Oman in the last 12 to 18

months. I would expect this to

continue in the coming year par-

ticularly given the government’s

budgeted growth in corporate tax

revenues by 25 per cent.

What is the law on capital

gains tax especially in the case

of mergers and acquisitions?

The Oman tax law in 2009, unlike

the old law, specifically has a pro-

vision which says that profits in

the nature of capital gains are

liable to tax at the same rate of

12 per cent. So if you sell or trans-

fer your business you will be liable

to tax. For example, when foreign

companies sell their branches,

they will have to pay tax on the

profits made from the sale.

With the oil revenues declin-

ing what can the government

do to increase tax revenue?

Do you feel there is a need to

increase taxes?

The budgeted price of oil for

2015 is US$75/barrel compared

to US$85/barrel last year. But the

question that is much asked

about is whether US$75/barrel is

realistic considering that today's

price is between US$45 and

US$50/barrel.

The government clearly has its

own assessment of what the

price is likely to be during 2015. I

have seen some reports that

indicate the median of various

industry estimates in December

2014 of oil prices to be US$75 per

barrel for 2015. The government

could have relied on such esti-

mates. As a result, oil revenues are

expected to decline only by five

per cent and gas revenues by

three per cent.

The overall revenues are how-

ever, expected to decline by one

per cent because of the significant

increase expected from taxes and

fees (29 per cent). Since there is

no increase in tax rates, the expec-

tation would be that more taxes

could be collected from compa-

nies who may report more profits

in 2014 compared to 2013.

Further, there could be an

increased push from the tax

authority to assess the open

years of tax payers which could

mobilise additional revenue if the

assessments result in higher taxes

being determined than what was

declared in the tax returns. The

corporate income tax revenues is

budgeted to rise by 25 per cent

from RO 400mn to RO 500mn.

Another area where revenues

are expected to increase is cus-

toms duty, which is projected to

rise by 22 per cent from

RO270mn to RO330mn. The

GCC custom duty rate is at

five per cent and there is no

increase in this rate. The expecta-

tion of the government to have

increased customs duty revenue

must be based on increased

imports for various projects being

executed in Oman.

The third significant increase is

expected from the non-Omani

labour license fees which is

expected to go up by 65 per cent

from RO150mn to RO245mn.

Whilst no details are available,

one would expect that the

increase in these fees must be on

account of increase in the level of

fees payable for obtaining such

non-Omani labour licences.

There may be also a limited

increase in the non-Omani labour

force which may be required

to help implement the ongoing

projects.

On the question of implement-

ing new taxes, it needs lot of

study and discussion. The easiest

thing for the government to do is

to increase the corporate income

tax from 12 per cent to 15 per

cent or may be even 18 per cent.

But the government hasn't done

that which is a good thing

because you should not react to

short term fluctuations.

You need to have a longer

term view. For so many years in

the recent past, oil was budgeted

at a lower price compared to the

market price which helped the

government to increase its

reserves. They can always draw

from the reserves or they can

also borrow.

Today, Oman's borrowing is

very low compared to global stan-

dards. If you look at the budget,

the interest cost on borrowing is

only RO50mn. The government

has also indicated that privatisa-

tion of companies is another

option to raise revenues and

improve efficiency.

The government has projected

an increase in expenditure by four

per cent despite the revenues

declining by one per cent.

This is very positive as it signals

the government’s intention to

continue driving growth. The gov-

ernment is expecting a five per

cent growth in GDP which would

be a creditable achievement if

accomplished.g

FOR SO MANY YEARS OILWAS BUDGETED AT ALOWER PRICE WHILE THEACTUAL PRICE WASHIGHER. SO WHEN IT FALLSBELOW THE BUDGETEDPRICE FOR A YEAR THEYCAN ALWAYS DRAW FROMTHE RESERVE WHICH THEYHAVE OR THEY CANBORROW


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