The OTA has published its Financial Services VAT Guide

27 April 2022 - The Oman Tax Authority (OTA) has now published its long-awaited Value Added Tax (VAT) Guide in English for the Financial Services Sector. The Guide provides interpretation and guidance on the application of the VAT Law, Executive Regulations and covers both banking and insurance as well as the Islamic Finance counterparts. The document also lays out several “Administrative Practices”, which require careful reading – these are in essence the approaches accepted by the OTA to facilitate the taxpayers’ compliance. The Guide is accessible on the following link.

This note provides insight on the topics listed below:

• VAT registration requirements for non-resident Financial Services providers
• VAT treatment of Financial Services (including Islamic products)
• Compensatory or punitive fees and VAT
• Administrative practices for VAT 
• VAT treatment of insurance services
• Deductible or recoverable input VAT

VAT registration requirements for non-resident Financial Services providers

The Guide reiterates that a non-resident person who has a fixed establishment in Oman or carrying on business through an agent or representative is treated as a resident of Oman and would be subject to the same VAT obligations as a domestic supplier in respect of activities carried out in Oman. 

However, a non-resident Financial Services provider with merely an Omani-resident customer or client who is not registered for VAT, will not create a VAT registration liability by itself. Where one legal entity has branches across different countries, the branch or fixed establishment which is most closely associated to the supply of goods or services would be where the legal person is resident for determining the VAT place of supply. 

On transactions between Head Office (HO) and a branch of the same entity, the guide notes that internal transactions between the HO and branch (within the same legal entity) would not be subject to VAT/reverse charge mechanism. However, if the HO is availing of services specifically for its branch operations in Oman, the Oman branch would have to account for VAT under the reverse charge mechanism. This is where the test of what is “most closely associated” in the VAT “place of residence” provisions would be relevant.

VAT treatment of Financial Services (including Islamic products)

The Guide sets out an extensive list of transactions and products by outlining VAT treatments, which is a good reference point for banks and other financial institutions for determining proper VAT treatment. In general, the VAT treatments are categorized as:

• Standard rated (5%): where payment for the services is for an explicit fee, commission, or commercial discount. 
• Exempt: where payment for the services is made by way of an implicit margin or spread, including interest.
• Zero-rated: when provided to a recipient resident outside Oman if all conditions for zero-rating of services are met. 

Islamic Financial Services

It is clarified through the Guide that Islamic finance products generally would have the same VAT treatment as their conventional financial product counterpart. As the provider of an Islamic finance product usually earns implicit profit, this profit will be treated as interest under a conventional financial product. It is also clarified that the general rule of equivalence of Islamic financial products places substance over form in specific circumstances to avoid an unanticipated VAT treatment. 

The Guide provides descriptions of some of the most used Islamic financing products in Oman like, Murabaha, Musawama, Mudaraba, Ijara, Mushakara and others, and their corresponding treatment for VAT.  The key clarifications, include:

• VAT treatment on buying and selling transactions executed by the Islamic banks to meet the Shar’iah principle. 
• Recovery of input VAT by the actual customers on the goods and services, where the financing is sought through an Islamic financial arrangement.
• Profit income realized by the customers – to be treated as outside the scope of VAT, where passively earned.    

Compensatory or punitive fees and VAT

Presumably arising out of industry consultations, please be aware that:

• Charges described as late payment fees or early termination fees are normally subject to VAT as these represent consideration for the broader scope of services provided by a financial institution to customers. Restitution of actual damages incurred , like in other countries and VAT systems, are not considered to be a consideration for a supply and no VAT is to be charged on such receipts. 
• Penalties charged by Islamic financing providers are not subject to VAT if these sums are required to be remitted to charity and are not available to financing providers as income.

Administrative practices for VAT 

The OTA uses a concept of “administrative practices” which are essentially facilitations to businesses on VAT compliance issues.

These include:

• Waiver of customer fees: This is where financial institutions elect to waive fees payable by a particular customer. Here VAT does not need be accounted for under the deemed supply provisions, however this is subject to fulfillment of several conditions.
• Reference of payment date on tax invoice: It is clarified through the guide, that the reference of payment date is required on the tax invoice only in cases where payment is received before the invoice date.
• VAT return filing due date if it falls on a weekend or a public holiday: If the VAT return due date falls on a weekend or a public holiday, the return and payment will be accepted if filed on the next working day.
• Supply before publishing daily exchange rate: If a tax invoice is issued before the daily rates are published, the previous day’s published rate would be accepted. In case the taxpayer wishes to follow an alternative procedure, then the taxpayer may seek clarification from the OTA.

VAT treatment of insurance services

Insurance services generally refer to the situation where a contract provides cover to the policyholder (the insured) against loss or damage arising from an uncertain event in the future. It is clarified that warranties are not normally considered as insurance services for VAT purposes. It is therefore important to note the following: 

• Life insurance and life reinsurance contracts (conventional or Islamic) that are lawfully entered and licensed by the relevant body in Oman will be eligible for exemption from VAT. This includes both the savings element and the protection element of these policies. 
• Exemption is not applicable to additional explicit fees such as administration fees, and intermediary services like broker and management services.
• Settlements made by the insurer in respect of an insurance claim are outside the scope of VAT. Also, where a third party carries out repairs covered by an insurance contract, the third party would generally be considered as providing services directly to the insured.

Deductible or recoverable input VAT 

As per the Oman VAT Legislation, input VAT cannot be recovered on expenses incurred in making exempt supplies. Businesses such as banks which engage in both taxable and exempt activities must apportion their input VAT to recover only the amount they are entitled to. The Guide details the requirements and conditions for this often-complex process including the methodology for calculating partial deduction calculation and recovery of input VAT on capital assets.

The Guide also clarifies that the monthly bank statement issued by a bank would be considered as a valid summary tax invoice, provided it contains all the information required by a tax invoice. Considering the same, businesses may evaluate claiming input VAT on such transactions.

Administrative practices in relation to input VAT recovery

• Relief on partial deduction calculation: A licensed Financial Services provider may use the partial deduction of the previous year’s annual partial exemption calculation, subject to conditions, instead of calculating the VAT partial deduction percentage in first, second, and third quarter of the financial year.
• Input VAT deduction for Islamic asset financing: For certain Islamic financing arrangements like Murabaha, a tax invoice for procurement of assets will be issued to and in the name of the financing provider. The guide clarifies that input VAT deduction in such cases will be allowed to the actual purchaser of the asset, if such person can present:
  • The incurrence of input VAT on the asset by providing the original tax invoice issued to the financing provider; 
  • The Islamic financing contract; and 
  • A written undertaking from the financing provider that it has not deducted input VAT on the asset purchase.