Personal income tax in Oman: Will other Gulf countries follow suit?

Oman’s decision to push forward with a personal income tax framework could provide a template for other GCC countries and encourage them to consider similar tax reforms, tax experts said.

Oman’s Shura Council recently moved the draft law on personal income tax to the State Council, Oman News Agency reported. This decision suggests that legislative momentum is gaining ground towards introducing the tax.

If passed, personal income tax will be a first in the GCC region and could affect high-earning foreign workers and wealthy Omani citizens.

“The likelihood of the legislation being enacted is high. The Council of State would normally only make technical comments on the legislation,” said Thomas Vanhee, founding partner of boutique tax advisory services firm Aurifer.

The proposed tax targets high-income earners, with citizens taxed on net global income above $1 million and foreign nationals on Oman-sourced income above $100,000.

The expected reported tax rates range between 5 per cent and 9 per cent for foreign nationals, with a flat rate of 5 per cent for Omanis above the specified threshold.

However, the exact rates and further details are still being finalised.

The levy is expected to be outlined in 2024 and then scheduled to be introduced in January 2025, said James Swallow, commercial director at business formation and support provider PRO Partner Group.

The initial draft bill was introduced in 2022, proposing a tax framework aimed at high earners.

Why is Oman introducing personal income tax?

The potential introduction of personal income tax is in line with Oman’s Vision 2040, aimed at diversifying revenue streams and reducing dependency on oil revenue, according to Syed Naqi, senior director, lead reward and people services for the Middle East at global consultants Alvarez & Marsal.

While Oman “is rich in agriculture, its biggest contributor to gross domestic product remains oil and gas”, with its ratio to GDP rising to 70 per cent, said Anurag Chaturvedi, chief executive of tax advisory firm Andersen UAE.

“This necessitates Oman to diversify its revenue base to replace declining oil revenue, manage the fiscal implications of oil price volatility and address inequalities,” he said.

“Considering fierce competition globally, higher living standards, generous subsidies for food and fuel, and pressure to reduce the fiscal deficit, Oman requires additional non-resource revenue through taxes to sustain them.”

The country’s plan to levy income tax on high earners was mentioned in a bond prospectus published by the finance ministry in 2020 when Oman raised $2 billion in external financing.

The government said in the prospectus that it aims to reduce its reliance on hydrocarbon revenue by the introduction of VAT at 5 per cent, “enhancing the returns from state-owned enterprises [and] introducing income tax for high earners”.

The introduction of personal income tax will create a stable and diversified revenue stream for Oman, said Mr Naqi.

“The move is essential for reducing fiscal deficit and ensuring long-term economic stability, particularly in the face of fluctuating oil prices.

“The income generated from PIT should allow additional resources for investment in public services, infrastructure and social programmes, in line with Oman’s Vision 2040.”

Mr Vanhee cited the International Monetary Fund’s country statement from last year, which stated that PIT, among others, “will help cement fiscal discipline and credibility”.

News reports of Oman’s introduction of the tax date back to 2021 and the IMF recommendations for its implementation date back at least 20 years, he said.

Like other taxes, Oman may adopt standards set by the most developed countries, generally referred to as a “semi-comprehensive” regime, according to Mr Chaturvedi.

This regime provides favourable treatment (including exemptions, rate reductions and deferral of tax liability) for different types of income, he said.

“For example, income related to personal residences, health insurance and retirement benefits generally receive favourable tax treatment and a substantial portion of income from capital is generally not taxed until the gain is realised, and then at favourable tax rates,” he explained.

“The PIT era may initially be applied to expatriates transferring wealth outside the state.”

Will other GCC countries introduce personal income tax?

It will remain to be seen whether the roll-out of income tax in Oman is mirrored across other countries in the GCC, according to PRO Group’s Mr Swallow.

However, countries such as the UAE and Saudi Arabia have previously strongly indicated that they have no plans yet to impose personal income tax as they seek to attract more international companies and talent.

“There are occasional rumblings on tax reform in other GCC countries due to proposals of members of parliament, which usually do not end up materialising, and occasionally remittance taxes are put on the table,” Mr Vanhee said.

“This was also the case in Oman in 2013, but it was not implemented finally.”

“Major economies within the GCC may first introduce personal income tax similar to VAT, excise and corporate tax,” Mr Chaturvedi said.

“Saudi Arabia introduced corporate income tax in 2000, Oman rolled it out in 2010 and the UAE in 2023. It’s a complex decision, which may upset the economic outlook of the country as it relates to talent.”

Will the tax affect Oman’s economic competitiveness?

It is expected that should Oman introduce PIT, it will be at a relatively low rate to remain a competitive expatriate business destination, according to Mr Swallow.

“Oman doesn’t attract as much volume of foreign direct investment as the UAE and Saudi Arabia, who have invested greatly into attracting foreign investments, and is instead looking to generate state funds through personal income tax of its residents to boost its economy,” he said.

Traditional Mutra Souq in Muscat – in pictures

Mutrah Souq is located along the corniche in Muscat, Oman. All photos: Victor Besa / media

“This is similar to European countries like the United Kingdom, which generates government funds through tax, allowing them to inject the tax back into the local economy for infrastructure, social programmes, health care, water and waste management,” Mr Swallow added.

Mr Chaturvedi believes it may not be feasible for Oman to introduce the tax in 2025 amid a greater economic rebound and development in the GCC region.

The country may experience a slowdown in economic activities if the bill is passed, he said.

The revenue consequences of imposing or increasing taxes on people are also unclear, as higher taxes will increase demands for higher wages.

Mr Naqi said the introduction of PIT may, in the short term, affect Oman’s competitiveness relative to other GCC countries for attracting foreign workers.

“However, PIT is just one factor among many others that businesses and individuals typically take into account when considering a move to the region,” he said.

“If the introduction of PIT is accompanied by other economic reforms [such as enhancing transparency in tax collection and public expenditure], it could contribute significantly to building public trust and positively improve Oman’s economic competitiveness in the region.”