The application of Value added tax (VAT) on financial services can be an intriguing subject. Margin-based financial products do not lend themselves to the application of the transaction-tax nature of VAT.
Let’s start by first understanding what could be considered as a financial service for VAT purposes. While the list is long, as an overview, bank account facilities; credit cards; safety deposit lockers; loans; money exchange; insurance; equity brokerage and trading; money transfers; hire purchase leases; operating lease; wealth management services; issuing of debt and equity instruments; and cheques would generally be the most common financial services consumed around the world.
For businesses, financing, overdrafts, letters of credit (LC), bank guarantees (BG), factoring, would also be included.
When providing a financial product/service, the provider would generally charge an explicit fee and/or an implicit margin, the latter of which is built into the amounts recovered by the provider.
Thankfully, not all financial services are subject to VAT. In general, interest or margin earned on a financial service is treated as VAT exempt in most parts of the world.
What this means is that when one repays a loan in instalments, the interest included in a loan instalment would be VAT exempt. The portion of the principal being repaid will also be outside the scope of VAT.
Another example of margin income is when a currency exchange house makes profits by buying and selling currency on spot rates and does not charge any fee separately.
In such a scenario the exchange house would not charge any VAT as the implicit ‘profit’ earned by it would be treated as VAT exempt.
That leaves us with the question as to which financial services are subject to VAT.
Across the GCC (and many other countries around the world), explicit fees charged by financial service providers have been made subject to VAT. Charges such as: annual debit card fees; cheque-book issuance fees; international remittance fees; annual safety deposit locker fees; and loan processing fees are subject to VAT.
When it comes to trade finance services availed by businesses, charges including: acceptance fees; bill negotiation fees; underwriting fees; BG issuance fees; and LC opening fees are subject to VAT.
Premiums charged for general insurances such as health insurance, motor insurance, fire insurance are also subject to VAT, although life insurance (as a saving product) is VAT exempt.
Shariah-compliant Islamic financial arrangements should attract the same VAT treatment as applicable to their non-Islamic counterparts, so that there is no distortion or difference in the tax treatment.
Thus, profit earned under Islamic financial products should be VAT exempt and explicit application or processing fees charged would be subject to VAT.
The Oman VAT law will follow the approach adopted in the other GCC states for financial services with life insurance and financial services treated as VAT exempt, unless an explicit fee or commission is charged, which will be subject to VAT.
The detailed list of financial services that will be VAT exempt or taxable in Oman will be clarified in the impending VAT Executive Regulations. [The author is Partner, Oman Tax Leader & MENA Energy Tax Leader at EY. He can be reached at Alkesh.Joshi@om.ey.com]
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