KUWAIT CITY, Oct 16: It is obvious that the path to taxation in Kuwait on multinational companies moves in one direction, whether from the government or from the concerned entities, since the indications are clear that the stage of persuasion has been passed, considering that paying locally is preferable to deducting externally. 

In confirmation of this, informed sources revealed to Al-Rai that banks and companies with foreign branches are finally preparing and accurate calculations for tax, especially after Kuwait officially submitted a request to join the framework of the draft law of the Organization for Economic Cooperation and Development (OECD). 

It is true to say that the ideal title for the accounting discussions currently open is “Determining the material impact of tax implementation,” or in short, how much is the cost of implementing the procedure in the budgets of the coming years? 

In this regard, sources reported that major banks and companies formed working teams of their financial employees and discussed with their auditors scenarios of the expected financial impact on their budgets as a result of deducting 15 percent of their profits locally as taxes, in order to avoid falling within the scope of the OECD draft law that imposes tax on multinational companies at least 15 percent if the revenues of the parent group exempt from paying taxes in their countries reach 750 million euros annually. 

The sources said that Kuwaiti companies concerned with the new tax recently reviewed with their auditors their expectations for the cost of the new accounting obligation in their budgets as part of their preparations for preparing their financial statements for the fourth quarter of the current fiscal year. 

The sources indicated that the accounting forecasts that were recently circulated among companies and their auditors indicate that the initially expected tax withholding will be a number consisting of 6 digits, noting that the organization’s draft law stipulates that “the tax paid should not be less than 15 percent,” and the government’s approach does not include a higher rate than the minimum. 

This means, accounting-wise, that the weighted average cost for the Kuwaiti companies that will be included in the new tax base will be in millions, varying from one company to another, and will often range annually between one million and 70 million dinars, while the potential number of companies covered by the tax is estimated at about 20, including government companies with multiple markets. 

The sources confirmed that the new tax is not scheduled to be calculated in the quarterly data on the 2023 budget, as the odds indicate the possibility of starting implementation in 2024, which is most likely, or in 2025, noting that there will be no tax calculated for 2023 data, but accounting preparation must be made. To implement the procedure and determine its impact on the capital adequacy ratio, the size of the commitment, and setting aside its allocations in the budget, while estimating the size of the application cost on net profits. 

As an inevitable result of this reality, the discussion among Kuwaiti companies operating in several markets, which is the technical meaning of multinational companies, has turned to accounting delivery and preparation for the application of the new tax rules. Here it can be said that there are several issues that must be worked on, and one of the thorniest issues is determining the tax rate.  

Perhaps the most prominent question that is still searching for precise answers relates to how this tax is calculated, especially in the budget of companies that already pay taxes in their foreign markets. 

In principle, there is almost no accounting consensus on the premise of deducting taxes paid externally from the total payments due from consolidated profits. 

To simplify, assuming that the combined profits of a company amounted to 600 million dinars, half of which came from foreign markets and were burdened with the taxes of these markets, the amount required to be paid locally would be 300 million dinars, and by applying the 15 percent tax locally on this amount, the amount due to be paid to the public treasury would be 45 million dinars. 

By deducting the historical taxes paid locally, a total of 6 percent, which is 1.5 percent zakat (it is expected to calculate the full value of zakat, 2.5 percent), and the same amount to support workers, and one percent for the Scientific Progress Foundation, and then the amount of additional tax that the company with the assumed profits will bear is equal to 300 million dinars is 9 percent. This means, accounting-wise, that the amount of tax withholding due from the profits of the company in question is 27 million dinars. 

Of course, there are accounting questions whose answers are still confusing and ambiguous, the most prominent of which is what are the procedures for redistributing the taxes of multinational companies to the countries that have their headquarters and where their profits are spread if they do not apply the local tax that is exempt from entering the scope of “Organization of Cooperation” taxes. 

More precisely, if the Kuwaiti company subject to the organization’s tax operates in the Gulf, Europe, Egypt, Turkey and other markets, how will its total taxes be distributed? Will the application be according to the concept of fines or according to a percentage of income? 

The sources pointed out that the OECD draft law aims to prevent companies from hiding behind “tax residency” in this or that country that adopts attractive tax rates, and is not actually linked to or operates in tax havens that do not impose sufficient taxes on their major companies, such as Kuwait. 

The proposed reform is based on two pillars -- the first aims at a fair distribution between countries of the rights to impose a tax on the profits of multinational companies, and the second is based on imposing a global minimum tax to ensure that the company does not pay less than it should wherever it is located. 

The Organization for Cooperation estimates the expected annual tax revenues, based on 15 percent, at approximately $150 billion.