Monetary Union for GCC - except Oman - but agreement on VAT

Nice to see some actual progress at the AGCC conference, because it seems the old story on a GCC wide, including Oman, Value Added Tax [VAT] continues to rumble along, and as the only viable effective income tax the Governments can introduce at this stage in the GCC economic development. This according to HE Mr. Macki quoted in the Gulf News. A VAT will also force the Government to have significantly more information and control over the internal economy especially, with the need to apply VAT credits for VAT paid on a business' purchases, and payment of taxes on ts sales. There is a lot of paper involved in VAT, so more jobs for civil servants too.

In addition, as long as average oil prices stay over $45 this year, the budget will be subsidised by the State reserve fund, and there's a reasonably good chance of that if OPEC implement their cuts. Good to see Oman's production up too.



Photo www.daylife.com2 months ago: Saudi Finance Minister Ibrahim al-Assaf (L) and Minister of National Economy and Deputy Chairman for Financial Affairs of Oman Ahmed bin Abdul Nabi Macki talk upon their arrival for a meeting in Riyadh October 25, 2008



He makes the fair point that the tourism sector is growing at a good clip it would seem, but then again, it's coming from a very low baseline and still only accounts for less than 3% of GDP. Given the huge investments being made, I'm not sure I find 23% growth very good. If any sector, Construction must have boomed in 2008.

Expenditure will grow and salaries are safe, he said. All in all, I agree with Minister Macki that 2009 will be relatively benign for Oman, especially in contrast to many other parts of the world. The rapid reduction in growth will catch a few businesses with inventory problems, and the market price for construction equipment should drop. Together with the soon to feed through drops in global prices for almost everything, especially cement, shipping, steel and food, construction should continue to do well.

The only big exposures for Oman will be the oil price, naturally, and the continued plan to remain fixed to the dollar. The dollar looks like it will face a big correction sometime in 2009, and is already down 10% or so of late, [but after the big recovery of the dollar rate in 2008 that we are all enjoying right now when we repatriate funds!]

The big question for me: I wonder if in his original speech he actually said 'Cyclone Gonu', or did he say 'unusual weather conditions'...?

Omani reserves will cover deficits

By Sunil K.Vaidya, Bureau Chief
Published: January 03, 2009, 23:19

Muscat: Ahmad Bin Abdul Nabi Macki, minister of National Economy and Supervisor of the ministry of Finance, yesterday said that any deficit caused by oil prices dropping below $45 a barrel would be covered by emergency reserve funds as well as restructuring the project plans.

"We will not touch salaries as we look for cuts if the oil price drops below $45," he said during a press conference after announcing the state's general budget for 2009 prepared with the oil price estimated at $45. He said that Oman has in the recent past targeted tourism as one of the main sector in governments bid for economic diversification.

Tourism
"The tourism sector continues to grow and is expected to realise a growth rate of 22.3 per cent by virtue of the increase in lodging capacities in the country and efforts exerted to market Oman as a tourism destination," he said.

...

He also announced that people affected by tropical cyclone Gonu in 2007, especially along the Batinah coast, would get 2,200 housing units as part of the first phase, expected to cost of 339 million Omani riyals (Dh3.39 billion).

The total expenditure for the financial year 2009, he revealed, was estimated at about 6.4 billion Omani riyals against 5.8 billion riyals in 2008.

GCC endorses VAT
Ahmad Bin Abdul Nabi Macki, Oman's minister of National Economy and supervisor of the Finance ministry, deputy chairman in the Financial Affairs and Energy Resources Council, has said that the introduction of Value Added Tax (VAT) was a joint GCC decision.

He also added that the study to introduce VAT in the GCC countries was underway to compensate for the loss of revenue following the Customs Union and Common market introduction.

In reply to a question he said: "There are no plans to introduce any other taxes."

Russian bought Oman's Kazak pipeline share

For those who didn't already know, looks like Oman sold its stake in the Kazak pipeline to Russia. Oman had been looking for a buyer around a year ago quite openly.

I understand the deal was assisted by one the other pipeline partners Oman has good relations with...

In the current situation, looks like it was a smart move.

Moscow Times

Russia May Have Bought CPC Stake
31 October 2008ASTANA, Kazakhstan -- Kazakh President Nursultan Nazarbayev told Prime Minister Vladimir Putin on Thursday that the two states should jointly buy Oman's share in a major pipeline, only to hear that Russia might have already bought it alone.

"Oman is a shareholder in [Caspian Pipeline Consortium] and we should buy [its stake]. We should take 50 percent each so the others do not do it. It is very important," Nazarbayev told Putin during a meeting in the Kazakh capital of Astana.

The proposal appeared to take Putin by surprise.

"I'm not entirely sure, but it seems to me we have already bought it. I need to check," Putin said.

The CPC owns the 1,580-kilometer long Tengiz-Novorossiisk oil pipeline, which links oil fields in western Kazakhstan and Russia's Black Sea coast. The CPC pipeline pumped 32.6 million tons of oil in 2007.

Russia and Kazakhstan, the two governments with a stake in CPC, have first right of refusal on Oman's 7 percent stake in the consortium, the key export route for Kazakhstan's crude oil.

Oman decided to sell its stake earlier this year, but so far there has been no information on who may have bought it.

Russia has a 24 percent stake in CPC and Kazakhstan owns 19 percent. The rest belongs to private shareholders: Chevron, BP, Royal Dutch Shell, ExxonMobil, LUKoil and Rosneft.

In September, BP also expressed interest in selling its stake in CPC if it failed to agree with the government on terms for expanding the line.

Of the shareholders, only BP has not agreed to the expansion terms demanded by Russia. (Reuters, MT)

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.