VAT clarification for the Oil & Gas sector in Oman

The Ministry of Energy and Minerals (MEM) released letter no. MEM/US/1161/2021/2830 dated 31 May 2021, which provides clarification on certain critical transactions for the Oil and Gas sector like cash calls, quality bank adjustment, etc. from a Value Added Tax (VAT) perspective. This clarification has come directly from the MEM in consultation with the Oman Tax Authority (OTA) and they will continue to work together to provide further clarity on sector specific transactions/issues from time to time.

VAT on cash calls
  • It has been clarified that cash calls made by operators to/from unincorporated/incorporated joint ventures partners (JVs) and investors/stakeholders for upstream activities under Exploration and Production Service Agreement (EPSA)/Joint Operating Agreement (JoA) will be treated as “out-of-scope” as long as VAT is accounted for, wherever required, reflecting the underlying supplies of goods and services.
  • This clarification, in our view, will provide relief to many businesses operating in upstream activities within the sector.
  • It is important to note that the relief is only for the cash call transactions made by the operator to the JV parties and others. The businesses who make taxable supplies of goods and services to the operators will need to continue charging VAT at either 5% or 0% (if they meeting the conditions mentioned in Article 93 of the VAT Regulations). We presume that where 5% VAT is charged to the operator, the operator would also be eligible to recover input VAT, subject to conditions mentioned in the VAT Law and Regulations.
VAT on Quality Bank Adjustment (QBA)
  • We understand that operators producing crude oil in Oman use a pipeline distribution network called Petroleum Development of Oman (PDO) for exports. Given that there are different qualities of crude oil flowing from common pipeline networks that are subsequently stored in common storage tanks, there is a likelihood that they may get mixed together.
  • Since different quality of crude oil supplied by operators may get mixed, there is a QBA done by the PDO with the operators depending upon the quality of their crude oil for export purposes.
  • It has now been clarified that if a QBA is done by the PDO, it will be treated as “out-of-scope” for VAT purposes.
 VAT on Pipeline Tariff Charges (MOL)
  • It has been clarified by the MEM in consultation with the OTA that the MOL tariff charged by PDO will be treated as “zero-rated” supply.
  • This will be applicable at the source as well as the recipient level. In simple terms, VAT will not be charged by the PDO to the operators and no VAT will not be payable by the operators. 
 Latest news on the OTA’s website

We understand that the OTA, as part of its communication strategy and to assist businesses on VAT, will continue to provide regular updates, news, and clarifications on their website under the section called ‘Latest News’. For further updates, please follow this link.

We will also continue to monitor the situation and share the latest VAT updates, news and happenings, as well as other information on the tax spectrum. Stay tuned for more information that will be shared through our Oman tax alerts and GCC Indirect Tax Digest

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