Interview: Kenneth Macfarlane
How can Oman use targeted tax reform to enhance its attractiveness as an investment destination?
KENNETH MACFARLANE: One issue we always have with foreign investors wanting to enter Oman is the uncertainty of the tax treatments. They expect definitive answers, but unfortunately there are none; we can only give advice based on what we have experienced in the past. Therefore, what we believe would be useful, and what we have suggested, is some form of formal advanced ruling system. This could greatly decrease the amount of uncertainty, and therefore the risk, that companies face when entering a new country. There is already enough risk around the particularity of projects, so decreasing the risk associated with the tax environment can boost the attractiveness of Oman as an investment destination.
In Oman the corporate tax rate is relatively low at 12%, but compared to its GCC neighbours this is still an extra cost. It is not necessarily a problem, since the cost is factored into the cost of doing business. The problem here is that companies know there will be a 12% tax, but not necessarily what it will be 12% of. This is where the uncertainty translates into risk. Companies would be willing to pay a fee upfront to remove any tax-related uncertainty and mitigate the potential risk.
In addition, implementing an online filing system and automated review would also be helpful. Reducing the amount of tax paperwork and filing time is crucial for businesses but can also benefit the tax environment. Here the tax environment would be able to filter returns and focus on the high-risk tax assessments. Rather than having their own resources tied up in filtering through tax returns and processing minimal risk assessments, a form of e-filing would greatly increase their efficiency and ability to focus on the big cases where there is a lot of money and judgement involved.
What more can be done to bring Oman’s corporate governance code up to international standards?
MACFARLANE: Oman introduced a corporate governance code fairly early on, in 2003. Since then a lot has progressed in the way of corporate governance. However, despite fairly sound existing rules, there is always room for revising them to be more applicable to the way businesses are run today.
This is especially true of non-executive directors. Major investors are usually institutional, government pension funds and sovereign wealth funds, so we see a lot of board members who represent government agencies. These people do not necessarily come from a business background. Consequently, this translates into poor governance and decision making, since the board members are not particularly well skilled in assessing and taking risks, which is a fundamental part of doing business. It would therefore be useful to encourage the more active use of non-executive directors, especially those who are entrepreneurs and experienced business professionals and can bring their business acumen, experience and expertise to the boards in a way that will increase the effectiveness of governance and the profitability of businesses on the market.
As the economy moves further towards diversification and companies are encouraged to go public, how can the investment tax regime be improved?
MACFARLANE: One area for improvement is the treatment of mergers and acquisitions. In many countries companies are free to reorganise so that they can move assets around within a group to maximise return on those assets. This is not the case in Oman, however. If a company wants to float a part of its business, this could, in some cases, result in a tax liability. This effectively becomes a disincentive to go public.
We must remember that many local businesses have been around for a long time and have grown organically, which means that they have assets and businesses under a larger structure, which they may not want to sell off because doing so would create major tax implications. Oman would do well to seriously explore tax-free reorganisations within businesses, which would help these big groups prepare their entities to go public.
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