Oman Introduces Historic Personal Income Tax

First GCC country to impose an income tax

This month, Oman introduced a personal income tax, making it the first among the six-member Gulf Cooperation Council (GCC) to take this step. The tax was introduced to help Oman diversify its government revenues away from oil dependency. The 5% tax will take effect in 2028 and will only apply to those earning upward of $109,000 annually. That income threshold reflects the top 1% of earners in Oman. However, income data remains opaque and difficult to pin down in Oman, so the tax authority will need to detail how income data will be collected.

In this article, I cover the tax system, the push to diversify, and the concerns with the tax base.

Tax System

According to KPMG, here are the details of the income tax:

Taxable income (calculated after subtracting exemptions, deductions, and losses from gross income) may include:

• Salary

• Income from immovable property

• Income from industrial/intellectual property

Exemptions may include:

• Income earned outside Oman (granted once for a period of two years)

• Capital gains on the sale of a primary residence

• Capital gains on sale of a secondary residence (one-time)

• Income from inheritance and gifts

• Income from industrial property rights (granted for five years from the date of registration)

Deductions from taxable income may include:

• Education expenses

• Healthcare expenses

• Zakat, charitable donations, and endowments ("waqf")

• Interest on loans financing the acquisition or construction of an individual's main residence (one-time)

The plan was issued last week by royal decree. It remains unclear whether this will inspire other nations in the region to follow suit. However, the International Monetary Fund has predicted that Gulf states may need to impose new taxes in the coming years to diversify government revenues.

Push to Diversify

Oman, like many of its Gulf neighbors, is an oil-exporting nation. It is predicted that this source of revenue could be exhausted within 15 years, a warning I have heard since I was a child in Oman in the early 1990s.

Recent concerns about climate change and supply from new competitors have dampened oil prices, prompting the International Monetary Fund to warn about the importance of cutting spending and diversifying away from oil revenue. The warning from the IMF comes as Bahrain faced defaulting on a loan in 2018 and received a $10 billion bailout from its neighbors. Bahrain's public debt stands at 93% of its gross domestic product.

The IMF has warned the Gulf Cooperation Council (GCC) that:

"with continued improvements in energy-saving technologies, adoption of renewable sources of energy, and a stronger policy response to climate change, the world's demand for oil is expected to grow more slowly and eventually begin to decline in the next two decades. If these expectations materialize, they would reshape the economic landscape of many oil-exporting countries, including those in the GCC."

The Introduction of Income Tax

The lack of income tax has been a boon for development in the Gulf, helping to attract investment and migrants to the region. The introduction of income tax could reduce economic development. However, Minister of Economy, H.E Dr. Said bin Mohammed Al-Saqri, stated that the introduction of income tax

"will further prioritize financial stability by diversifying revenue sources. The tax serves as a new revenue stream to diversify public income sources and mitigate risks associated with reliance on oil as the primary revenue source."

It is hoped that the income tax will help shelter Oman from "fluctuations" in the global energy market.

The Problem

Taxes will not diversify Oman away from oil fluctuations. Government revenues, derived mostly from oil, directly influence spending in Oman's economy. In 2023, government spending accounted for 32.7% of GDP; therefore, tax revenue in Oman will be directly related to oil revenue. When oil prices fall, oil revenue falls, Government spending falls, economic activity declines, businesses and incomes drop, and therefore tax revenue falls. We witnessed this exact problem during the COVID pandemic.

In the 2025 Omani budget, total oil and gas revenue will account for 68% of government income, whereas taxes and fees total 18% of revenue. The introduction of the new income tax may increase the proportion of revenue collected through taxes and fees.

Diversifying the Tax Base

If you have attended my presentations at Majlis Al Khonji, you will recall that I have advocated for diversifying Oman's tax base before imposing an income tax. Oman's business activity, outside of the oil industry, is relatively young and needs time to mature. Introducing a tax on business activities could cause them to depart and relocate, especially when neighboring countries currently provide tax shelters.

The Takeaway

In an attempt to diversify its revenue, Oman imposed the first income tax of its kind in the GCC region. The move was celebrated as an indication of improved financial stability, with Moody's rating agency moving Oman to investment grade. However, the long-term effects remain unclear.

Will this move bring in more economic activity because of the signal of financial stability and strength that taxes provide, or will businesses relocate to neighboring economies and reduce tax revenue?

Stay informed,

Dr. A

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About the Author

Dr. Abdullah Al Bahrani is an economics professor and an award-winning educator. His research focuses on household finance and economic education. In addition to this newsletter, he has a YouTube channel and an Instagram account to share his economic insights. His goal is to improve economic literacy and well-being.

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