Oman Guide: What is the VAT impact on Oil and Gas sector in Oman?

VAT in Oman
What is the VAT impact on Oil and Gas sector in Oman

Implementation of a 5% standard VAT rate from April 16, 2021, is an instance of Oman’s compliance with GCC’s “Common VAT Agreement”. The country has been preparing its businesses for this by making them register for VAT since February 2020.

Amid the COVID-19 situation, the Oman government has intended to derive about yearly 1.5% of their GDP equivalent to $1.04 billion from revenue that will be generated through this VAT imposition. But the business organizations including companies in the oil and gas sector are now in adverse conditions regarding the uncertainty lying ahead about the VAT regulations.

Companies of Oman’s oil & gas industry can be classified into three categories- upstream, midstream and downstream. The first one involves the production and extraction of oil and gas. The midstream sector provides storage and transportation services whilst the downstream industry is attributed for related support services of different kinds. VAT treatment will be different for each of these areas. So will be its implication on these sectors.

Natural gas, crude oil and derivatives are fully exempted from VAT. That is, the supplies of these products will allow the oil and gas companies to reclaim the VAT expense.

For now, the businesses will have to go through the following two complications due to the new VAT imposition initiative.

Impact on cash flow: There is a time gap between claiming for VAT refund and monetizing the VAT amount. Though some products of oil and gas industry are made zero-rated, companies supplying these products will also have to provide VAT in Oman initially. As oil and gas companies make large capital and operating expenditure, it will affect their cash flows substantially. So, they need to be ready with a higher amount of cash flows to meet up with such a huge level of initial costs even though they can claim the VAT amount back later. But companies especially those who are in the downstream sector will have to bear higher VAT expenses in Oman. Oil and gas companies will also have to increase their working capital requirements.

Impact on unclarified tax bracket: The three sectors of the oil and gas industry are inter-connected. So, clarification regarding which items are zero tax rated, which are partially exempted and which are taxable should be ensured otherwise it might result in complication in the business. As per the recent VAT laws in Oman, the companies in the oil and gas industry must be certain about these facts before entering into any new business contracts.

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