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Special VAT treatment for free zones

Opinion Sunday 24/January/2021 19:06 PM
By: CA. Sarweshwar Biyani
Special VAT treatment for free zones
Vice President – Finance and Accounts, SV Pittie Sohar Textiles [FZC] SAOC, Sohar Free Zone

Oman is located on the south-east coast of the Arabian Peninsula which gives Oman a strategic location as a shipping and trading centre for markets in Europe, Africa and Asia.
To realise the economic benefits of this location, currently, Oman is the home of three free zones, viz. Sohar Free Zone, Salalah Free Zone and Al Mazunah Free Zone. According to Asyad, Sohar and Salalah free zones attracted 120 projects with an estimated investment OMR3.7 billion by the end of 2019.


Oman market will see 5% VAT invoices from April 21. As a consumption tax, VAT is applied on most supplies of goods and services across the country.
Generally, a special VAT treatment is provided to free zones to exempt from VAT for specific supplies of goods and services to encourage economic activities.

However, this special treatment is based on strict criteria by Tax Authority including control, fenced geographical area, security, custom and specified internal procedures of free zone. Strict criteria are put in place to enable any kind of tax avoidance. Free zones must comply with these criteria to enjoy VAT exemption. Free zones businesses are expected to keep a detailed record and comply with VAT regulations to receive VAT-free purchases and other benefits.


As a practice, many supplies of goods to free zone businesses are outside the purview of VAT and also VAT is not applicable for services performed in free zones.


The exception to the general rule, VAT is applicable if supplied goods to a person or businesses in Free Zone are consumed or utilised by them. For example, a business purchases furniture’s, electronic items, vehicles, fuel for vehicles, stationery, computers, food and similar goods to run the business, these purchased goods will attract VAT as these are consumed by business. An individual in free zone buying goods for his purpose will be paying the VAT.


However, if the purchaser of goods in free zone plans to resell the goods then these goods are exempted from VAT. Also, supplied goods becoming part of another good in Free Zone will be outside the scope of VAT.    


Purchasing of goods in free zone for using in production does not attract VAT provided there is a strong direct connection between purchased goods and produced goods e.g. tools will have sufficient connection but computer purchased to only support pre-manufacturing functions will not have sufficient connection.


The supplier is responsible to assess carefully that a supply of goods to Free Zone is not chargeable under VAT. This makes supplier charge VAT on all supplies by default and in that case, free zone's purchasers should be alert to avoid paying VAT unnecessary.
Normally, goods are free from VAT if supplied from outside the country to free zones. Also, the transfer of goods between Free Zones does not attract VAT subject to some compliances. Supplying goods outside the Free Zone is treated import and VAT is payable.


The rules and procedures will be elaborated in the expected VAT Executive Regulations from the tax authority.