The Oman Ministry of Finance has recently clarified that withholding tax applies to payments for services to foreign persons regardless of where the services are performed. This makes it unnecessary to determine the place where a service is performed and therefore removes considerable uncertainty.

In February 2017 amendments to the Income Tax Law expanded the scope of withholding tax to dividends, interest, and payments for services. Thereafter, in FAQs published on the website of the Oman Ministry of Finance and in clarifications obtained in writing by various taxpayers, the tax authorities stated that withholding tax would not apply where services were rendered entirely from outside Oman. Recently, the tax authorities removed the FAQs from the Ministry’s website and issued a letter to accountancy firms stating that withholding tax applies to payments for services to foreign persons, regardless of where the services are performed. This new interpretation is in line with the application in a number of other jurisdictions that apply withholding tax on services.

The current interpretation removes ambiguity that had existed on the question of where particular services are performed, since it is no longer necessary to make that determination. However, it will affect local businesses that purchase services from abroad, especially where the service agreement calls for a “gross-up” of payments to cover withholding tax.

There has been no official announcement on the effective date of the revised interpretation. However, the tax authorities have verbally advised that they will not apply the new interpretation retroactively as this would cause undue hardship to taxpayers.

Hence, taxpayers are recommended to comply with the current interpretation from March 2018.

Executive regulations

We understand there have been no changes to current interpretations on the applicability of withholding tax to dividends and interest. The forthcoming executive regulations are expected to provide greater clarity. These regulations are now in the review and approval stage and are likely to be issued later this year.

The takeaway

Taxpayers purchasing services from abroad should seek professional advice on the application of withholding tax rules. This is particularly true in negotiations with the foreign vendor and in cases where tax treaties may apply.

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