In fact, Kuwait appears to be a tax haven for Kuwaiti citizens, institutions and companies. These segments are completely exempt from value-added tax on annual net income.

This situation means that imposing value-added tax on consumers directly, will make the capital cycle for merchants and institutions free of the tax burden, in return consumers will bear the full tax burden.

In addition to that, the Kuwaiti citizen’s habit of obtaining compensation and direct government support will make him demand this support again after his inability to face the wave of high prices and inflation that will often follow the imposition of the value-added tax, and thus the role of this tax will be negative; It increases the burden on the public budget instead of treating the accumulated deficit in it.

Therefore, it seems necessary to us to follow these following tax procedures in preparation for the value-added tax implementation:

First: Issuing a law that regulates the income tax of Kuwaiti institutions, which is less than half the tax rate on its foreign institutions; since the rate imposed on foreign institutions is 15% of the annual net income, 7% seems appropriate for Kuwaiti institutions.

In this manner, the Government budget can compensate part of its deficit in exchange for obtaining a tax resource from industrial and commercial institutions in which it will have a solid financial position, and a good operational strength that will not be affected by the decrease in its revenues after the application of the tax.

Also, the honored Kuwaiti institutions and merchants are historically linked to the state, as most of them have their clients and their well-established commercial environment, and they are not expected to leave the Kuwaiti market because of the imposition of income tax on them.

As for small and emerging projects, they are in the incubation and sponsorship of business institutions, and then they are operated with funding from a government fund which benefits from them and their success.
As a result, the legislator has paved the financial, legal and cultural way for the value-added tax, and reduced his need for consumers’ liquidity.

Second: Reducing immigrant workers rate; they represent a burden on state utilities and business sectors, as they compete with national labor, and deprive them from obtaining experience and job opportunities.

If the expatriate labor rate decreases significantly, this will be reflected in a decrease in the government budget deficit through two forms:

•  Direct form; lifting the financial burden by canceling the health care and security services that the state provides to expatriates which are free of charge or in return of a fee.
  The imposition of value-added tax will directly increase the burden of living on expatriates, which will make them demand compensation and bonuses on their fixed salaries from the institutions in which they work. Thus, limiting expatriate workers in Kuwait appears to be one of the most important necessary stages before thinking about changing the tax policy.

•  Indirect form; The departure of a large percentage of expatriate workers will reflect additional income for national labors, and thus the employer will be obliged to give the local worker his opportunity and allow him to gain experience, instead of bringing in expertise from abroad.
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• This additional income will flow into the budget of unemployed citizens or workers in the private sector with insufficient salaries, or other hampered scientific and practical competencies.

Accordingly, the citizen’s income will be equivalent to his basic needs, and this is accompanied by an existing policy of providing direct support to small projects.By then, it is possible to consider placing a tax on citizens.

Third: Adopting a well-studied effective method for taxation; this means thinking carefully about the ideal tax base, and here we suggest focusing on luxurious commodities and services as a starting point of the tax implementation.

For example, if the tax base is the percentage that is calculated from the price of a good or service during the stages of the supply chain, then a financial and economic field study must be conducted for the categories of goods that Kuwaiti society considers as luxurious.

Then, the highest percentage is imposed on it, let it be 5% as stipulated in the Gulf agreement; Thus, the vast majority of citizens will not be affected by the high prices of these goods and services because they do not use them at all or they can neglect them without affecting their standard of living.

As for the upper segment of society, they will not be affected by the high prices of luxurious goods and services since their income level is higher than their expenses in the first place.

Fourth: choosing the taxpayers segment very carefully; it is not enough to focus on the goods and services that bear the burden of tax, but rather the people who are in charge of it as well, they must be selected and verified.

Here, we do not mean exempting some segments from tax, imposing a zero tax rate, or granting them the right of refund, but rather not imposing tax on them legally; That is, for the tax to take a specific form in view of the taxpayer.

For example, a special law regulation policy is issued for sports clothing and equipment for non-professionals whether fully or partially; in this way, the tax is imposed on people who want to practice sports as a hobby and for those whose practice it as a profession, the tax is not imposed on them at all. After that, the segment of people who had to buy sports equipment for treatment can be granted the right of refund, for example.

Fifth: Imposing broad exceptions; the possibility of exempting or imposing a zero rate of value-added tax in the Gulf agreement included the following sectors: the education sector, the health sector, the real estate sector, and the local transport sector. The agreement also allowed the imposition of the zero rates on the oil sector petroleum products, and gas (Artcle29/ agreement).

In this matter, it is not enough to impose the previous exceptions to protect Kuwaiti society from the negative effects of the tax, as the mentioned sectors are mostly free or originally nominal in cost, except for the real estate sector.

According to the nature of Kuwait economy, it needs to exclude the basic consumer sectors such as food commodities, clothing and essential services such as telecommunications.

Instead, the tax should be imposed on raw materials for luxurious commodities and on imported goods.

Sixth: treating tax refund cases wisely; The Gulf agreement stipulates categories that are entitled to recover value-added tax after paying it (Article/30). Those categories are as following:

•  Government agencies defined by each country.

•  Charitable bodies and institutions of public interest, as determined by each country.

•  Exempted Companies under agreements to host international events..

•  Citizens of the Member State when constructing their homes for private use.

•  Farmers and fishermen who are not registered for the tax.
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• Recovery cases seem to need exemption in the first place, as the tax cannot be imposed on government agencies, so they lose their liquidity for a specific period in order to be able to recover its funds, and this will entail losses for them as a result of depriving them of operating these funds during the period prior to their recovery.

Also, charitable organizations and public benefit institutions are far from the purposes of the taxation, and they play a positive role in reducing the tax burden on the people who are in need, as they should not be charged or burden by a tax even if it is for a temporary period before the tax amount is recovered.

The same applies on citizens who build their homes, farmers or fishermen; They may not have the amount of the tax to pay it even for a short period of time before recovering it, and this means that the tax will paralyze the construction sector for a number of citizens or will push them to borrow repeatedly while bearing its burdens.

This situation may also lead many farmers and fishermen to leave or change their profession due to their lack of liquidity to purchase basic needs, especially farmers who need support in the first place, and not being troubled by additional financial burdens.

While companies participating in international events remain as a reasonable possibility of a redemption case; it is already exempted according to international agreements.

Other than that, we believe that the recovery cases mentioned in the agreement must be basically tax-exempt business sectors such as the government sector, charitable and public benefit, private contracting business, agriculture and fishing.

It seems to us that it is necessary to add professional sectors such as medicine, nursing, pharmacy, law and accounting, in addition to the simple craft sectors.

After that, it is possible to start applying the value-added tax in Kuwait without affecting the average income citizen or the small investors, as the purpose of this tax is to give the government budget an additional resource to serve the citizens so that their country remains strong in terms of its financial position in the long term.

International Department Team
Dr. Bader S. Al-Otaibi
Law Firm & Intl. Arbitration