The enhancement and diversification of government revenues have been one of the most important financial, economic and legislative demands over the last 10 years to reach the country’s financial and economic diversification and reduce the dependence on oil revenues
Lo’ai BatainEh –
Although most Arab countries in general and GCC states in particular have recently made several procedures, facilities and regulations to improve the investment climate through offering several incentives and guarantees to investors, Arab and foreign investment cash flows are still suffering from some legal, administrative and financial obstacles, including taxes.
Several countries have made some amendments to their regulations, including those pertaining to income tax, profits and financial returns.
The Income Tax is considered the most important source of income for governments. In addition, it is one of the most attractive factors for investors to start their business anywhere.
Although the income tax has just increased over the years, especially after the steep decline in oil prices, the importance of income tax as a main source of public revenues increased.
Income tax is a non-oil source of income for GCC governments, including the Sultanate of Oman.
The enhancement and diversification of government revenues have been one of the most important financial, economic and legislative demands over the last 10 years to reach the country’s financial and economic diversification and reduce the dependence on oil revenues.
The recent amendments to the Omani Income Tax Law include raising the income tax for Omani companies and subsidiaries of foreign firms from 12 per cent to 15 per cent, in addition to cancelling the minimum tax exemption of RO 30,000 and imposing a tax of 3 per cent on small enterprises.
The amendments also included cancelling exempting the mining activities and some industries from income tax. In addition, the industrial sector shall be no exemption from income tax for a non-renewable period of five years, as per the regulations adopted by the Council of Finance and Energy Resources.
The recent amendments to the Income Tax Law include the tax on the dividends of one-person company or foreign investors. This means that the tax shall be paid on the cash dividends distributed by shareholding companies from which foreign investors benefit.
The new adjustments also include the expansion of tax base and imposition of a tax of 10 per cent of the total amount of dividends paid to a foreigner (who does not engage in an activity in the Sultanate through a stable facility) as regards some sources of income in Oman, which include fees and management fees, as well as research, development and use of computer programs.
Taxes should be applied in a competitive and attractive form for some economic sectors. For example, the progressive taxes should be applied to vital sectors that have reached the stage of maturity.
However, they should be reduced to the promising sectors targeted by foreign investors who usually bring with them financial investments, as well as the technical, administrative and marketing knowledge to market these products and services resulting from these investments.
I see that these adjustments will lead the majority of companies through the boards of directors to make several amendments to the dividend payout policies, some of which will be positive and others will negative according to the nationality and objectives of investors.
The amendments have the following implications:
n The replacement of corporate cash dividends with bonus share distribution (not subject to income tax) shall lead to increasing the number of shares and liquidity and thus pressuring prices.
n When companies replace cash dividends with bonus share distribution, this will pose pressure on the earnings per share (EPS).
n Foreign investors may shift their focus from companies paying cash dividends to others distributing bonus shares, when they wish to continue with their investments in the country.
n Investors may liquidate their investments before the payment of cash dividends, which increases pressure on prices.
n Investors may move to more attractive markets in term of growth, earnings and tax rates.
We advise investors to take into account the impact of taxes on earnings for 2017, as well as the potential impact on companies’ ability to pay cash dividend or distribute bonus shares (if any) at the same level of the previous years.
This usually attracts investment managers when taking decisions.