The OTA has issued a VAT guide for the Oil and Gas sector

The Oman Tax Authority (OTA) has recently issued its Value Added Tax (VAT) guide for businesses within the Oil and Gas sector in English. The guide provides an interpretation and guidance on the application of the VAT Law, and the Executive Regulations to the Oil and Gas industry in Oman. The guide also provides definitions for commonly used terms within the Oil and Gas sector such as, operator, contractor, partners, farm-in and farm-out, etc. Important practical aspects on the applicability of VAT for upstream, midstream and downstream activities performed by the sub-contractors, contractors, and operators are discussed through the guide including the scope of zero-rating under Article 93 of the Executive Regulations, which is one of the critical areas for businesses operating within the sector. The guide is available on the following link.

In this alert, we cover several key areas as listed below:  

• Clarification on applicability of zero-rating under Article 93 of the Executive Regulations
• VAT implications on upstream activities
• VAT implications on midstream activities
• VAT implications on downstream activities

Clarification on applicability of zero-rating under Article 93 of the Executive Regulations
 

As per Article 51 of the Oman VAT Law, supply of oil, oil derivatives and natural gas qualify as zero-rated supply, subject to fulfilment of conditions prescribed under the Executive Regulations. The guide reiterates that all the conditions of Article 93 of the Executive Regulations must be met, to qualify for zero-rating for upstream and midstream activities.

The guide also provides clarification on one essential condition of Article 93 where it is required that “The supplier and the customer must be registered and licensed by the Ministry of Energy and Minerals (MEM) to carry out primary and intermediate activities related to exploration, production, extraction, transportation or import of crude oil, its oil derivatives and natural gas”. It is clarified, the following certificate/information provided by the supplier and customer should fulfill this condition:

For supplier (i.e. contractor) - The OTA will accept the Joint Supplier Registration System (JSRS) certificate and the contractors supplying goods or services for upstream or midstream activities must submit their JSRS certificate copy as proof of “MEM certification” for VAT registration.

For customer (i.e. operators) - MEM shall periodically submit to the OTA, a list of operators and partners engaged in upstream and midstream activities (including service agreement for small fields).

In terms of compliance, the guide stipulates that an upstream/midstream operator should provide a confirmation to contractor(s) that goods/services are for an exclusive upstream/midstream use. This can be through an electronic or physical purchase order, goods/services received document, or similar document which states the words “Received for direct and exclusive use in zero-rated upstream or midstream activities as prescribed by Article 93 the VAT Executive Regulations”. In the instances where the supplier (i.e. the contractor) has issued the tax invoice with 5% VAT, the customer (i.e. the operator) must not refuse such tax invoice; as the operator can recover the same as input VAT or claim refund from the OTA, subject to standard recovery of input VAT provisions.

It is further clarified that the following supplies are not eligible for zero-rating under Article 93:

• Local supply of goods/services by a sub-contractor to a contractor irrespective of usage in upstream or midstream activity.
• Import of goods into Oman even where intended for use in an upstream or midstream activity.
• Services procured by operators or contractors from non-resident businesses.

VAT implications on upstream activities
 

Definition: The term “upstream” is defined as “Activities related to searching for potential hydrocarbons, including geophysical activities, drilling exploratory wells, and subsequently drilling and operating the wells (including injector wells) that recover and extraction of crude oil or raw natural gas to the surface and abandonment of wells and facilities.” In simple terms, upstream activities are mainly concerned with searching for potential underground crude oil and natural gas, and subsequent activities like drilling and development facilities to aid the lifting of hydrocarbons to the surface and processing them to separate gas, oil and associated water, if any.

VAT treatment
 

The guide clarifies applicability of VAT on various upstream activities in a detailed manner. For better clarity, we have segregated key activities category-wise below:

Transactions related to Government

• Government payments such as royalties, signature or production bonuses, annual rental, Oil and Gas Data Repository (OGDR) subscription fee, etc. are clarified to be sovereign in nature and not subject to VAT.
• Training levy collected by operators on behalf of the Government while making payments to contractors do not attract VAT.
• Exploration and Production Sharing Agreement (EPSA) overheads applied to the total recoverable cost on an annual basis, based on agreed percentages/rates with the Government to be treated as zero-rated supply.

Transactions between operator and other non-operating joint venture (JV) partners*

• Cash calls or similar arrangements made by an operator to other JV parties - to fund exploration, production or other activities – are clarified as not subject to VAT. The guide states that any other arrangement (not involving request for future recharges of zero-rated upstream costs) should have prior approval for VAT treatment from the OTA and the MEM.
• Recharged upstream costs from operator to non-operating partners are stated as zero-rated. Recharges of other costs to attract normal VAT based on the nature of goods or services.

   * A joint venture is clarified as not a separate taxable person for VAT purposes.

Transactions between upstream operators

• Oman Blend Revenue Distribution Agreement (OBRD) or Quality Bank Adjustment (QBA), represents receipts by operators, for the purpose of compensating other operators for the revenue lost due to reduction in the quality of crude exported after mixing with Mukhaizna heavy crude, is clarified to be compensatory in nature and not subject to VAT.
• Transfer of materials/services between operators or between blocks (through separate legal entities) of an operator to be treated as zero-rated supply.

VAT treatment on other transactions of relevance to the sector are clarified, like – fuel/electricity procured by operator, demurrage charges, accommodation/camps, catering and transportation facilities provided to workforce, etc.
 

VAT implications on midstream activities
 

Definition: The term “midstream” is defined as “Activities related to gathering of unrefined hydrocarbons, transportation via pipeline, tanker truck or other means of transport to the storage facility for export or distribution to the refineries or downstream customers. This could also include liquefaction procedures for converting methane to Liquefied Natural Gas for export”.

In simple terms, midstream activities are broadly the activities that connect upstream production of Oil and Gas with the downstream activities of refining and marketing for consumption. The guide also provides for examples of midstream activities, like OQ Gas Network (OQGN) or Petroleum Development of Oman’s (PDO) Main Oil Line (MoL).

VAT treatment: It is clarified in the guide that the OTA in conjunction with MEM will publish from time to time, the applicability of zero-rating on activities carried out by midstream players and only taxable person or parties specifically agreed by the OTA and MEM will be eligible for zero-rating. All other supplies will be subject to standard VAT rules.

As per the guide, the local supply of goods or services by the contractors to a midstream operator (like, OQGN or PDO) for exclusive use in midstream activity will qualify for zero-rating, subject to meeting of conditions under Article 93 of the Executive Regulations. For example, supplies for capital work carried out for construction of gas transport network assets, major maintenance/refurbishment work, operation and maintenance work, etc.

Implications on downstream activities
 

Definition: The term “downstream” is defined as “Activities related to the conversion of hydrocarbons into petroleum products and marketing of oil derivatives”.

In broad terms, the downstream operations are concerned with transformation processes of raw hydrocarbons (Oil and Gas) and convert them to final products for use by consumers and industrial units. Downstream operations typically commence with any supply made after delivery of hydrocarbons to a refinery, and will include storage of finished products of hydrocarbons such as petrol, diesel etc.

VAT treatment on local supplies: The supply of goods or services for downstream activities are not covered under Article 93 of the Executive Regulations and such supplies will be subject to 5% VAT. VAT will be applicable as per the general time of supply provisions, i.e. earliest of the (i) date of issuance of invoice; or (ii) date of payment; or (iii) date of supply. However, it is clarified in the guide that gas supplied through a network on continuous basis will qualify as repetitive supply; and VAT on such supply will trigger at the earliest of (i) date of payment specified on tax invoice; or (ii) date of actual payment.

VAT treatment on export of refined Oil and Gas: It is clarified that, export of refined Oil and Gas will be subject to general export provisions and will qualify as zero-rated supply, subject to maintaining the export and commercial documents evidencing Oil and Gas is exported from Oman.

VAT treatment on consignment or reserve stocks: The guide clarifies, VAT on supply of oil products on a consignment basis to a customer will trigger on the date when such goods are placed at the customer’s disposal. This is regardless if ownership of such goods is transferred at a later date. The supplier will need to charge VAT and issue a tax invoice based on the date of supply provisions.

Supply of aviation and marine fuels: The supply of fuel, lubricants or other goods which are to be used or consumed by a “qualifying means of transport” on an international voyage will qualify as zero-rated supply, only if:

• the goods are physically placed onto the qualifying means of transport; and
• the qualifying means of transport is departing for a destination outside Oman.