Kuwait is one of the last two holdouts not yet to introduce a Value Added Tax regime under the 2017 Gulf Cooperation Council agreement to create a VAT union. The other is Qatar which may expect to launch VAT in 2023. Kuwait may alter plans to introduce VAT as inflation hit 10-year highs of nearly 5%, with fear that an increase in prices from the introduction of the consumption tax would undermine public support for wider tax reforms

When Was VAT In Kuwait Introduced?

The tax authorities in Kuwait recently announced that it will finally introduce Value Added Tax (VAT) at 5% from 1 April 2021. Kuwait is part of the Gulf Cooperation Council (GCC) and all of the 6 countries of the GCC have agreed to implement a harmonised VAT regime of 5% by 2021.

VAT in Kuwait: For Kuwait Resident Businesses

For Kuwait resident businesses, the mandatory VAT registration threshold is 375,000 United Arab Emirates Dirham (AED), and the voluntary registration threshold is AED 187,500. No registration threshold applies to non-resident businesses making supplies on which the UAE VAT is required to be charged.

Businesses are impacted indirectly by the introduction of VAT in Kuwait, as the new tax implemented led to several compliance costs and major changes to businesses active in the country. The implementation of VAT in the UAE is a step in the right direction, setting the path for a new efficient taxation system.

VAT in Kuwait: Legal Perspective

From a legal perspective, it was necessary to review existing contracts to check if they needed to renegotiate contracts that had no VAT clause in order to avoid bearing any VAT cost. They also had to check that all new contracts dealt with the application of VAT and set out which party was responsible for bearing the VAT liability.

 It was also important to communicate with suppliers to ensure they were going to issue VAT-compliant invoices and businesses had to evaluate the cash flow implications and their working capital requirements as a result of now having to pay the VAT before they received payments.

VAT in Kuwait: What should businesses do now?

The completion of the tax return may seem a simple, straightforward task, but the department within the organisation that files the return on behalf of the business will be held responsible for the tax positions taken in that return regardless of whether the compliance work was outsourced. The relevant department will usually be the tax department, but it could be the legal or finance department.

Given VAT is a new law, there may be uncertainty on many technical positions which could create risk and this has to be taken seriously as penalties for non-compliance, including incorrect tax returns, could be as high as 300% of the tax amount due. VAT will involve a compliance cost for businesses, given the potential risks and penalties, it is important whenever there is uncertainty, businesses work with a trusted tax adviser and navigate logically through any areas of doubt.

VAT in Kuwait: Impact on Travel & Tourism Industry

The VAT for tourism operators can vary from business to business lot more complex than operators may be able to feasibly handle. This complexity may drive some operators to make changes to the way in which they do business. Tourism operators will generally find that assuming they breach the threshold for being required to register for VAT, they will need to charge VAT on their fees. Even though a significant percentage of their client base will be tourists from offshore. The reality is that the authorities are likely to take the view that the service is supplied in the respective GCC state, and that it should therefore be subject to VAT there.

VAT in Kuwait: Impact on accommodation providers

The major issue for hotels will be the recognition of the time of supply for VAT purposes. Traditionally,
hotel operators tend to recognize income from room revenue at the date of the guest’s arrival at the earliest, although many also, recognize it at the date of departure, based on the premise that prior to that time, the booking may have uncertainties associated with it (the guest may depart earlier or later than their booking may initially indicate.

VAT in Kuwait: Impact on Airlines

If any domestic flight is undertaken with the GCC, most flights would be expected to be zero-rated on the basis that they are international flights. The issues and complexities that arise typically do so as a result of the various ‘non-airfare’ charges made to customers, and other fringe operations that airlines often engage in outside of their core operations of transporting people and goods around. One of the more obvious examples would be their participation in frequent flier programs on the revenue side.

VAT in Kuwait: Overall Impact on Tourism Industry

The tourism industry contributes significantly to the Gulf economies and offers immense opportunities for individual operators throughout much of the GCC, but all such operators will face major complexities in the manner in which they will need to address the implementation of VAT in Kuwait.

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