In the mid-1700s, the rallying cry of colonists in America seeking greater freedom and independence from the oppressive English Crown and the domineering British Parliament, was ‘No taxation without representation’. The colonists were referring to Great Britain’s policy of imposing arbitrary taxes without providing people in the new settlements due representation in British Parliament.
Luckily, in Kuwait we have no such issues with regard to representation or taxation; We are reminded of our representation in parliament through the vociferous speeches and belligerent antics of our elected representatives every time the National Assembly is in session.
In 1961, when Kuwait gained its independence and set out to charter its own destiny, the visionary and sagacious leadership of the first Amir of Independent Kuwait, Sheikh Abdullah Al-Salem Al-Sabah, ensured the country pursued a democratic path with a constitutional form of governance and a representative parliament with elected legislators. Today, people in Kuwait are not short of any representation; if anything, citizens can be thankful that they belong to a handful of nations with the rare distinction of providing ‘representation without taxation’.
Besides representative democracy, the flow of abundant revenue from new-found oil wealth at the time of independence helped establish a welfare state that provided cradle-to-grave free services to citizens without levying any taxes on them.
The half-a-million or so citizens who are eligible to vote in elections, as well as the 50 legislators they choose to represent them in the National Assembly, do not pay any taxes. The large population of foreign workers and the so-called ‘stateless persons’, who live and work in the country but are disenfranchised and not represented in parliament, also pay zero-tax.
However, governments need money to pay for its functioning and for the services it provides to citizens, including for healthcare, education, agriculture, infrastructure, research and other public goods. In countries with a democratic setup and a representative form of government, these funds come largely through tariff on the various public services, as well as from levying taxes on businesses, corporates and on individuals.
A situation under which the state does not tax its citizens but instead relies on rent revenues from export of natural resources to fund its functioning and to mollify citizens with national patrimony, may be tenable in the short-term but over longer periods it invariably becomes unsustainable.
Over extended periods state-sponsored mollycoddling of citizens through subsidies and largesse leads to a sense of entitlement, which is not conducive to personal growth of individuals or to the collective human resource development of the nation.
A framework where natural resources provide the main source of government income, fuels the economy and drives market movement is fraught with dangers to economic progress and prosperity, as well as to evolution of democracy in the country. Besides catalyzing the evolution of a tax system to fund economic and administrative activities, participatory representation of people allows representative institutions to take effective hold, strengthens people’s engagement in politics, and consolidates their involvement in ensuring transparent and accountable governance.
Kuwait is unique in that though it has participatory representation it has no taxes to support the economy. Instead, the country relies on a rentier economy based on hydrocarbon revenues to fund its various activities and services, as well as provide prodigious state subsidies. However, the fickleness of commodity prices on international markets results in rentier economies surging when prices for the commodity rise on global markets, and falling or stagnating when it drops. Kuwait is now in this unenviable situation.
When oil flowed freely and its price on international market was sky-high, Kuwait’s economy burgeoned and it seemed there was no stopping the country’s ambitious plans and mega projects, or the lavishness of its handouts to citizens. But when oil prices fell precipitously in mid-2014 all these grandiose plans and projects soon ground to a grinding halt or were shelved. In addition, in a bid to salvage the free-fall of oil prices, the Organization for Petroleum Exporting Countries (OPEC), along with their newly minted non-OPEC allies, also decided to impose production cuts and quotas on member states from January 2017.
With an economy wholly dependent on oil revenues, Kuwait suddenly found itself saddled with the twin drawbacks of lower production and lower prices. The fall in revenue soon led to recurring annual budget deficits and to the gradual depletion of the state’s treasury, the General Reserve Fund. Cracks in Kuwait’s rentier model of economy have been appearing for a while now, but in recent years these cracks have widened into chasms that only the blind or the most blinkered would miss. The latest economic downturn in the country has been further exacerbated by an ongoing COVID-19 crisis that shows no signs of receding any time soon.
The latest International Monetary Fund (IMF) evaluation mission in Kuwait found that while the banking sector remained resilient, the economy as a whole continued to face setbacks. The review process, held virtually due to the ongoing pandemic from 4 to 8 April, was organized by the Central Bank of Kuwait within the framework of the preliminary periodic consultations for the year 2021, in accordance with Article 4 of the agreement establishing the fund.
The Fund said that the repercussions of the Corona pandemic, in addition to the oil price shock and the reduction in oil production under the OPEC + agreement, have imposed heavy burdens on economic activity and financial balances in 2020. In terms of economic performance for the year 2020, the mission estimated the real GDP of Kuwait to shrink by about 8 percent (and by about 6% for the non-oil sectors) in 2020, and that the overall budget balance has significantly deteriorated compared to the previous year.
The fund added that it expects a gradual recovery in 2021, supported by the revival of domestic and external demand with the continuation of vaccination operations, however, a great deal of uncertainty surrounds the expectations, including due to the continuation of the pandemic and related global and local containment measures.
Implying that the persistent absence of any meaningful economic and financial reforms hindered speedy economic recovery, the Fund noted that there was a pressing need to control public finances and implement strong structural reforms to maintain fiscal buffers and enhance growth in the economy.
But reforms, just as taxes, are anathema to the country’s elected legislators as well as to many of its citizens. It is to the credit of the government that despite this bulwark of opposition to any form of taxes, the authorities are said to be pursuing efforts to design and implement a robust tax system in the country. Last week, media reports hinted that the Ministry of Finance is planning to issue a public tender seeking the assistance of foreign tax experts to study the tax situation in the country, restructure existing tax policies, and to train the national manpower to use and manage the new system.
The aim is to implement an integrated digital tax administration system as an alternative to the obsolete tax system currently in place. The main goals are digitization, integration and speed of implementation in line with the latest global tax systems. The existing laws that could be reviewed, restructured, implemented and monitored through the new system include: Income Tax Decree No. 3 of 1955, as amended by Law No. 2 of 2008; Law 19 of 2000 regarding support and encouragement of national manpower to work in non-governmental entities; Law No. 46 of 2006 regarding zakat and the contribution of public and closed joint-stock companies to the budget.
According to a detailed study on corporate and other taxations in Kuwait by PricewaterhouseCoopers (PWC), a leading multinational professional services network of firms, the country does not impose corporate income tax (CIT) on companies wholly owned by Kuwaitis and nationals of other Gulf Cooperation Council (GCC) states. However, GCC companies with foreign ownership are subject to taxation to the extent of the foreign ownership. CIT is currently imposed only on the profits and capital gains of foreign ‘corporate bodies’ conducting business or trade in Kuwait, directly or through an agent.
Another aspect of corporate tax revealed by the PWC study is that income earned from activities in Kuwait shall be considered subject to tax in Kuwait on the basis that it is Kuwait-sourced income. In cases where a contract involves the performance of work both inside and outside Kuwait, the entire revenue from the contract must be reported for tax in Kuwait, including the work carried out outside Kuwait. At present, Kuwait imposes a flat rate of 15 percent CIT. Foreign companies carrying on trade or business in the offshore area of the partitioned neutral zone under the control and administration of Saudi Arabia are only subject to tax in Kuwait on 50 percent of their taxable profit under the law.
In addition, Zakat is imposed on all publicly traded and closed Kuwaiti shareholding companies at a rate of 1 percent of the companies’ net profits. All Kuwaiti shareholding companies are also required to pay 1 percent of their net profits as per their financial statements, after transfer to the statutory reserve and the offset of losses carried forward, to the Kuwait Foundation for the Advancement of Sciences (KFAS), which supports scientific research and development.
Kuwait, along with other GCC states, also has a unified customs tariff of 5 percent on cost, insurance, and freight (CIF) invoice price, subject to certain exceptions. A higher tariff is imposed on imports of tobacco and its derivatives, among other products. In addition, though GCC states (including Kuwait) executed the GCC VAT framework agreement in February 2017, and the signing of the treaty was supposed to pave the way for the introduction of VAT with effect from 1 January 2018 in the GCC, the agreement is still under discussion in Kuwait’s parliament, while the draft Law is said to be under preparation by the government.
The study underlines that there are no payroll taxes applicable in Kuwait, other than those for social security contributions by Kuwaitis. For Kuwaiti employees, contributions are payable monthly by both the employer and employee under the Social Security Law. The employer’s contribution is 11.5 percent and the employee’s is 8 percent of monthly salary, up to a ceiling of KD2,750 per month. Benefits provided include pensions on retirement and allowances for disability, sickness, and death.
In addition to the above contributions, the employee must contribute 2.5 percent of their monthly salary, up to a ceiling of KD 1,500 per month, under the Social Security Law. Though there are no social security obligations for expatriate workers, it is generally necessary for employers to make terminal indemnity payments at the end of their tenure.
Other than corporate taxes, there are no excise taxes, property taxes, transfer taxes, or income taxes in Kuwait. This lack of any meaningful taxes is apparently supported by an elected parliament that represents citizens and ensures expatriates remain unrepresented. Welcome to this land of representation without taxation.
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