Tax neutrality for Islamic Financial transactions in Oman
In Oman, Islamic financial transactions (IFTs) are taxed ‘at par’ with conventional financial transactions (CFTs). For tax policymakers, at times, achieving ‘at par’ taxation is tougher than granting tax exemption. For example, the borrowers, who have availed Islamic financing, cannot deduct an expense like their other conventional banking loan interest against tax due, in the absence of ‘at par’ provisions that consider ‘in lieu of interest’ as interest.
Not only are there corporate taxes in the nature of taxation of expenses, but there is also the capital gains tax against asset transfers. Capital gains may seem to arise from the plain application of the general law to the Shariah compliant structures as they are asset-proofed.
Taxation of these ‘seemed’ capital gains solely due to the nature of Shariah compliant structures means being taxed ‘discriminately’. Unless there are provisions that avoid this discrimination caused by applying the same law to two different types of transactions, it shallcause a disadvantage to one, due to economic double taxation. This disparity can have the effect of making the IFT unattractive to the persons who are religiously or otherwise seeking for it and also fail to achieve the country’s goal of financial inclusiveness.
In Oman, the profits, fee and charges linked to ownership and leasing of the underlying assets, solely in IFTs, are exempt in order to achieve tax neutrality. Under the Oman Banking Law amendments that came into force in 2012, Islamic banks are exempted from charges imposed by transactions related to the ownership, leasing and renting of real estate and movables where the transactions are performed for the purpose of providing Islamic banking services. According to the Capital Market Law amendments that came into force in 2014, an SPV incorporated for the issuance of Sukuk will benefit from the exemption of tax and all kinds of fees that are connected to the registration and transfer of ownership of assets.
Under the Oman Income Tax Law amendments that came into force in 2017 and its executive regulations issued in 2019, disposing of capital or other assets by sale or exchange or waiver, leasing of immovable or movable properties or the usufruct and the income arising in consideration of rent or usufruct linked with these transactions are not subject to tax.Donations (the excess arrived after the Shariah audit) are deductible and the credit losses created by the Islamic banks shall be treated as the loan losses of the CFT. Also, for taxpayers, any amount spent in lieu of interest shall be treated as a deductible expense.
While the Income Tax Law endeavors to achieve neutral tax treatment between IFTs and CFTs, it is clearly ruling out any type of tax avoidance using these provisions intended for a different purpose. It does not accord the neutral treatment to transactions that “explicitly or implicitly” involve financial principles other than IFTs. Understanding that inbound investment is conducive to the Omani economy, there are various tax exemptions and financial incentives provided under the Capital Market Law; however, they are not specifi cally for IFTs, but also for CFTs.
Dhana Pillai is the head of real estate, tax and project finance at Al Hashmi Law Firm (Oman). She can be contacted at firstname.lastname@example.org.