Tuesday, January 29, 2008

Income Tax and Business in Oman

I was intrigued by the article in the hard-hitting Times Of Oman on the Majlis Al Shura debating a draft law on Income tax in Oman Income Tax Law debated
Al Shukaili explained that the income tax draft would not include individuals or personal income.

I must admit I was a bit disappointed with that. I would have thought that a mild tax, say 10%, on high-earning individuals would be a good idea for Oman to start with now, so that the Government has levers to pull later if required. There are a lot of people making some serious money lately, as the record oil price and the Government's investment-lead boom feeds through the economy. And given the resulting increased gap perceived by average Omanis between the so-called 'haves' and the 'have-nots', this would have been a good opportunity to start the debate on these individuals paying their fair share. Of course, a the side effect would be perhaps to just push them to living outside Oman, but that could be covered by making it a tax on international income required of all citizens of Oman resident here or not, as is done by other countries such as Australia and the USA.

But, no, its just a revision and consolidation of Company taxation. At the moment this is predominantly 12% for normal companies registered in Oman (but 32% for Foreign registered companies – more on that later). For those interested, this usually doesn’t apply to the oil concessions, or big capital intensive projects, as the agreements with the Government will normally explicitly exempt them from any changes in the tax law. This is to stop the Government waiting until the investment have been made and then changing the law to take all the profits, and is completely normal. The Private Shareholders in Omans biggest oil company, Petroleum Development Oman, effectively pay a tax rate of around 85%, which is pretty high compared to comparable international deals. Most Omanis don’t know this, and think that Shell (the main private shareholder in PDO) is taking an unfair amount, but they’re wrong. Oman gets a really great deal. The real tax rate they pay is more like 93%. The newer concessions operated by the likes of Occidental and BP pay a lot less tax, by the way.

The big difference in tax rate between an Omani registered company and a foreign one is a big driver that helps the 'big families' and other well connected businessmen and women in Oman. An Omani registered company has to have an Omani sponsor, and of course, he or she will require a share of the spoils. But as the alternative is a 32% tax bill vs 12%, it's obviously in the interests of the foreign company to do a deal and register locally. This usually entails a 'carry deal' of some kind, whereby the foreign owners take all the risk and effectively the sponsor gains a risk free 5%-10% take. Sweet eh? In exchange, the sponsor will be able to facilitate connections for Government, other businesses, contracts, arrange logistical support, distribution, import/export assistance, arrange a friendly bank to supply financing (usually one in which the sponsor is a shareholder, heh heh), provide offices and suppliers (and hence take a cut from that side as well, or even be the owner or sponsor of those companies too!). It’s a great racket. As sponsor you can also then get the company to employ family members, or the family members of other well connected people. A virtuous circle.

And with the large influx of new business lately, and the booming economy, you can see why the number of nice new Lexus, Porsche and big palaces is also skyrocketing.

6 comments:

  1. Although economically ineffecient, I as well believe that we should introduce a personal income tax now rather than later.
    This can help some with the increasing income inequlity.

    ReplyDelete
  2. Per,

    I'm not so sure personal income tax would be that inefficient, if they made the tax code a flat tax with no complicated loopholes, started it at a high enough level (say 30000 rials / yr), and made sure it was deducted at source (pay as you earn).

    Given there is still significant unemployment, it would boost jobs (the gov employees needed to collect it and the accountants to manage it for people). It would be progressive and the funds used to boost pensions and social welfare provisions.

    A goods and services tax or sales tax would be economically efficient, but regressive and further bias the economy to dividends and businesses.

    ReplyDelete
  3. I understand your point. I was thinking more of the fact that the gov of oman doesnt have a problem generating revenue due to oil prices. Therefore we dont really need the tax revenue CURRENTLY! By taxing it serves more of an income redistribution. However, by taxing the high income individuals or "sponsors" we will be reducing the incentive for these individuals to support foreign firms and may reduce employment. Obviously I am working with the assumption that these firms will hire local labor.

    ReplyDelete
  4. Good post,and interesting to know how the private shareholders @ PDO are taxed. I's be pissed if someone was taking 85% of my hard earned dollars.

    Anyway, I agree that a simple, flat tax on the top earners is a good place to start. As PYR said, and It's good to get everybody's head around the idea of taxation now, while we still have the oil revenues to keep the country afloat.

    I am a pretty capitalist individual, but there is a great deal of inequality between the upper class and the lower classes here. An income tax could help to reduce the effects of that,and help to grow an employed and productive middle class.

    ReplyDelete
  5. Thanks for the comments Pr, Suburban

    As Oliver Wendell Holmes, Jr. said - Taxes are the price we pay for civilization.

    Of course the no. 1 big problem with a personal tax in Oman? The other famous quote:

    No taxation without representation.

    This basic principle is found in the Declaration of Independence and the U.S. Constitution. It would also be a potential problem here.

    ReplyDelete
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