Special economic zones have special treatment under VAT regime. For VAT purposes, these zones are treated as being located outside the Sultanate and will be VAT free. Oman has three Free Zones namely, Salalah Free Zone, Sohar Free Zone and Al Mazunah Free Zone and two Special Economic Zones namely, the Duqm Special Economic Zone and Knowledge Oasis. The VAT law has not defined the designated zone for VAT purposes and the Executive Regulation are expected to specify the same. These zones and its borders and location must be specified under the law, so that the area shall have applicable procedures to control the movement of goods and their supply to the area, within or between them, and the area should be supervised and managed by the responsible operator of the area.
It is not necessary that all transactions pertaining to Designated Zone will be VAT free. Let us look at some of the scenarios and the VAT implications. Under the VAT regime, the place of supply rule is very important to ascertain the taxability.
Scenario 1: The transfer of goods between two different designated zones will bear no duties and value added taxes under certain conditions to be defined by the Executive Regulation like, the goods are not altered or released during the transfer.
Scenario 2: In the case of supply of services, the VAT treatments will be just the opposite of supply of goods. Any services whether supplied from the mainland to Designated Zone or within the Designated Zone, the standard rate of VAT at 5% will be levied. For instance, catering services, hotels, catering commitments, cultural, artistic, sports, educational, recreational services, all kinds of energy goods sold for use or consumption like supply of water will be standard rated.
Scenario 3: In case any company located in the Designated Zone self-consumes goods and services, then the place of supply will be Oman and will be taxable at standard rate of 5%. However, the executive regulations will specify certain exceptions to the rule.
Scenario 4: In the case of transfer of goods to and from a Designated Zone there can be three possible VAT treatments; (a) supply of goods into a Designated Zone from outside Oman will be treated as outside Oman and will be VAT free; (b) supply of goods from mainland into a Designated Zone will not be considered as export and standard rate will apply; and (c) movement of goods from a Designated Zone to mainland will be treated as an import of goods to Oman.
As per Taysir Al Rawahy, it is important for businesses established within the designated zones to understand that they have the same VAT compliance obligations and rights as non-Designated Zone businesses have. They will have to register for VAT, account for VAT, file VAT returns and pay VAT as per the law.
In any case, relevant documents must be kept for the transfer of goods to, within or between designated zones, to be certified by the operator and supervisor of the special zone with respect to the supply of goods within the special zone, and by the General Customs Administration with regard to the supply and transfer of goods to the special zone or from one special area to another.