Oman Proposes Tax On Remittances As Budget Pressure Rises

Oman should tax the billions of dollars which foreign workers send back to their home countries every year, an advisory committee to the government has proposed after signs of mounting pressure on state finances.

The economic and financial committee of the Shura Council, a consultative body, recommended this week that the tax should be set at two per cent.

“The committee is of the opinion that the imposition of a tax on such transfers at an appropriate rate is not expected to have negative effects on economic activity or the citizens,” the committee’s deputy head Ali bin Abdullah al-Badi said in a statement.

The proposed tax would hit about 1.5 million migrant workers, most from south and southeast Asia, who send money home from Oman, which has a total population of 3.9 million. Currently such money transfers are not taxed.

The tax would not by itself solve the government’s fiscal problems but it would help to diversify revenues beyond oil, a key issue for Oman as it faces the prospect of its oil reserves declining in coming decades.

By making foreign workers more expensive to hire, it could also encourage more hiring of Omani citizens. The country needs to create tens of thousands of jobs for its citizens every year to prevent a politically sensitive rise of unemployment.

Transfers associated with outward worker remittances increased by 12.1 per cent to 3.1 billion rials ($8.1 billion) in 2012, a central bank report showed. That would imply some 62 million rials in annual tax income.

Oman’s proposal reflects growing concern in Gulf Arab oil exporting states that they have become too dependent on foreign labour. The United Arab Emirates has been considering whether to impose a similar tax, government and banking sources said in September, while Saudi Arabia has expelled nearly a million foreigners since March to get more Saudis into private sector jobs and cut money outflows.

The problem is potentially serious for Oman because its oil resources are less ample than those of its wealthy neighbours. The government of Sultan Qaboos bin Said, who has ruled since 1970, has boosted state spending sharply to keep social peace after street protests demanded jobs and an end to corruption in 2011; this has pressured state finances.

Next year, state budget spending should rise to a record 13.5 billion rials from 12.9 billion planned for 2013, the committee’s statement said. That is excluding an extra 800-900 million rials of wage costs which the government may have to pay following a royal order to standardise salaries and grades across the public sector.

As a result, overall budget expenditure could climb by as much as 12 per cent next year compared to the 2013 plan, according to a Reuters calculation. That would follow a 29 per cent jump in planned spending for 2013.

“The committee stressed the need to rationalise public spending, and in this regard recommended imposing a fair tax rate on natural gas,” the statement said, noting that state-owned Oman LNG’s 2012 net profit was 751 million rials.

The committee also recommended raising the royalty rate imposed on the exploitation of minerals and reconsidering some of the fees collected by the government.

The 2014 budget draft projects a deficit of 1.8 billion rials, or six per cent of gross domestic product. That assumes an average oil price next year of $85 per barrel, but Brent crude is now around $108; if the oil price does not drop much below $100, Oman could still post a substantial surplus in 2014.

But long-term trends in spending and oil revenues do not appear to favour the country. The International Monetary Fund has predicted it will slip into a fiscal deficit of 0.2 per cent of GDP in 2015, which would then widen gradually to as much as 7.1 per cent in 2018.

The budget draft, including any new taxes, still needs approval by the cabinet and ultimately by Sultan Qaboos.