The connection between Kuwait's proposed tax amendments, including the introduction of a 15% corporate tax rate effective from 1 January 2025, and broader global tax developments may not seem direct at first glance. However, both are deeply intertwined with efforts to align with international tax standards set by the Organisation for Economic Co-operation and Development (OECD) through its G20/OECD Inclusive Framework on BEPS.
Why 15% and €750 Million?
The 15% tax rate and the €750 million revenue threshold are not arbitrary figures. Kuwait and the UAE have adopted these benchmarks as part of the OECD's two-pillar solution, designed to combat aggressive tax avoidance practices under the Base Erosion and Profit Shifting (BEPS) initiative. The GCC countries including UAE and Kuwait are members of the OECD/G20 Inclusive Framework on BEPS, committing to implement the framework's standards and working together to implement 15 measures to tackle tax avoidance.
A Quick Look at BEPS
The BEPS initiative seeks to curb strategies employed by multinational corporations to shift profits from high-tax jurisdictions to low-tax jurisdictions or tax havens.
For example, A US-based company develops software and sells it at a low price to an affiliate in a tax haven, such as Ireland. The Irish affiliate earns royalties from selling software licenses, while the US headquarters reports lower profits. By shifting intellectual property rights to the Irish affiliate, the company minimizes taxes in high-tax jurisdictions while maximizing profits in the tax haven. This strategy enables companies to exploit tax discrepancies, leaving high-tax countries at a disadvantage.
The OECD's Two-Pillar Solution
To address these challenges, the OECD introduced a two-pillar framework:
- Pillar 1: Targets large multinationals with global turnover exceeding €20 billion and profits above 10% of their revenue. It reallocates 25% of profits above the 10% threshold to jurisdictions where revenues are generated. For instance, if a company earns 50% of its revenue in France, 30% in Germany, and 20% in the UK, the reallocated profits are split proportionally among these countries.
- Pillar 2: Establishes a minimum global corporate tax rate of 15% for multinational groups with revenues over €750 million. This ensures that such companies pay a minimum tax rate in every jurisdiction where they operate. For countries like the UAE, this includes introducing a "top-up tax" to meet the 15% threshold, as the local tax rate in the UAE is below this benchmark.
What This Means for the UAE and Kuwait
"These developments are in line with anticipated reforms and reflect continuity in implementing the framework's standards. Multinational corporations have anticipated the 15% rate since the GCC countries joined the Inclusive Framework and began implementing corporate tax. Even under the 9% regime in the UAE, affected companies have been paying "top-up taxes" in their home countries to meet the OECD's minimum standards.
The UAE's and Kuwait's adoption of the 15% rate aligns with the measures set by G20/OECD Inclusive Framework on BEPS the to tackle tax avoidance. These efforts began with the introduction of VAT in the UAE in 2017 and continue with these corporate tax reforms.
Awaiting Official Amendments
While the principles and rationale behind these changes are clear, we now await the formal release of amendments to the corporate tax laws in Kuwait and the UAE. These updates are expected to further clarify the implementation of the OECD framework and reinforce both countries' commitments to international tax compliance.
By adopting these measures, Kuwait and the UAE signal their dedication to fostering fair global tax practices while advancing their economic goals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
