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Related party transactions – Solving the tax twist
June 19, 2019 | 4:53 PM
by Rakesh Jain*
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Muscat: Corporate related party transactions (RPTs) are generally subject to a variety of litmus tests to determine the quality of corporate governance, degree of transparency and whether they are transacted at arms’ length. This article considers the Oman tax implications of RPTs and approaches to managing compliance.

Tax law for RPT

The tax law dictates that RPTs should be conducted in a manner akin to how independent persons would transact—also known as the “arm’s-length principle.” Detailed transfer pricing regulations, however, are not detailed in the tax law.

Narrower scope



As per the Oman Tax Law, “Related party” is defined to cover cases where one party has ‘control’ over the other, or when a third party has ‘control’ over both. ‘Control’ means the right to exercise control over the activity and commercial matters of another company. More specifically, it includes persons who own a greater part of the company’s capital or voting rights, are entitled to a greater part of either the income distributions or the assets on dissolution/cessation.

The above definition can be considered narrower than International Accounting Standard 24 –Related Party Disclosures (applicable to all businesses) and under the Capital Market Authority Regulations (applicable to SAOG companies). Hence, associated companies, although related under IAS 24 and CMA regulations, would not qualify as “related parties” under the tax law.



Current practices

Audit cycles over the last few years are proof that Omani tax authorities are increasingly focused on RPTs and tax adjustments. In absence of detailed rules/guidelines, assessments of RPTs remain at the discretion of tax authorities.

Hence, taxpayers are largely responsible to build an overall RPT audit file. It is recommended that such a file, amongst others, should include the agreement, invoices, detailed nature of services/transactions, proof of activities done and benefit obtained by the taxpayer, comparable third party quotes, transfer pricing study evaluating the three primary pillars (i.e. functions, assets and risks).

Can certainty be obtained?

While the current tax law does not contain provisions to seek a pre-agreement (commonly known as “Advance Pricing Agreement”), a taxpayer can initiate proactive discussion, with a view to obtain informal and potentially non-binding feedback from the tax department.

Corresponding relief

Where tax authorities make adjustments for transactions undertaken between two related Omani companies, it is possible for the other Oman-taxable company to seek corresponding relief through a specific application. This benefits Omani taxpayers engaged in RPT by avoiding potential double taxation.

Thin capitalisation

Apart from arm’s length, thin capitalisation seeks to restrict the deduction for interest on loans from related parties, where a debt-to-equity ratio of 2:1 is surpassed. Specifically, this affects conglomerates which make group borrowings at a parent-entity level (i.e., due to better credit history and access to banks) and pass on a portion of these funds to sister companies/subsidiaries, thereby technically triggering the thin capitalisation rules for sister companies/subsidiaries. In this situation, direct borrowings by the concerned companies with corporate guarantees may be a better alternative.

Foreign MNCs with tax presence in Oman

Multinationals’ Oman operations may take the form of a branch—a permanent establishment for executing specific projects. In many cases, revenues and related expenses are accounted at the headquarter level, without a detailed breakdown for Oman-based operations. For tax purposes, Omani operations are required to reflect revenues/profits in the way in which an independent party would have earned in similar business situations. Corporates are thereby advised to follow the arm’s-length principle for attribution of profits to their Oman operations in order to ensure that there is neither over or underestimation of tax liability.

Recent developments

More recently, the Kingdom of Saudi Arabia (KSA) has legislated transfer pricing provisions. Hence, Omani businesses operating in KSA would be advised to review their transactions for compliance.

Closing out

With RPTs inevitable in the business world, contemporaneous documentation and readiness for the enquiries mayhelp in the pursuit to ensure smooth sailing in the tax journey.

* This article has been authored by Rakesh Jain, Director at KPMG Lower Gulf.

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