The Organization for Economic Co-operation and Development (OECD) launched an international tax reform initiative under the name "Pillar Two," which specifically targets the practices of multinational entities operating in multiple countries and shifting profits to low-tax states.

The rules of Pillar Two aim at ensuring that the group of multinational entities pay a minimum tax rate on their profits earned in each country or jurisdiction in which they operate. By implementing this measure, governments can reduce revenue leakage and promote fair tax practices on a global scale.

To keep pace with such global practices, the State of Kuwait joined the Comprehensive Framework on Preventing Tax Base Erosion and Profit Shifting (BEPS) on November 15, 2023. This framework includes more than 140 countries and jurisdictions working together to combat international tax evasion and ensure a more transparent tax environment. The State of Kuwait aims to adopt the global minimum top-up tax rate in accordance with Pillar Two rules by January 2025. Any delay in implementation could lead to significant tax revenue leakage from Kuwait to other countries or jurisdictions that have already adopted the Pillar Two rules. Therefore, implementing the Pillar Two rules is a critical step for Kuwait to protect its tax revenues.

Since the Amiri decree was issued on 10 May 2024 stipulating in Article 4 whereof that laws have to be issued by decrees, the draft decree-law issuing Group of Multinational Entities (MNEs) tax law was introduced. It includes five articles.

Article 1 of the draft decree-law states that the provisions of the accompanying law shall apply to the Group of Multinational Entities (MNEs) as of tax periods starting on or after 1 January 2025.

Article 2 of the draft decree-law grants the Group of Multinational Entities (MNEs) subject to the provisions of the accompanying law a nine-month period from the date the decree-law comes into effect to register with the Tax Department, without the imposition of the administrative penalty stipulated under item (1) of Article 34 of the accompanying law. However, this does not imply that the provisions of the law will apply to this category of taxpayers from the registration date, where the law applies to persons subject to its provisions as of the tax periods starting on or after 1 January 2025 in accordance with above mentioned Article 1.

Article 3 emphasized the priority of applying the provisions of this law in the event of a conflict with any other law.

Article 4 of the draft decree-law entrusted the Minister of Finance with the responsibility to issue the executive regulations of the law within six months from the date of its publication in the Official Gazette.

Article 5 stated that the Prime Minister and the Ministers, each within their purview, are obliged to implement the provisions of the law, which will come into effect starting from 1 January 2025.

The accompanying Group of Multinational Entities (MNEs) tax draft law contains a total of 41 articles divided into 8 chapters, as follows:

Chapter 1 includes two articles. Article 1 provides definitions for terms and phrases used in the law that require clarification or conceptual specification. Article 2 defines, without limitation, the situations that constitute a permanent establishment in the State of Kuwait. It refers to that the fundamental idea of a permanent establishment is a fixed place of business through which a non-resident person conducts business in Kuwait. However, this does not mean that a permanent establishment is limited to a fixed office in the traditional sense. Under this concept, various forms of permanent establishments are included, and this article provided examples of such establishments.

Chapter 2 deals with taxable and excluded entities. Article 3 clarifies taxable entities subject to this tax. Article 4 specifies the excluded entities. While Article 5 shows when the state of Kuwait is considered a location of the entity.

Chapter 3 contains the provisions related to the imposition and accrual of tax. Articles from 6 to 16 regulate the rules derived from the guidelines issued by the Organization for Economic Co-operation and Development (OECD) regarding Pillar Two. Article 6 refers to the determination of the tax rate, while Article 7 explains how to calculate the effective tax rate. Articles from 8 to 12 outline how to calculate the taxable income and the method for calculating the tax due. Articles from Article 13 to 16 address specific provisions derived from the Pillar Two rules, such as the simplified calculation method safe harbor and the initial phase of the international activity. Article 17 specifies that the tax period is twelve calendar months, and it should align with the accounting year of the ultimate parent entity of the taxpayer, which must be notified to the Tax Department. If the taxpayer fails to comply, the calendar year will be considered the tax period. This article also allows the Tax Department to permit the taxpayer to change the tax period under taxation for tax purposes upon his request. Article 18 requires related entities to comply with the arm's length standard when determining net income. The net income is considered to meet this standard when the financial or commercial transactions, on which it is based, are carried out under conditions that are similar to those that would apply between unrelated entities in comparable circumstances. If this is not complied with, the Tax Department shall have the right to determine the taxable income based on the arm's length price. This article entrusted the executive regulations with defining controls related to identifying related entities, and the methods and rules for calculating the arm's length price.

Chapter 4 clarifies the obligations of taxpayers, especially what has been stipulated upon in Article 19, which mandates that the taxpayer must voluntarily register with the Tax Department within 120 days from the date of starting his tax liability. If the taxpayer fails to comply, the Tax Department has the right to register them automatically and notify them accordingly, without prejudice to the imposition of fines and penalties outlined in the law. Additionally, the taxpayer is required to notify the Tax Department with any changes to their registration data within 120 days of such changes, and must request cancellation of their registration if they no longer meet the registration requirements in accordance with controls set by the executive bylaws.

Article 20 emphasizes the obligation of the taxpayer to file the tax declaration in accordance with the deadlines, forms, and regulations set forth.

Article 21 grants the taxpayer the right to submit an amended tax declaration in case of omission or material or arithmetic mistakes within 5 years from the deadline for submitting the original declaration, provided that no tax assessment has been issued for the relevant tax period for which the amended declaration is filed. This is without prejudice to the imposition of fines and penalties specified in Chapter 6 and Chapter 7 of the law, in case the conditions for them are met.

Article 22 adds that the taxpayer must pay the tax due to the Tax Department within the legal deadlines set for filling the tax declaration. They will have the right to refund any tax paid in excess, if any.

Article 23 stipulates that the taxpayer must retain the books, records, documents, and information related to any tax period for a minimum of 10 years from the end of the relevant tax period. If the taxpayer fails to comply, the Tax Department shall be entitled to estimate the tax due on an estimated basis, without prejudice to imposing fines and penalties as stipulated in this law, should the conditions for such penalties apply.

Chapter 5 addresses the provisions of tax auditing, tax assessment, and provisional seizure, along with the consequent procedures. Article 24 grants the Tax Department the right to audit the tax declarations of all taxpayers, and it may, on an annual basis, audit only a sample of the declarations, based on the rules and guidelines issued by the Tax Department in this regard. This article also requires taxpayers to allow the Tax Department staff to perform their duties related to such audits.

Article 25 shows provisions of tax assessments. If the Tax Department approves the information contained in the filed tax declaration, the declaration will be considered a tax assessment. However, if the Tax Department makes amendments to the declaration or assesses the tax on an estimated basis, then this will be considered as a tax assessment.

This article highlights the Tax Department's right to re-assess the taxpayer and amend the tax assessment regarding any income that has not been previously taxed or concerning any tax amounts due to the taxpayer as a result of mistakes in the initial assessment. This is done without prejudice to the statute of limitations outlined in Article 38 of this law.

Article 26 emphasizes an important provision for combating tax avoidance. It states that if the Tax Department recognizes that one of the purposes of any agreement or transaction is to reduce, defer, or exempt taxes, the Tax Department shall have the right to assess taxes based on the true commercial or economic significance of the transaction, while disregarding any tax avoidance measures as outlined in this article.

Article 27 regulates procedures for objections, grievances, and appeals, ensuring transparency and helping to reduce tax disputes before the courts. It grants the taxpayers the right to object to a tax assessment within 60 days from the date they have been notified or became aware of the assessment notice, whichever is earlier. Moreover, it includes that the objection must contain its reasons and supporting documents. This article also stipulates that the Tax Department must study, review and respond to the objection within 90 days. If this period has been elapsed without a response from the Tax Department, the objection shall be implicitly considered as rejected, and the taxpayer can proceed with further actions accordingly.

Furthermore, this article grants the taxpayers the right to appeal a rejected objection (either explicit or implicit) before the Tax Appeals Committee within 60 days. It also states that the Tax Appeals Committee must decide on the appeal within 90 days from the date of submission, with the possibility of extension for a similar period or periods (not exceeding 365 days in aggregate) upon request by the taxpayer or the Tax Department.

Finally, this article regulates procedures for appealing before the judiciary. It allows both the Tax Department and the taxpayers to appeal the decision of the Tax Appeals Committee before the competent court within 60 days from the date they became aware of the committee's decision or from the date the appeal period expired without a decision.

Article 28 defines the formation of the Tax Appeals Committee and authorizes the Minister of Finance to issue a decision on the rules and procedures for the committee's work and the compensation granted to its members.

Article 29 lists the cases in which the tax due is final and should be collected compulsorily without the need for litigation. It states that the tax declared by the taxpayers in their tax declaration is considered final, and the Tax Department may collect the same compulsorily using the declaration as a writ of execution. This is without prejudice to the Tax Department's right to amend the declaration and take necessary actions regarding any tax differences due arising from the amendment. The article (items from 2 to 6) also outlines other cases where the tax due becomes final during the objection and appeal stages, whereby either the original or the amended tax assessment becomes a writ of execution, as the case may be.

To reduce judicial disputes, and in cases where the tax due is not final, the article states that an agreement could be reached between the taxpayers and the Tax Department on the tax debt and settling the dispute. A settlement report is then drawn up according to specific conditions and procedures. In this case, the settlement report becomes a writ of execution, and the tax specified in the same shall be final.

Finally, the article confirms that a final judgment or any enforceable judgment on the tax debt shall make it final.

Article 30 deals with provisions of provisional seizure, stating that when the Tax Department determines that the tax debt is at risk of being lost, it may take provisional seizure measures to seize the taxpayers' movable assets, whether in their possession or in the possession of others. This article also indicates that the seizure can be lifted by a decision from the head of the Execution Department if the taxpayer provides sufficient guarantees for the payment of the tax debt or if the Tax Department requests the seizure to be lifted for reasons it deems appropriate.

Chapter 6 addresses the administrative fines that the Tax Department may impose to increase taxpayers' compliance levels and ensure the smooth functioning of the tax scheme. Article 31 specifies the fines for delays in filing the tax declaration, with due attention to graduality of fines based on the length of the delay. However, in all cases, the minimum fine is set at 1,000 Kuwaiti Dinars. If the fine determined in any case is less than this amount, a fine of 1,000 Kuwaiti Dinars shall be imposed. If the determined fine exceeds this amount, the standard fine shall be applied.

To encourage those who are late in filing their tax declarations to do so promptly, the article stipulates a fine of 25% of the final tax amount, with a minimum of 5,000 Kuwaiti Dinars, shall be imposed if the tax declaration is not filed by the time the tax assessment is issued.

The article further clarifies that imposing these fines does not affect the application of late payment fines specified in Article 32 herein.

Article 32 defines the fines imposed on the taxpayer in cases of late payment of the tax due. The fine is being calculated for every 30 days or part whereof, at a rate of 1% of the unpaid amounts.

Article 33 refers to fines imposed for filing an incorrect tax declaration. If the difference between the final tax and the tax declared is more than 10% of the tax declared, a fine of 25% of the difference is imposed on the taxpayer.

However, if he corrects the mistake before being discovered by the Tax Department, the fine shall be reduced to 10%. The provisions of this article do not affect the calculation of late payment fines specified in Article 32 herein.

Article 34 stipulates a fine of 3,000 Kuwaiti Dinars for certain administrative violations that affect the smooth operation and organization of the tax process.

Article 35 specifies the fine which should be imposed to any person who, by virtue of their position, duties, or work, is involved in assessing or collecting the tax prescribed by this law, or in resolving disputes related to the same, to disclose any information concerning the taxpayers, except in cases permitted by law.

Chapter 7 addresses tax evasion. Article 36 specifies penalties for individuals involved in tax evasion activities, including imprisonment for up to three years and a fine of up to three times the amount of tax evaded, or either of these penalties. This applies to anyone who commits or contributes to the falsification, fabrication, concealment, or destruction of books, records, documents, or data that affect the value of tax due amounts. The same penalty applies to anyone who commits or contributes to fraudulent methods aimed at obtaining tax deductions, exemptions, or refunds.

The article tightens the penalty in case of a repeat offense, which occurs if a similar crime is committed within five years from the completion or expiration of the adjudicated sentence. In the case of repeated offenses, the penalty shall be imprisonment for up to five years and a fine of up to five times the amount of tax evaded, or either of these penalties.

Article 37 designates the Public Prosecution as responsible for investigating, acting, and prosecuting tax evasion crimes outlined in this law. However, it establishes that criminal proceedings related to these crimes can only be initiated upon the request of the Minister of Finance or his delegate. This article also allows the Tax Department to settle these crimes through payment of the owed taxes, administrative fines, and a fine equal to the amount of tax evaded or double the amount in case of repeating the offenses. It is specified that the settlement shall not be valid unless it is approved by the Minister of Finance or his delegate, which leads to the non-initiation or dismissal of criminal proceedings, or penalty's stay of execution, as the case may be.

Chapter 8 covers the final provisions of the law. Article 38 defines the statute of limitations for tax debts, specifying a 10-year period that begins from the date the tax declaration is filed or from the expiration date of the legal filing deadline in case of non-filing, or from the date the Tax Department becomes aware of activities data and elements not declared by the taxpayer. The article also outlines the actions that interrupt the statute of limitations, which reset the 10-year period starting from the date of any such action.

Additionally, the article stipulates that the taxpayer's right to request a refund of any overpaid taxes expires after 5 years from the date the right to a refund arises.

Article 39 emphasizes the Tax Department's right to obtain any information and documents it deems necessary from any person or entity for the purposes of implementing provisions of this law, in accordance with legally permitted situations in order to protect public treasury rights.

Article 40 grants the Tax Department employees, as designated by a decision from the Minister of Finance, the status of judicial police. This allows them to enter places where taxpayers conduct their activities or retain records and documents, in order to detect tax violations and seize related records or documents. They may seek the assistance of police officers when necessary.

Article 41 stipulates that exchange rate for foreign currencies related to the application of the provisions of this law is evaluated in Kuwaiti Dinar, in accordance with the instructions of the Central Bank of Kuwait. The monthly or annual average exchange rate shall be considered, as the case may be.

The executive regulations will specify the procedures and controls necessary for the application of the provisions of this article.