Kuwait – changes in tax practices surprise taxpayers

Kuwait – changes in tax practices surprise taxpayers

KPMG in Kuwait provides a briefing on some key tax developments in Kuwait that may have an impact on foreign investors – some of which were not formally announced.

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These developments include:

  • indications that local agents are being held responsible for the tax obligations of their foreign principles
  • new templates accompanying  the tax declarations and objections/appeal letters
  • changes in the Kuwait Tax Authority’s (KTA) practices for applying penalties related to non-compliance with tax retention regulations and to income that has been reported in the tax declaration but exempted under a tax treaty.

Tax affairs of foreign principals – role of local agents

Based on recent local media reports and informal conversations with the Ministry of Finance (MOF) officials, KPMG in Kuwait understands that the MOF now expects local agents to take more responsibility for the tax affairs of their foreign principals. In recent cases, it appears that the MOF would consider a local agent acting on behalf of foreign principals to be liable for the foreign principal’s total taxes and related penalties where foreign principals do not comply with their Kuwait tax obligations.

We understand that certain local agents have challenged the MOF’s approach in the Kuwaiti Courts at several levels. However, local media reports3 indicate that, in one ruling, the Kuwait Court of Cassation allowed the MOF to prosecute local companies acting as agents for foreign principals in connection with collection of unpaid taxes and penalties due to Kuwait.

Tax retention returns – new templates

The KTA issued standardized templates in February 2015 to accompany taxpayer’s annual tax declarations for corporate income tax, Zakat and National Labor Support Tax. The templates specify details on the key items to be included in the declaration. The templates also hint at possible future electronic filings. Some fields on the templates require identification numbers that are yet to be issued by the KTA.

The KTA also issued templates to accompany letters related to tax objections and appeals to be submitted by taxpayers to the KTA. These templates require summaries of the main points of the tax assessment that are to be contested.

Tax retention regulations

Tax retention regulations require business entities, authorities and ministries operating in Kuwait to retain 5 percent from the total contract price or individual payments to contractors, sub-contractors, service providers and other recipients4. Contract owners normally retain the amounts, and the amounts are released only when the recipient provides a Tax Clearance Certificate from the KTA authorizing the release.

The regulation specifies contract owners are to retain 5 percent on either the total contract value or from each payment. But KPMG in Kuwait is aware of cases where taxpayers had not made tax retentions on each payment to subcontractors but could verify that their retentions on the payments at the end of the contract represented 5 percent of the total contract value. Previously, the KTA would accept these retentions.

Now, it seems the KTA has changed this practice without notice. Based on recent discussions with tax inspectors and senior KTA officials, the KTA now looks at compliance with tax retention regulations on the basis of amounts retained annually, rather than over the entire period for multi-year contracts. The KTA would also be satisfied where 5 percent of the contract value is specifically retained in advance.

Thus, where contract payments are made in more than one tax year but the taxpayer cannot show that their tax retentions represent 5 percent of payments for each of those years, the KTA now disallows the related costs in full.

KPMG in Kuwait understands that a number of taxpayers are facing 100 percent disallowance of costs because of the KTA’s change in practices. These cases are being contested at various levels with the KTA, and how they will be resolved is uncertain.

Delay penalties applied to treaty-exempt income

The KTA appears to now levy a penalty of 1 percent of the tax related to unreported revenue from the date of the tax declaration’s filing deadline (3.5 months following the year-end) to the date of issuance of the tax assessment by the KTA in the case where the KTA does not accept exemption of revenue under the relevant tax treaty. In the past, the penalty was only applied when the KTA became aware of revenue that was not reported in the tax declaration5.

In recent tax assessments, the KTA has been applying the above treatment to cases where revenue was reported in the tax declaration but claimed as tax-exempt under a tax treaty. The KTA appears to be equating revenue reported in the tax declaration but not offered for tax based on treaty exemptions with the non-disclosure of income.

This interpretation is being vigorously challenged, and discussions with senior KTA officials are in progress.

Footnotes

1See, for example, Al-Jarida, 27 January 2015

2Article 37 of the Executive Bylaw issued by the Ministerial Order No. 29 of 2008.

3Executive Rule No. 52 of the Kuwait Income Tax Decree No. 3 of 1955 as amended by Law No. 2 of 2008 issued in 2013.

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