Continuing with KPMG’s insights into the Oman Tax Law, this week, we seek to highlight the intricacies involved in the tax treatment of provisions made by finance and leasing companies (FLCs) against their loan receivables. Under the regulatory framework governing FLCs in Oman, they are required by the Central Bank of Oman (CBO) to mandatorily establish provision for loan losses (LLP) in their annual financial statements.
These provisions are of two types – specific loan loss provisions (SLLP) based on loan classification into prescribed categories including special mention, substandard, doubtful and loss accounts and at prescribed percentages applicable to each category ranging from 5 per cent to 100 per cent; and general loan loss provisions (GLLP), being additional general provisions over and above SLLP, of at least of 1 per cent of standard and special mention non-personal loans, and 2 per cent of standard and special mention personal loans.
Historically, based on directives issued in respect of Oman’s old tax law, the tax authority allowed LLPs created by banks (to the extent recommended by the CBO) to be deducted from their taxable income and denied such deduction to FLCs, who were only allowed deduction to the extent of bad debts actually written off during the tax year.
However, with the promulgation of the new Tax Law in 2009 by Royal Decree (RD) 28/2009 (Tax Law), the tax department started allowing such deduction of both SLLP and GLLP even to FLCs. This was pursuant to the Tax Law defining banks as “the meaning specified in the Banking Law previously referred to” and the Banking Law includes leasing, factoring and hire purchase financing within the definition of banking business. This paved the way for FLCs to be considered at par with banks in terms of their eligibility to this benefit of deduction of LLPs. Article 66 of the Tax Law states that “in determining taxable income of any bank for any tax year, there shall be deducted provisions established for loan losses, to the extent of the amounts of such provisions required to be established on a date nearest to the bank's balance sheet, prepared for an accounting period ending during that tax year, to comply with the recommendation of the Central Bank of Oman, provided that the loan was made in the normal course of the banking activity."
Accordingly, the Tax Law now has a specific provision allowing a deduction to both banks and FLCs, for LLPs to the extent of the recommendation made by CBO in its report dated nearest to the company's balance sheet date. If the LLPs established by the company in its financial statements are in excess of the CBO recommendation, it would be required to offer such ‘excess’ provisions to tax and claim tax deduction in the year in which the CBO recommendations match the provisions established by the company.
While the CBO, in its annual examination report, specifically recommends the SLLP to be maintained by the company, it may or may not make a specific mention of the GLLP in their report. The Tax Department’s current practice is not to allow tax deduction of GLLP unless they are specifically mentioned in the CBO annual examination report and covers the GLLP established by the company.
Therefore, in order to get such tax deduction for the GLLP, FLCs should endeavour to ensure that the CBO specifically includes GLLP recommendation as well, besides the SLLP, in its annual examination report.
Finally, FLCs should note that following a specific provision in the Tax Law allowing a deduction for provisions for loan losses as mentioned above with effect from the Tax Year 2010, they would be able to claim a deduction even for loan losses established prior to 2010 so long as these are covered in the CBO report closest to the tax year 2010.
This position has been accepted by the tax authorities in the assessments of some of the FLCs recently completed and comes as a significant relief to FLCs and gives them a level playing field with banks.
*The writer is tax manager at KPMG Oman and specialises in the financial services sector.