Taxing imported goods and services

Muscat: This week, as part of a fortnightly series of articles on the recent developments regarding taxes, we provide certain insights on the government’s plan to levy new taxes – VAT and excise tax – and their impact, specifically on import of goods and services. These taxes could be applicable in addition to the existing customs duty on imported goods. Currently, imports of goods into Oman are subject to customs duty under the Common Customs Law of the GCC states. The duty is levied at a rate of 5 per cent on most goods with the exception of a higher duty on some specified goods such as alcohol and tobacco. There are also certain exemptions available under the Common Customs Law on imports of certain goods and upon meeting certain conditions as prescribed.
Value added tax
The GCC states, including Oman, are targeting to introduce a Value Added Tax in 2018. Based on the recent announcements that the Saudi cabinet has provided its final approval to the GCC framework agreement and with reports of the recent signing of the GCC framework by Bahrain, it is understood that the GCC framework agreement has now been signed by all the GCC states. While the VAT framework is expected to only set out key VAT principles, once ratified it would clear the way for each GCC state to release its own national VAT laws based on those principles.
Imposition of VAT on import
VAT is a tax on the final consumption of goods and services but collected at various stages of the supply chain, including on the importation of most goods and services. The VAT rate on imported goods and services would be the same as applicable on supplies in Oman.
It is expected that VAT on goods would be collected along with the customs duty at the time of import by the customs authority. VAT is typically applied on the total landed value of goods—that is, on the customs value, plus any customs duty, plus any other charges such as freight and insurance. With the proposed excise tax expected to be implemented sometime in 2017, this may also become part of the landed cost for VAT purposes.
The import of services would also be subject to VAT where the recipient of services is registered for VAT in Oman. VAT on the import of services operates on a “reverse charge” or “self-accounting” basis whereby the recipient of the services would be required to self-declare the value of the import of services and discharge the VAT liability. This is similar to self-declaration and payment of duties on the import of goods. The distinction is that whilst the import of goods is subject to physical control in the form of customs clearance through filing of appropriate documents with the authorities, the import of services does not go through a similar process. Consequently, it is the obligation of the importer of services to self-declare and pay VAT.
In both instances, payments to the overseas supplier of either the goods or the services would require documentation and compliance with the procedures that would be prescribed under the Omani VAT law in terms of filing of VAT returns and audit of such returns.
Unlike customs duty and the proposed Excise Tax, in the case of VAT, the importer of goods and services would be eligible to offset the import VAT suffered in their next VAT return to the extent the imported goods and services are used in making taxable supplies (standard rated or zero rated).
The self-accounting of VAT on imported services can be offset in the very same VAT return, mitigating any impact on cash flow. However, the payment of import VAT in the first place on import of goods and then the claim for the credit in the next VAT return can create a significant financial burden in terms of cash flows. To mitigate the cash flow impact, many international VAT laws provide for the deferral of payment of VAT on imported goods until the next VAT return is due, thus addressing the issue of any adverse cash flow impact. We expect that the GCC framework agreement would allow for the provision of similar VAT deferral schemes.
Excise levy
The GCC states are planning to levy excise tax in 2017 at rates of up to 100 per cent on a number of "harmful" goods, such as alcohol, tobacco, soft drinks and energy drinks. The excise tax would also be levied on the import of such harmful products and it is expected to be collected by the customs authority. Excise tax would be levied in addition to the customs duty and proposed VAT.
With the imposition of excise tax and VAT, the cost of importation to the extent credit is not available for import VAT suffered will go up. It is time for businesses to gear up for the new taxes and start analysing their impact. They should determine whether they have the necessary systems and processes in place to comply with these new taxes, understand how it will impact their acquisition costs and their demand. Finally, businesses need to consider whether they can pass some, or all, of these additional imposts on to their customers or whether they be forced to absorb some of these, impacting their profitability.