INSIGHT — By Ashok Hariharan — Criteria for deductibility of contributions to pension and provident funds Part 4 of the new Executive Regulations (ERs) which deals with rules governing deduction of expenses has a separate chapter (Chapter 2) dealing with conditions for deducting contributions paid to pension and provident funds. These include:
- The pension fund set up in Oman should be independent from the tax payer; its funds shall be kept separate from the tax payers’ funds and invested for the funds own account. In respect of the pension fund set up outside Oman, it should be licensed in accordance with the laws of the country in which it is established.
- The tax payer’s contributions to the pension fund and the fund’s obligations to pay to the beneficiaries should be in accordance with its rules and schemes; in respect of the pension fund set up outside Oman, it should provide for either a periodical pension or an end of service gratuity to the tax payer’s employees or to their beneficiaries in case of debt.
- The tax payer should submit to the Secretariat General for Taxation copies (approved and attested if the fund is set up outside Oman) of the regulations and schemes of the fund, the licenses issued to it and in the case of pension funds set up in Oman, audited financial statements of the fund.
In case of provident funds, they should be registered with the Ministry of Manpower in Oman and the tax pay should be obliged as per the internal regulations of the fund to pay contributions to the account of his employees in lieu of the end-of-service gratuity.
The above ERs do not deal with provisions established under Omani labour law for end of service benefits to employees where no funds are set up by the employer. It is expected that these would continue to be allowed on an accrual basis based on period of service of the employees.
Write off of debts
Chapter 4 of Part 4 deals with a very important issue which businesses routinely face in the course of their day to day operations and that is the recoverability of debts which, in certain cases, have to be written off often without pursuing the legal process because of the cost and effort involved.
The ERs specify that no deduction will be given for debts written off unless:
- The debt has arisen due to transactions in the normal course of a tax payer’s business, which are necessary to realise gross income;
- The debt should have previously accounted in the books of the tax payer; and
n The tax payer should have complied with the procedures specified in the ERs for the recovery of debt. The procedures include legal proceedings for recovery. An exception is provided only if the value of debt does not exceed RO 1,500 (this exception does not apply to related party debts).
Debts which are written off on account of any discount or settlement reached with the debtor shall also be excluded from the requirement of complying with the legal proceedings. However, this should be documented and supported.
Currently tax payers do face challenges in getting a deduction for write off of debts. This is likely to increase given that the ERs now specify detailed procedures to be followed for recovery of debts failing which the tax authorities would deny a deduction. Tax payers would also need to make sure that appropriate documentation is kept evidencing any discounts given or settlements reached with debtors.
Donations
Chapter 7 of Part 4 deals with rules for deduction of donations.
Donations are allowable as a deduction to the extent of 5 per cent of the gross income of the tax payer provided these are made to:
- Ministries, government bodies, municipalities, public authorities or other bodies of the State Administrative Apparatus for specified purpose.
nNon-governmental charitable organisations recognised under the Non-Governmental Associations Law No. 14/2000.
- Private organisations engaged in the field of sports and recognised under the law dealing with such organisations No. 81/2007.
We will continue our analysis of the ERs in tomorrow’s edition.
■ The writer is the Partner and Head of Tax at KPMG Oman
