The Oman Tax Authority (OTA) has recently issued a Value Added Tax (VAT) Guide on Special Zones in Oman in Arabic. The Guide aims to provide a simplified explanation of the VAT principles and rules applicable to Special Zones in Oman.

The positions clarified in the Guide, as well as some critical issues for businesses to consider, are summarized below. 

VAT registration for a person in a Special Zone

Any person operating in a Special Zone, who is obliged/eligible for VAT registration, must attach the following documents with the VAT registration application:

  1. Copy of commercial registration certificate
  2. Copy of license issued by the Authority operating/supervising the Special Zone 

Tax Group registration for a person in a Special Zone

A person registered with the Authority operating in a Special Zone cannot register as a Tax Group. 

Special Zones in Oman

Special Zones are considered a part of Oman. Currently, areas that qualify as Special Zones for VAT purposes in Oman are:

  1. Al Mazunah Free Zone
  2. Sohar Free Zone
  3. Salalah Free Zone
  4. Duqm Special Economic Zone

VAT on supply of goods to/from Special Zones

General conditions for zero-rating supply of goods to Special Zones in Oman, set out in Article 103 of the Oman VAT Executive Regulations, require that:

  1. The customer or recipient is a taxable person
  2. The customer or recipient is registered with and licensed to conduct the activity within the Special Zone by the Authority operating and supervising the Special Zone
  3. The customer or recipient receives the goods for the purposes of the activity in the Special Zone
  4. The goods are not excluded from the right to deduct input tax, under Article 56 of the Oman VAT Executive Regulations

Additionally, the supplier must obtain a declaration from the customer confirming that:

  1. The customer is licensed by operating/supervising Authority of the Special Zone; and
  2. The goods are received for the purpose of the activity in the Special Zone.

In the absence of such a declaration, the supplier may refuse to apply zero rate.

The VAT treatment of supply of goods to/from Special Zones in various scenarios is summarized below:

#

Transaction type

From

To

Oman VAT

Conditions/Notes

1

Supply or transfer of goods

Outside Oman

Special Zone

Suspended

Subject to suspension conditions

2

Supply or transfer of goods

Mainland Oman

Special Zone

Zero rate

Subject to zero-rating conditions mentioned above and obtaining a declaration from the customer

3

Transfer of goods

Customs suspension status

Special Zone

Zero rate

4

Supply or transfer of goods

Special Zone

Special Zone

Zero rate

5

Supply or transfer of goods

Special Zone

Mainland Oman

Standard rate

Payable by the importer of goods in Mainland Oman

6

Supply or transfer of goods

Special Zone

Outside Oman

Zero rate

Subject to export conditions

7

Transfer of goods

Special Zone

Customs suspension status

Zero rate

Subject to proof of transfer of goods attested by operating/supervising Authority of the Special Zone or the Directorate General of Customs

VAT on supply of services to/from Special Zones


General conditions for zero-rating supply of services to Special Zones in Oman set out in Article 107 of the Oman VAT Executive Regulations require that:

  1. The customer is a taxable person
  2. The customer is registered with and licensed by the Authority operating and supervising the Special Zone
  3. The customer receives the services for the purposes of the activity in the Special Zone
  4. The services are not restaurant and hotel services, provision of food and beverage, and cultural, artistic, sports, educational and recreational services specified in Article 24(5) of the Oman VAT Law
  5. The services are not exempt from VAT under Article 47 of the Oman VAT Law

Additionally, even for services the supplier must obtain a declaration from the customer confirming that:

  1. The customer is licensed by operating/supervising Authority of the Special Zone; and
  2. The services are received for the purpose of the activity in the Special Zone.

In the absence of such a declaration the supplier may refuse to apply zero rate.

The VAT treatment of supply of services to/from Special Zones in various scenarios is summarized below:

#

Supplier status

From

To

Oman VAT

Conditions/Notes

1

Non-resident supplier

Outside Oman

Special Zone

Zero rate

Subject to zero-rating conditions mentioned above.

Standard rated where ineligible for zero-rating or exemption, VAT payable by the recipient under reverse charge mechanism.

2

Non-taxable/unregistered supplier

Mainland Oman

Special Zone

Out of scope

Input VAT not deductible by the customer

3

Registered supplier

Mainland Oman

Special Zone

Zero rate

Subject to zero-rating conditions mentioned above and obtaining a declaration from the customer.
Standard rated where ineligible for zero-rating or exemption. Input tax deductible by the customer, if eligible.

4

Registered supplier

Special Zone

Special Zone

Zero rate

Subject to zero-rating conditions mentioned above and obtaining a declaration from the customer.

5

Registered supplier

Special Zone

Customs suspension status

Zero rate

6

Registered supplier

Special Zone

Mainland Oman

Standard rate

Payable by the supplier, except where service is otherwise exempt or zero-rated

7

Registered supplier

Special Zone

Outside Oman

Zero rate

Subject to export conditions

VAT on specific supplies to/from Special Zones

  • Supply of utilities

Supply of utilities (e.g. water, electricity, cooling, etc.) to or within Special Zones is eligible for zero rate if the supplier can prove that the supply is to a location within the Special Zone.

  • Supply of real estate and real estate related services

Supply of real estate and services related to real estate in the Special Zone are eligible for zero rate if the conditions specified in Article 103 and 107 of the Oman VAT Executive Regulations (summarized above) are satisfied. 

Issues for consideration

Businesses located in Special Zones, as well as those dealing with businesses in Special Zones, need to examine the tax positions adopted considering the Guide. While the Guide helps clarify the tax treatment of several transactions, there are several issues that still merit consideration, that have not been clarified in the Guide. For instance:

  1. To qualify for zero-rating, the customer must be a taxable person i.e. registered or required to be registered for the purposes of Oman VAT. Businesses in/outside Special Zones regularly supply goods and services to the Zone Operating Authorities, Government Bodies, Quasi Government Bodies, etc. that are currently not taxable persons. Is the intention to subject such transactions to VAT and increase the cost of purchase for the recipient?
  2. In case of supply of goods, zero-rating is extended to the customer or recipient if all other conditions specified are satisfied. Would zero-rating apply in a “bill to”-“ship to” transaction where the “bill to” party (i.e. the customer) is in Mainland Oman but the “ship to” party (i.e. the recipient) is in the Special Zone?
  3. Several businesses procure services for their activity in the Special Zone, but such services may be performed outside the Special Zone. For instance, storage or transportation of goods outside the Special Zone, but within Oman. Since these are ultimately/indirectly used for the activity in the Special Zone, would these qualify for zero-rating? Should one read the illustrations related to supply of real estate and real estate related services to suggest that only services performed within the Special Zone are eligible for zero-rating?
  4. Several businesses operate in Special Zones as well as outside. These businesses procure goods and services where the purchase/use of such goods or services is common i.e. not exclusive for the purpose of the activity in the Special Zone e.g. telecommunication, banking, etc. Would such services be eligible for zero-rating?
  5. Supply of restaurant and hotel services, provision of food and beverage, and cultural, artistic, sports, educational and recreational services specified in Article 24(5) of the Oman VAT Law are ineligible for zero-rating. What is the scope of restaurant and hotel services? Does the restriction also apply to hotel accommodations? In some cases, given their infrastructure in some of the Special Zones, businesses may be compelled to procure these for their employees so they are able to perform work. Is the intention to subject such transactions to VAT and potentially increase the cost of purchase for the recipient?
  6. Whether a person operating in a Special Zone cannot register as a Tax Group, even with other persons operating within the same Special Zone?

While the above list is only illustrative, businesses should consider reviewing their VAT positions and seek clarity where the position is ambiguous in order to avoid onerous penal consequences.