Value Added Tax (VAT) application started in Gulf Council Countries. On 27 November 2016, GCC States signed Common VAT Agreement of the States of the Gulf Cooperation Council. Pursuant to the said Agreement, the six GCC States agreed to introduce the VAT at rate of 5% where each of the member States will set the implementation date.

Kingdom of Saudi Arabia and United Arab Emirates decided to introduce VAT starting from 1 January 2018.

Such Agreement is expected to be adopted in the State of Kuwait starting from January 2019. Particularly that the common agreement indicates that “if 12 months elapse from the implementation of VAT by two States out of the six States, then the remaining States shall have to implement the same or otherwise, they shall be out of the Value Added Tax (VAT) scope”.

In Kuwait, Ministry of Finance presented the Value Added Tax (VAT) implementation mechanisms to the National Assembly to decide whether to implement the same or not. If the bill is passed, Ministry of Finance will issue the Executive Regulations of the Law and announce the mechanisms to be followed by businesses to enforce the Law.

It is worth mentioning that Value Added Tax (VAT) is an indirect tax, which is imposed on consumption of products or services, not profits. VAT is a vehicle that nations use to raise the revenues in order to finance the State public budget. It is assessed in each phase across the supply chain. In general, the final consumer will bear the cost of VAT while businesses calculate and collect the tax and then pay the same to the government. Currently, VAT is applied in more than 150 countries worldwide including Arab countries.

What is VAT?

Value Added Tax (VAT) is an indirect tax. VAT is a form of a consumption tax that is applied at each stage to all the goods and services as mandated by laws and regulations applied in each jurisdiction.

What are companies that will be subjected to VAT in Kuwait?

Only companies operating in the State of Kuwait that meet the minimum annual turnover requirement set as per the Law will have to register for the purposes of value added tax in Kuwait. Companies in the State of Kuwait are currently in the process of assessing the VAT impact on their business.

How is VAT calculated?

It’s calculated at fixed rate on the gross amount of the invoice. The formula for calculating VAT is:

VAT = Output Tax – Input Tax

Output tax is the amount received by a seller as a percentage of the selling price of the final product.

Input tax is the amount paid by a buyer as a percentage of the cost price for goods/services used to make a final product.

What is the status of implementing VAT in Kuwait?

In Kuwait, the Ministry of Finance presented the Value Added Tax (VAT) implementation mechanisms to the National Assembly to decide whether to implement the same or not. If the bill is passed, the Ministry of Finance will issue the Executive Regulations of the Law and announce the mechanisms to be followed by businesses to enforce the Law.

What is the expected VAT rate in Kuwait?

It’s expected to be fixed-rate at 5% on each gross sales invoice value (excluding special cases, e.g., profit margin scheme)

What is the Difference between VAT & Excise Duty & Customs Duty?

• VAT is the tax added on goods as it moves from the initial stage of manufacturing to the point of sale.
• Excise duty is a form of tax imposed on goods for their production, licensing and sale that is paid to the related authority by producers of goods that are manufactured domestically in the country.
• Customs duty is levied on those coming from outside of the country.

Worth mentioning, there is no Excise duty in Kuwait.

Who is responsible for charging and collecting VAT?

VAT is the responsibility of every business entity. Each business entity shall charge the customers and receive VAT amount on behalf of the related authority (in Kuwait represented by Ministry of Finance).

Added value to business entities from engagement of VAT services in Kuwait

• Ensure compliance with the applicable legislative and regulatory requirements related to value added tax in State of Kuwait.
• Minimize risks of exposure to financial penalties and sanctions, and thus, save relevant expenses and costs.
• Enhance business entity’s reputation and motivate business growth.

What are the benefits of being VAT Ready?

• Maximize VAT recovery on business inputs.
• Reduce adverse impacts on cash flow.
• Ensure compliance with VAT obligations and reporting.
• Minimize risk of fines, penalties and reputational damage.
• Ensure compliance with the applicable legislative and regulatory requirements related to value-added tax in State of Kuwait.
• Minimize risks of exposure to financial penalties and sanctions, and thus, save relevant expenses and costs.
• Enhance business entity’s reputation and motivate business growth.

Value Added Tax (VAT) Services provided by Baker Tilly

• Develop report on the impact on VAT implementation on business entities in terms of impacts on their business activities, operations, accounting systems and processes, and IT systems.
• Assist companies with the application of value added tax.
• Provide training to the companies’ employees regarding awareness about VAT nature and implications.
• Assurance report on compliance with VAT regulations.