Tax Flash

The Oman Tax Authority (OTA) has issued the Value Added Tax (VAT) Guide on the Real Estate Sector. The Guide aims to explain the application of Oman VAT to transactions in the real estate sector.

The positions clarified in the Guide, as well as some critical issues for businesses to consider, are summarized below. 

Mixed-use refers to real estate or plot of land that has separate sections that are used for different purposes. For instance, real estate housing commercial shops on the ground floor, commercial offices on the first floors and residential units on the higher floors is considered as being designed for mixed use. Supply of each section may be subject to different VAT treatment, based on the use of such section (i.e. commercial or residential).

Where mixed-use real estate is sold entirely, it is necessary to split the consideration according to the different sections of the real estate. Accordingly, consideration for the residential part of the real estate will be treated as exempt (in case of re-sale) or standard rated (in case of first sale) and consideration for the commercial part of the real estate will be treated as standard rated.

Undeveloped land is land on which there are no installations or man-made structures, or part completed structures above its surface or underground. Conversely, land on which there are installations or man-made structures, or part completed structures above its surface or underground is considered developed land.

In order to determine whether the land is developed, a building is considered as above-ground structure or installation when its construction progresses beyond the foundation level. Sale or lease of the land at such stage is no longer a supply of bare land.

Construction that takes place on the ground or in its subsoil (e.g. roads, bridges, pipes to distribute water and electricity) is sufficient to render the land developed. Agricultural land that is covered with necessary construction to operate it as a farm (e.g. irrigation systems, roads, etc.) is considered as developed land. Lands prepared for operation as permanent car parks is considered as developed land. However, if a plot of land is only fenced and enclosed with walls to allow construction to begin, the land does not qualify as developed land.

1.      Car parks

Renting of car parks is subject to VAT at the standard rate of 5%. However, if the car park is a part of a single supply of real estate (e.g. with residential or commercial real estate), then it would be subject to the same VAT treatment as the supply of the real estate.

2.      Service charges related to real estate

The building owner or developer of a residential complex may impose fees on owners or tenants for various services such as maintenance, electricity, internet, water, administrative services, commissions, etc. Such fees are consideration for additional services and subject to VAT at the standard rate of 5%. Where such service is considered part of a single supply of real estate, then it would be subject to the same VAT treatment as the supply of the real estate.

3.      Real estate owned by individuals

The Oman VAT Law does not exempt individuals who own real estate in Oman from complying with its provisions. Individuals undertaking any economic activity, such as renting or selling real estate, are required to assess their VAT obligations and ensure necessary compliance.

4.      Lease of undeveloped land for development purposes

When a landlord leases a plot of land to a tenant who intends to develop it, the landlord may supply bare land when it is first leased to the tenant, but as soon as the lessee begins to develop the land, the nature of the supply changes. As soon as structures or installations are erected on the land, or part of completed structures are erected above its surface or underground, the landlord is deemed to have supplied developed land. In such cases, it is necessary to compute VAT at the standard rate on payments relating to the period after the change in the nature of the supply.

5.      Real estate related services by non-residents

If real-estate-related services are provided by a non-resident supplier to a registered taxable person in Oman, the taxable person is required to compute VAT under the reverse charge mechanism.

If real-estate-related services are provided by a non-resident supplier to a non-taxable person in Oman, the non-resident supplier is obliged to register for VAT in Oman. Monetary threshold for registrations does not apply to non-resident suppliers making taxable supplies in Oman.

Where the real estate constitutes a fixed establishment of the non-resident supplier under the Oman VAT legislation, the non-resident supplier would be considered as a resident in Oman and will therefore be subject to the monetary threshold for mandatory registrations.

6.      Real estate located in Special Zones

Place of supply in case of supply of real estate, including sale and lease of real estate, is where the real estate is located. Therefore, where a supply is of real estate located in Special Zones, the place of supply is Oman. Supply of real estate located in Special Zones is eligible for zero rate, subject to conditions specified in this regard (refer our tax alert on Special Zones for details). 

1.      Construction cost of real estate

Input VAT incurred on construction of new commercial real estate by a taxable person is fully recoverable since all the intended supplies of such real estate are taxable. Developers will be entitled to a refund of VAT on expenditure incurred during the development phase.

Input VAT incurred on construction of new residential real estate by a taxable person is also fully recoverable on the basis that it relates to the first taxable sale subject to VAT at the standard rate. Subsequent supplies of the real estate by that taxable person should be ignored.

2.      Expenses associated with resale of residential real estate

When a supplier incurs input VAT on expenses associated with the resale of residential real estate, such as broker fees, or on overhead costs such as property maintenance, such expenses are considered as directly related to exempt supplies. Accordingly, the supplier is not eligible to deduct input VAT on such expenses. However, the supplier is eligible to deduct input VAT on such expenses directly related to the first sale of residential real estate (which is standard rated).

3.      Repair and maintenance expense

Input VAT on repair and maintenance expenses for real estate used:

-        entirely for commercial purposes is fully recoverable

-        entirely for residential purposes is not recoverable

-        for both commercial and residential purposes (common input VAT) should be apportioned in order to determine the amount deductible.

For example, when a building houses leased shops and residential apartments, input VAT on repair and maintenance expense can be recovered in relation to the shops and should be foregone in relation to residential apartments. Common input VAT (i.e. which has been used for both the commercial and residential sections) is partially deductible.

Step 1: The percentage of recovery rate should be computed as follows:

Recovery rate =                     _{Taxable supplies}

                                                 ^{Taxable supplies + Exempt supplies}    

Step 2: The percentage of recovery rate should then be rounded to three decimal places.

Step 3: The percentage of recovery rate should be multiplied with the value of common input VAT. 

1.      Scope of construction services

Construction services are generally works carried out for the construction of buildings or infrastructure and other installations, including demolition and restoration. This includes professions and industries such as architecture, project management and craftsmen. These services may also include supply of goods as a part of the service.

2.      VAT on construction services

Construction services are subject to VAT at the standard rate of 5%, except where such services are supplied to Special Zones and eligible for zero rating. The VAT treatment applies regardless of the type of building being constructed.

3.      Tax due date for supply of construction services

a.      One-time supply

Small construction works that involve only one lump sum consideration should be treated as one-time supply. Such transactions should follow the general time of supply rules and the tax due date should be the earlier of: 

-        Date of receipt of payment

-        Date of completion of service

-        Date of issuance of tax invoice for the supply

b.      Continuous/consecutive supply

Construction works involve supplies over long and continuous period and therefore include interim or advance payments, retentions, etc. linked to project completion. Such supplies that are provided on a continuous basis and involve periodic payments and bills should follow the special time of supply rules and the tax due date should be the earlier of:

-        Payment due date shown on the tax invoice

-        Date of receipt of payment

If 12 months from the date of commencement of supply pass and none of the above occur, then the date of supply is the date the 12 months expire. The project completion certificate does not affect the date of supply for VAT purposes. However, a project completion certificate is often associated with other obligations such as the due date for payment, which may impact the time of supply.

4.      Date of supply of retention payments/guarantee

Construction contracts often include a clause allowing the customer to retain a percentage of the contract value until the completion of the project, in order to ensure that the supplier executes the contract properly and rectifies defects, if any.

Often the customer does not pay the retained amount until the expiry of a specific period agreed upon in advance. In some cases, where the customer is not satisfied with the quality of work, the customer may not pay the retained amounts to the supplier.

There are no special rules for determining the tax due date with respect to retained payments. Therefore, where the construction services result in periodic payments or invoices, the tax due date should be determined in accordance with Article 27 of the Oman VAT Law, i.e. the earlier of:

-        Date of receipt of payment (of the retained amount)

-        Payment due date (for the retained amount) shown on the tax invoice

-        12 months from the date of completion of the project (determined according to the contract)

Where the construction services are a one-time supply, the tax due date should be determined in accordance with Article 26 of the Oman VAT Law, i.e. the earlier of:

-        Date of receipt of payment

-        Date of completion of service (determined according to the contract)

-        Date of issuance of tax invoice for the supply

5.      VAT on supplies to correct construction defects

Customers often retain guarantee payments (retention money) to cover potential defects that may occur in the building, during or after construction.

If the customer is not satisfied with the quality of work, he may ask the supplier to correct the defects at the supplier expense, or contract with another supplier to correct the defects. If the original supplier corrects these defects at his own expense (i.e. no additional consideration), the work to rectify such defects will be considered a part of the original supply, and not subject to VAT.

If the customer contracts with another supplier to correct these defects, or the original supplier corrects these defects for additional consideration, this will be considered as a separate supply and VAT will be due on such supply.

If the customer does not pay the retention money to the supplier, VAT is not due on the unpaid amount and the supplier has the right to issue a tax credit note to correct the VAT due where VAT has already been computed thereon, or resort to bad debt relief if eligible.

6.      Partially completed building

A building is usually considered completed on the date the Building Completion Certificate is officially approved. However, if the building is occupied before such date then the building will be deemed to be completed on the date the building was occupied. Sale of a partially completed commercial building will be subject to VAT at the standard rate unless it qualifies as a transfer of business.

VAT treatment of transactions in the real estate sector depends on several factors, including the type of property, the use of property, payment terms, liquidated damages, retentions, accounting treatment, etc. The contract terms are equally important to distinguish the substance from the form and ascertain the correct VAT position. One size does not fit all. Therefore, businesses need to examine their VAT positions adopted considering the Guide. In addition, there are several other issues that merit consideration, which have not been clarified in the Guide. For instance:

• The Oman VAT legislation allows the use of alternate apportionment methods to calculate partial exemption. Floor space method is an alternate apportionment method usually accepted by tax authorities for the real estate sector in the GCC and globally. However, its application can result in several practical challenges that could skew the input VAT recovery rate. Guidance from the OTA will help bring consistency and certainty in assumptions businesses make while using this/any other alternate apportionment method. Is the intention to leave the choice and working of such alternate apportionment methods entirely to businesses?
• The tax due date in case of continuous supply is required to be determined based on Article 27 of the Oman VAT Law (mentioned above) i.e. earlier of due date of payment specified on the invoice, date of receipt of payment or 12 months from the commencement of supply. Date of issuance of tax invoice has no mention in Article 27 of the Oman VAT Law.
  • Article 30 of the Oman VAT Law provides that when a person issues an invoice with VAT thereon, the tax due date is the date of issuance of tax invoice.
  • The VAT legislation in several other GCC countries where VAT has been implemented require businesses to determine their tax due date in case of continuous supplies as the earlier of date of invoice, due date of payment specified on the invoice, date of receipt of payment or 12 months from the commencement of supply.
  • How do businesses need to interpret Article 30 of the Oman VAT Law in case of continuous supply? If the date of invoice does not warrant consideration in determining the tax due date in case of continuous supplies, what is the relevance of Article 30 of the Oman VAT Law? If the date of invoice warrants consideration in determining the tax due date in case of continuous supplies, then how does that impact the tax due date for retention payments?
• How should businesses determine the tax due date for advances received as at 16 April 2021 in relation to standard rated supplies to be made after 16 April 2021? Since the payment is received, should VAT be paid on such advances in the tax period ended 30 June 2021 regardless of whether it is a one-time or continuous supply?
• In case of retail sale of real estate, often there is a time lag between the date the property is physically handed over (may or may not be occupied) and the date the title transfer is documented/registered. What is the tax due date in such cases?
• Often businesses maintain labor camps to house employees. Businesses may volunteer to offer these as a part of the employment package or be compelled to offer these in case of remote/ underdeveloped project sites. Businesses incur expenses in the operation and upkeep of such labor camps, but do not recover any money from employees for extending such accommodation.
  • What is the VAT treatment of such labor camps? Should these be treated as residential real estate? Where the business does not recover any money from employees for extending such accommodation, can it claim input VAT credit for such expenses? Would it constitute a deemed supply between the business and employee?
• Often developers purchase large plots of land and divide them into several smaller plots for sale/development. As a part of the development process, the developer builds infrastructure for the common areas e.g. infrastructure for supply of water, electricity, telecommunication services, roads, parks, mosques, etc. At the time the infrastructure is developed, it is not known whether the plots will be supplied as bare land, or developed and supplied as residential/commercial real estate.
  • Where the nature of supply is not known and there is no direct nexus between the expense and supply, can the developer claim input VAT credit for such expenses?
• The Guide clarifies that where real-estate-related services are provided by a non-resident supplier to a non-taxable person in Oman, the non-resident supplier is obliged to register for VAT in Oman. How should businesses determine the place of supply in case of services provided by non-residents that do not fall within the scope of real-estate-related services? Does a non-resident business supplying services that do not fall within the scope of real estate-related-services to a non-taxable person in Oman expose the non-resident business for VAT registration in Oman? 

While the above list is only illustrative, businesses should consider reviewing their VAT positions and seek clarity where the position is ambiguous in order to avoid onerous penal consequences.