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Fiscal and economic reforms to support the diversification of Kuwait economy by Ernst & Young

Kuwait is petroleum-based economy with 6% of the world’s oil reserves. While the oil production cuts have weighed down growth, output should gradually recover supported by still buoyant non-oil activity and infrastructure spending. Key challenges therefore remain dependency on the Oil sector and implementation of deep structural reforms.

Kuwait is coping up with the regulatory challenges in the other parts of the world, such as the OECD initiatives of Base Erosion and Profit Shifting (BEPS) action plans and Multilateral Instruments, CBCR and CRS reporting etc. In this respect, the Kuwait Government is taking reasonable steps to cooperate with the peers for a more tax transparent environment. With the current deficit of the Government, the Government has been forced to look for cost savings elsewhere, including reducing the subsidies, PPPs (public private partnerships) to finance infrastructure projects, the implementation of a VAT (expected in January 2018) and privatization of state assets.

The Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) have implemented VAT with effect from 1 January 2018. VAT readiness initiatives in the four other Gulf Cooperation Council (GCC) countries are ongoing and all these countries are committed to adopting VAT during the course of 2018 and 2019. In Kuwait, the draft law is prepared and put for discussions with the concerned authorities. The law is expected to be discussed with the Council of Ministers and presented to the Kuwait National Assembly for approval to implement the VAT as early as January 2019.

Oil and Gas sector based business environment and the large size of the public sector have hindered the development of the private non-oil sector. Comprehensive reforms are therefore, needed to rebalance the economy away from the energy sector to a more diversified growth path underpinned by innovation, private sector entrepreneurship and job creation, and the quality of its labor force. A major change is the introduction of the Kuwait Direct Investment Promotion Law. The Kuwait Direct Investment Promotion Authority (KDIPA) was set up in 2014 that is making reasonable efforts to attract foreign companies to invest in Kuwait, offering them the ease of doing business in Kuwait. KDIPA’s objectives coincide with the overall key strategic objectives of Kuwait, the Vision 2035 of “New Kuwait”, i.e. increase the employment of Kuwaiti nationals in the private sector, privatization of a few sectors and support to small and medium enterprises etc. In this respect, KDIPA continues to improve their systems and bring together all the key stakeholders, such as Ministry of Commerce and Industry, Ministry of Social Affairs and Labor etc. to streamline the licensing procedures. In addition, KDIPA continue to improve their internal systems to evaluate the license applications. In this respect, they have also introduced the Point Scoring Mechanism for evaluation of the applications.

The other recent regulatory updates include the amendments to the agency law, the Inter- Governmental Agreements (IGA), and implementation of BEPS actions.

With respect to the OECD BEPS initiatives, in October 2015, the Organization for Economic Co-operation and Development (OECD) released the final reports on the 15 action items of the Base Erosion and Profit Shifting (BEPS) Action Plan. The final report concluded that it was not only feasible but also desirable, and, in light of this, a mandate was issued to create an ad hoc group to develop the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), and to prevent the treaty abuse.

On 7 June 2017, 68 jurisdictions, including Kuwait, signed the MLI during a signing ceremony hosted by the OECD in Paris. Signatories submitted a list of their tax treaties in force that they would like to designate as Covered Tax Agreements (CTAs), i.e., to be amended through the MLI. At this stage, it is expected that over 1,100 tax treaties will be modified based on matching the specific provisions that jurisdictions wish to add or change within the CTAs nominated by the signatories.

Kuwait has also signed the IGA with the United States (US) for implementation of US FATCA. The financial institutions are required to do an annual FATCA reporting to the Ministry of Finance (MoF) and audit report prepared by a certified auditor is required to be submitted by the FIs on an annual basis.

Kuwait is also a signatory to CRS Multilateral Competent Authority Agreement (‘MCAA). The MoF has recently issued additional guidelines for CRS, which among other things include appointment of an auditor for CRS reporting purposes (similar to the requirements for FATCA reporting). The deadline to submit the auditor’s report is 31 May 2018, for the year ended 31 December 2017.

Furthermore, Kuwait has also introduced the New Agency Law (Law No 13 of 2016), which removed “exclusivity” and allows principals to have more than one agent /distributor in Kuwait. Franchises have expressly been covered within the scope of the new Law. Distributorship and dealership agreements may also be registered as commercial agency agreements. The new Law emphasizes on the need to register the agency agreement with the Ministry of Commerce and Industry (MOCI) – As per the new Law, only those commercial agencies that are registered with the MOCI will have the right to be heard by the Courts of Law in Kuwait. There is no express provision for compensation for termination. However, agents can still make a claim for compensation under the Commercial code.

While, the country is adopting a safe and prosper approach to coincide with a renewed appetite for investment and reform that has promising endeavors for private sector players, funding mechanisms such as public-private partnership agreements, as well as capital projects funded by state-owned enterprises, are set to provide opportunities for international firms. With the government, actively seeking to attract foreign direct investment and highlighting the ICT, renewable energy and finance as sectors it would like to see development using the international expertise over the next few years.

By Alok Chugh
Partner
MENA Government and Public Sector Tax Leader
Ernst & Young (Al Aiban, Al Osaimi & Partners)

Alok will be speaking at the 5th Kuwait Oil & Gas Summit on Session 6

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