The Oman VAT law is not just about tax, it is also about law

Alongside its impact on public health, the Covid-19 Pandemic has caused major disruptions for businesses worldwide. The supply chains that connect the four corners of the world have been clogged by border closures. Sectors such as tourism and aviation have taken the biggest hit. Other sectors where businesses have managed to stay afloat have nonetheless been confronted with newer challenges.

The initial response of businesses all over the world was to lay-off employees and scrap out old, outdated business models that were unjustifiable in terms of risk versus reward. The idea was to stay afloat in today’s challenging times.

Within Oman too, companies were forced to re-think their business strategies. In our dealings with clients in Oman, we have witnessed ‘cost cutting’ as the primary driver behind private sector management decisions.

This was an expected response from the market. In today’s challenging economic times, companies that fail to relook at their business models could risk closure or liquidation.

But there is also another (rather disturbing) trend that we have witnessed. In trying to cut corners, some Omani companies have lumped ‘legal/law’ in the ‘unnecessary costs’ basket and in doing so, have removed it from their priority list of ‘things-to-do’.

There is an obvious risk in doing this. Here’s why.

The Sultanate of Oman’s laws, like those of any other jurisdiction, are continuing to evolve. For example, only in the last one year or so, a plethora of new laws were issued in the Sultanate. Awareness of these laws, and remaining abreast of legal developments, is as important today as it was before we were struck by the pandemic. Ignorance of the law is not condoned in any jurisdiction and the Sultanate of Oman is no exception.

Despite putting legal due diligence on the backburner, we have seen some Omani companies make a last minute scramble and reach out to us for assistance. Again, from a financial perspective, this does not make much sense. The ‘cost’ of the ‘cure’ that these companies end up paying could be far more than the ‘cost’ of ‘prevention’ (if they had acted in a timely matter).

For example, one is better off paying upfront the cost of insurance to be protected against a car accident, rather than paying for accumulated losses ‘after the event’.

The same principle applies to ‘legal cost’. The cost of ignoring the law or failing to act at the right time may not just be financial. It could be reputational, loss of business opportunity, and the ultimate cost: falling on the wrong side of the law.

In our experience, an Omani law whose legal requirements and implications have not received the attention that they deserve is the recent Value Added Tax or VAT law issued by Sultani Decree 121/2020 in October 2020 (“VAT Law”).

The VAT Law is the Sultanate of Oman’s implementation of the GCC wide VAT Agreement dated 27 November 2016. It will enter into force in Oman on 16 April 2021 and will be supplemented by executive regulations to be issued in due course.

The VAT Law has introduced a flat rate of 5% VAT in Oman. With the VAT Law’s implementation on the horizon, Omani companies that haven’t already sought assistance from their tax advisors must do so right away without wasting any further time. (note: the VAT registration for certain categories of businesses commenced on 1st February).

Moreover, it is equally important for Omani businesses to note that full compliance with the VAT Law would require a proper legal review of their commercial contracts as well as company documents.

This is primarily because the VAT Law applies to all suppliers of goods and services in Oman and therefore, impacts the entire supply chain.

For example, the VAT Law prohibits a “Person liable to tax from transferring its the liability to others”. The common practice whereby tax liabilities are passed on to third parties could be impacted by this provision. As a result, businesses impacted by this would need to get their commercial contracts reviewed and amended by lawyers to bring them in order.

Moreover, commercial contracts would need to clearly spell out whether the agreed fees for goods and services are inclusive or exclusive of VAT. Businesses whose commercial contracts fail to do so may end up absorbing costs and find themselves unable to recover VAT. Suitable indemnity provisions may also be needed in commercial contracts to protect against violation of the VAT Law provisions by third parties.

Other requirements that the VAT Law has introduced could also have potential legal implications for businesses, and depending upon the nature of the commercial activities, these would need to be examined by lawyers.

Businesses would also require a legal review of their entire suite of commercial documents (invoices, purchase orders and standard terms and conditions etc.). Financial risks identified by tax consultants could necessitate amendments to commercial documents to bring them in line with the VAT Law’s requirements.

Therefore, while tax consultants can explain what VAT is and how it works, it is only lawyers who can undertake legal due diligence and close out any potential legal loopholes.

Like one would never risk health by avoiding or delaying reaching out to a doctor when faced with a medical issue, businesses should also get in touch with tax consultants and lawyers for full compliance with the VAT Law. Acting late on the pretext of ‘cost’ or not taking the VAT Law seriously could add up further costs that eventually become payable by non-compliant businesses. Therefore, the time to act is now.