News on Oman's secret cyclone, our new taxation plan, and naughty Iranians

The International Monetary Fund, or IMF, just released its latest annual Public Information Note [PIN] following discussions with the Oman Government. Apart from the stuff about banking and inflation, and how the Government needs to use fiscal policy to control it (ie the Government needs to rein back its growth in spending), there were two real nuggets.

The first highlights the very strange way last year's Cyclone Gonu is reported here.

Here’s the Oman Press version of the opening paragraph, as printed in the outstanding Times of Oman

IMF Praise for Oman growth
Oman’s economic performance during 2007 was strong. The economy withstood well the impact of last year’s unusual weather conditions and real GDP grew by 6.4 per cent, supported by high oil prices and rapid growth of non-hydrocarbon sectors such as petrochemicals, trade, and transport and communications, the International Monetary Fund (IMF) said in a recent report on Oman.

Well, actually, that’s not quite true, is it Times Of Oman, because that’s not what the International Monetary Fund (IMF) actually said in their recent report on Oman. Here’s the IMF version

Oman's economic performance during 2007 was strong. The economy withstood well the impact of the June cyclone and real GDP grew by 6.4 percent, supported by high oil prices and rapid growth of non-hydrocarbon sectors such as petrochemicals, trade, and transport and communications.

Note how The Times (and all other Omani papers) have changed June Cyclone to last year’s unusual weather conditions? It was always a bit Orwellian how, sometime later last year, all mention of a cyclone, Gonu, and the cause of the damage it did was replaced with the magically semantic phrase unusual weather.

The second piece, again totally unhighlighted by Oman’s extremely perceptive press corps, was that Oman is apparently planning to institute a value added taxation system.

Directors called on the authorities to restrain the growth of wages and transfers, phase the implementation of lower-priority projects. They encouraged the authorities to reduce over time the implied subsidy on petroleum products, and supported efforts to increase non-oil revenues through the introduction of a value-added tax.

Hmmm. A value added tax, also known as a goods and services tax, will be extremely regressive. That means that families who spend most of their income will face a much higher effective marginal tax rate than rich families who either save and invest money or spend it overseas. Perhaps Oman will choose to implement a more distorting (and more expensive to administer) VAT whereby food for example is excluded. Lets see. But interesting that we have to find out about this through the IMF...

Iranians caught supplying Iraqis with arms.
Well, no surprise there I guess. The Americans have been claiming since last year that the road-side explosive devices being used had reached levels of sophistication that indicated Iranian military support. It will be interesting to see how the Gulf countries react to clear proof of active Iranian support for the insurgency in Iraq.

Iraq shows proof of Iranian support for militants

BAGHDAD An Iraqi delegation in Iran has confronted Iranian security officials with evidence that Teheran is providing support for militias battling Iraqi government forces, an Iraqi official said on Friday.

"They presented a list of names, training camps and cells linked to Iran," Haidar Al Ibadi, a member of Iraqi Prime Minister Nuri Al Maliki's Dawa party, said.

"The Iranians did not confess or admit anything. They claim they are not intervening in Iraq and they feel they are being unfairly blamed for everything going on Iraq," he said of the talks, which took place on Thursday. Ibadi said he had been in contact with the delegation.

Washington has long accused Teheran of backing militias, particularly cleric Moqtada Al Sadr's Mahdi Army, providing them with weapons, funding and training. It has displayed some of the weapons, including rockets and mortars.

The Iraqi government, however, has generally been more restrained in its criticism of its neighbour, which denies the charges and says it supports the government.

The US military said this week that "very, very significant" amounts of Iranian weaponry had been found in Basra and Baghdad during offensive against militants. Some of those arms were made in 2008, a senior US military official said on Friday.

The official, who spoke on condition of anonymity, said there had been a "sea change" in Baghdad's view of Iranian activity in Iraq since the discovery of the weapons.

"Basra changed it for the Iraqis. I'm not sure they believed it before. But they went to Basra and saw it first hand," he said.

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.