What is BEPS (Base Erosion and Profit Shifting)?
Tax base erosion and profit shifting (BEPS) refers to tax planning strategies that multinational companies use to exploit loopholes and variances in tax rules to artificially shift profits to low or no-tax countries to avoid paying tax.
In response, the collaborative efforts of the G20 countries and the Organization for Economic Co-operation and Development (OECD) led to the initiation of the BEPS project in 2013. This project comprises 15 actions aimed at curbing tax avoidance, ensuring that profits are taxed where economic activities generating them occur, and promoting a more transparent tax environment.
BEPS actions include, but are not limited to, establishing disclosure rules, transfer pricing guidelines, effective dispute resolution mechanisms, and a multilateral instrument to amend bilateral tax treaties for efficient BEPS action implementation.
It is worth mentioning that four of these 15 actions are mandatory minimum standards for members of the Inclusive Framework on BEPS
| S. | Action Number | Action Title |
|---|---|---|
| 1 | Action 5 | Harmful Tax Practices |
| 2 | Action 6 | Prevention of tax treaty abuse |
| 3 | Action 13 | Country-by-Country Reporting |
| 4 | Action 14 | Mutual Agreement Procedure |
Kuwait’s joins the Inclusive Framework
On 15 November 2023, Kuwait joined the Inclusive Framework on BEPS, aligning with over 140 countries in a unified effort to combat international tax avoidance. This move is part of the OECD’s global tax reform initiative under Pillar Two rules.
Pillar Two
Pillar Two aims to ensure that multinational enterprises (MNEs) pay a minimum effective tax rate of 15% on profits earned in each jurisdiction where they operate, applicable to those with annual global revenues exceeding €750 million or an equivalent amount. Implementing Pillar Two rules enables Kuwait to safeguard its tax revenues and prevent their diversion to other countries enforcing these rules.
Draft Business Profits Tax Law in Kuwait
In a significant development for Kuwait’s tax system, the Council of Ministers approved the draft Business Profits Tax Law on 24 December 2024. This legislation is designed to meet Kuwait’s commitments under the Inclusive Framework on BEPS, in line with Pillar Two rules, and to restructure existing tax laws by consolidating them into a single statute, replacing the four laws currently in force.
- Scope of Application: The law applies to all companies operating in Kuwait, including MNEs.
- Tax Rate: A 15% tax on business profits is imposed.
- Anticipated Effective Date: For MNEs, the law is expected to take effect from taxable periods beginning on or after 1 January 2025.
What Are The Entities Exempted from Business Profits Tax?
- Kuwaiti government entities
- Kuwaiti non-profit organizations
- Taxpayers with annual turnover not exceeding KD 1.5 million during the taxable period
What Are The Kuwaiti or non-Kuwaiti Entities Excluded from Top-up Tax?
- Government entities, non-profit organizations, and international organizations
- Pension funds, investment funds, and real estate investment vehicles when they are the ultimate parent entity
Implementing the Business Profits Tax Law is expected to achieve the following outcomes
Satisfying Kuwait’s International Obligations with the OECD
This law fulfills Kuwait’s commitment to the Inclusive Framework on BEPS under Pillar Two, reflecting its dedication to global efforts against tax avoidance as a part of the international tax reform initiative launched by OECD.
Promotion of Tax Equity and Elimination of Tax Havens
The law ensures tax equity between domestic and foreign companies by subjecting all to the same tax rate, offering equal opportunities and fostering fair competition in the local market, as well as contributing to the elimination of tax havens.
Maximizing Tax Revenues
The law will preserve Kuwait’s rightful tax revenues, preventing their diversion to other jurisdictions enforcing Pillar Two while diversifying the State’s income streams and reducing dependence on oil revenues, thereby strengthening Kuwait’s financial and economic stability.
Restructuring the Current Tax System
The Business Profits Tax Law seeks to enhance Kuwait’s tax system by introducing a unified tax law aligned with international standards, contributing to a more transparent and investment-friendly economic environment.