Kuwait Approves Draft VAT Amid Concern Over Gulf’s Readiness

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By Matthew Kalman

Kuwait announced Aug. 7 that its cabinet had approved draft bills supporting a value-added tax, a Gulf Cooperation Council unified selective excise tax, and the statute of the GCC Economic Judiciary Commission.

The announcement comes in response to the looming Jan. 1 start date for introducing the VAT in the six-nation GCC.

The GCC states have agreed to introduce VAT at 5 percent on goods and services from January 2018 as they seek to replace declining revenue from oil, which dropped from more than $114 a barrel in June 2014 to less than $50 a barrel Aug. 9.

Kuwait joins Saudi Arabia, which approved legislation in July; Qatar, whose cabinet approved a draft law in May; Bahrain, which signed the VAT and excise tax treaties in February; and the UAE, which published a tax framework last week.

GCC Ready?

Saudi Arabia and the UAE have said they will introduce the new tax by Jan. 1, but it seems unlikely that all GCC members will be ready in time. The Unified Agreement on VAT, adopted last year, allows GCC member states another year to implement. Bahrain has already said VAT will take effect there only from mid-2018.

“It’s tight to have a whole new tax being introduced,” Jeremy Cape, tax and public policy partner at London law firm Squire Patton Boggs, told Bloomberg BNA Aug. 8. “This announcement would suggest that certainly Kuwait is going to do it in January. They’ve got a fighting chance of doing it now. If they’re going to do it, August feels to me really the latest that the legislation can be published. Even then, August is too late. I think it’s ridiculous it’s been left this long.”

Not all experts are convinced that Kuwait will meet the deadline. Rasheed M. Al-Qenae, head of tax and managing partner for the Middle East and South Asia at KPMG, said the cabinet approval was “a very important milestone” but no guarantee the law will be ready in time.

“It’s very challenging,” Al-Qenae told Bloomberg BNA from Kuwait City. “You are four, five months away. This will have a major economic impact on businesses, individuals and on the regulators as well, which means a lot of preparation and readiness. It’s not something easy. This is something that’s going to change the face of the economy. Consumer spending behavior will be changed, businesses will be changed. It takes time. These projects normally need preparation of one and half to two years at least.”

Call for Text Publication

The drafts were referred to Sheikh Sabah al-Ahmad Al Sabah, the Emir of Kuwait, before being considered by the National Assembly, the Kuwaiti news agency said. It didn’t publish the text of the bills. Cape said it would be better to release the wording soon to facilitate consultation in good time for January.

“We want to have the legislation,” he said. “On the one hand we’re saying to clients they’ve got to get ready for VAT, on the other hand we’re saying we don’t actually have a law to tell us what VAT will look like.”

“Best practice would have been to publish the legislation and consult on it” to address potential difficulties or differences in interpretation across jurisdictions as much as the framework agreement allows, Cape said, adding that the legislation “needs to marinate a little bit.”

“The fact they’ve left it so late means that these issues are going to be hard-wired into the legislation, whereas with a bit more consultation it’s possible we could have ironed out some of the difficulties and learned from some of the theoretical and practical issues” experienced in other parts of the world.

Slow Pace

The slow legislative pace, particularly in those countries which haven’t yet approved a draft or framework, almost guarantees the introduction of VAT won’t be uniform. The year-long transition period will create opportunities for arbitrage, Al-Qenae said.

“Consumers, businesses, people will try to find ways how to save this 5 percent,” he said. “They might benefit from non-VAT regimes in other countries.”

“We may expect to see a staggered implementation across the region,” Terri Bruce and Anthony Blenkey of Moore Stephens LLP wrote in a Bloomberg BNA analysis in July. “This could have commercial implications, particularly for businesses that trade across GCC Member States. The application of VAT in some GCC states ahead of others may increase the complexity of intrastate transactions and competitiveness in the short term. It is this type of risk that business will need to be ready for.”

To contact the reporter on this story: Matthew Kalman in Jerusalem at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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