Point of View –
James RavI –
The advent of the new decade 2020s has brought in fresh opportunities and challenges to the global business community, especially to the multinational enterprises. Thanks to technology, free capital movement and gradual removal of trade barriers, the integration of national economies and markets is increasing. That trend is extending to global enterprises identifying lucrative tax heavens worldwide and structure their operations with an intention to reduce, if not avoid their tax burden.
Base Erosion and Profit Shifting
In many instances, this practice is over-stretched with increased accounting sophistication in tax planning and tax avoidance schemes resulting in questionable actions. Such practices exploit ambiguity in the interaction of different tax rules in the bilateral Double Tax Treaties (DTTs) made between two countries.
This results in erosion of tax base in high-tax regimes and shifting of profits to low-tax or nil-tax regimes in order to minimise the overall tax payment. These Base Erosion and Profit Shifting (BEPS) strategies adopted by the MNEs (Multi-National Enterprises) result in eroding tax revenue to governments.
OECD and BEPS
Recently, the pervasiveness of BEPS has come under intensified scrutiny, especially in high-tax jurisdictions. Accordingly, tax authorities and international bodies like the OECD (Organisation for Economic Cooperation and Development) are advancing changes to existing rules. The modifications aim to address weaknesses in the current global tax system.
In the year 2013, G20 finance ministers asked OECD to develop a unified action plan to address BEPS issues. The resulting programme provides governments with domestic and international instruments better aligning taxation with economic activity and value creation. Further, realizing the importance of a global coordination in plan implementation, the OECD in 2016, developed the BEPS Inclusive Framework (IF) which allows additionally for non-OECD countries to benefit from the pact. Once signed, the concerned country must satisfy a few basic requirements, such as curtailing harmful tax practices, preventing treaty abuse, and mandating transfer pricing documentation among others.
Oman signs MLI
The OECD developed the Multilateral Instrument (MLI) aiming to modify the application of thousands of bilateral DTT agreements to effectively eliminate double taxation, counter treaty abuse, and improve dispute resolution mechanisms. MLI also provides flexibility to accommodate specific tax treaty policies introducing BEPS into DTTs without having to revisit each. Accordingly, MLI signatories must automatically adopt the changes into their respective DTTs, without renegotiating.
Oman signed the Multilateral Instruments of OECD in November 2019, entailing changes brought by the BEPS project would impact many of its bilateral DTTs with various countries. Oman has also committed and signed the international framework for implementing the Common Reporting Standards (CRS) regulation to enable automatic exchange of financial information with other jurisdictions. Banks and other financial institutions had been mandated by the Central Bank of Oman to ensure collection of CRS-related information for new account holders effective from 01 July, 2019.
It is expected that the first set of exchange of information by Oman will be mandated by September 2020. It is also expected that Oman legislation will allow specified institutions to undertake CRS compliance.
Currently, there are no specific provisions for Transfer Pricing (TP) in the Oman Tax Law yet the transfer pricing issues are dealt with on a case to case basis during tax assessments/investigations. It is expected that the specific guidelines for Transfer Pricing shall be issued in due course.
Impact on MNEs in Oman
Oman’s signing of MLI of OECD has brought in further discipline and oversight on global business units operating in the Sultanate. Multinational Enterprises in Oman and all over the world are challenged, and even denied benefits under DTT agreements when they are abused. Reported transactions must reflect economic and commercial reality so that levied taxes are in line with the value they create in the domestic economy.
MNEs need to thoroughly understand how these new requirements can impact their operations and business activities. Law-abiding entities are required to report the economic substance of the transactions and avoid devious practices to evade taxes.