population reaches 5.098,539
By Tuba Nur Sonmez Nine years ago, on the night of July 15, 2016, the people of Türkiye witnessed a betrayal that tested not only the strength of their institutions but the very soul of their nation. It was a night when tanks blocked roads, helicop...
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Kuwait Times
3 days ago
- Kuwait Times
Kuwait FM, GCC chief discuss boosting Gulf cooperation
Kuwait's recent stride into the era of global minimum taxation, marked by Law 157/2024 and its executive regulations, brings with it a precise methodology for assessing the tax contributions of large multinational enterprises (MNEs). We have previ... By Omar Ibrahim Belly fat seems to be the only friend that will never leave me. It's with me at all times of the day: I wake up, it's there; I have my morning cheesecake (it's a thing, I swear), it's still there; it even follows me to the s...
Kuwait Times
4 days ago
- Kuwait Times
Kuwait's pursuit of fair global taxation
Kuwait's recent implementation of the BEPS Pillar Two framework, through Law 157/2024 and its executive regulations, has introduced a new paradigm for the taxation of large multinational enterprises (MNEs). We have explored the foundational elements: understanding 'GloBE Income or Loss' as the standardized profit base and 'Adjusted Covered Taxes' as the relevant tax burden. Now, we arrive at the pivotal moment where these two concepts converge to determine if an MNE owes additional tax - the calculation of the Effective Tax Rate (ETR) and, if needed, the top-up tax. This article will demystify these crucial computations, showing how the 15 percent global minimum tax is enforced and how Kuwait strategically ensures that any top-up tax arising from economic activities within its borders directly benefits the nation through its Qualified Domestic Minimum Top-up Tax (QDMTT). Step 1: The jurisdictional blending approach - A collective view Unlike traditional tax systems that often look at individual companies, Pillar Two takes a jurisdictional blending approach. This means that for each country where an MNE group operates, e.g., Kuwait, the GloBE income or loss and the adjusted covered taxes of all constituent entities of that MNE group located in that specific jurisdiction are aggregated. Why aggregate? Because the goal is to determine if the MNE's overall operations in a given country are effectively taxed below 15 percent. Aggregating allows for an average to be taken across all the group's entities in that location, preventing MNEs from manipulating the effective rate by having some high-taxed and some low-taxed entities in the same country. So, for Kuwait, an MNE group will first sum up the GloBE Income of all its entities based here, and then sum up their Adjusted Covered Taxes. Step 2: The core formula - Calculating the Effective Tax Rate (ETR) Once we have the aggregated GloBE income and adjusted covered taxes for a particular jurisdiction, the calculation of the Effective Tax Rate (ETR) is straightforward: Jurisdictional ETR = aggregated adjusted covered taxes for the jurisdiction aggregated GloBE income for the jurisdiction. For example, if an MNE's constituent entities in Kuwait have an aggregated GloBE income of KD 100 million and have paid KD 10 million in adjusted covered taxes, their jurisdictional ETR would be: KD 10 million = 10 percent KD 100 million. This 10 percent ETR is now compared against the 15 percent global minimum tax rate. But, what if the ETR is a loss or zero GloBE income? Special rules apply if the aggregated GloBE income for a jurisdiction is a loss or zero. In such cases, if the adjusted covered taxes are positive, the ETR calculation would result in an undefined or negative rate. The GloBE rules generally treat the ETR as being below 15 percent in such scenarios, which means a top-up tax could still be triggered, but specific computations would apply to ensure fairness. The key is that the absence of taxable profit does not automatically mean immunity from the Pillar Two rules if taxes have been significantly reduced. Step 3: Determining the top-up tax percentage - The shortfall If the calculated jurisdictional ETR is less than 15 percent, then a 'top-up tax percentage' is determined. This simply represents the difference between the 15 percent minimum rate and the MNE's actual ETR in that jurisdiction. Top-up tax percentage = 15 percent (minimum rate). Jurisdictional ETR now, using our example where the ETR for Kuwait was 10 percent: Top-up tax percentage = 15 percent? 10 percent = 5 percent This 5 percent is the additional rate of tax that needs to be levied to bring the overall effective tax rate up to the 15 percent minimum. Step 4: Calculating 'excess profit' with the substance-based income exclusion (SBIE) Before applying the top-up tax percentage, the GloBE rules introduce a crucial element, that is the substance-based income exclusion (SBIE). This is a vital policy carve-out designed to ensure that Pillar Two taxes only 'excess profits' - those profits that are not directly attributable to real economic activities, like having employees or physical assets, in a jurisdiction. It aims to reward MNEs for genuine investment and discourage purely artificial profit shifting. The SBIE is calculated as a fixed return, i.e. a percentage, on the MNE's: Eligible payroll costs The payroll expenses of eligible employees performing substantive activities in the jurisdiction. Eligible tangible assets: The carrying value of tangible assets, like property, plant, and equipment, located in the jurisdiction and used in the MNE's business. For a transitional period, starting at 9.6 percent for payroll and 7.6 percent for tangible assets, phasing down to 5 percent over ten years, a portion of income derived from these substantive activities is excluded from the profits subject to top-up tax. SBIE = (payroll carve-out percent x eligible payroll costs) + (tangible assets carve-out percent x eligible tangible assets) The 'excess profit' for a jurisdiction is then calculated as: excess profit = aggregated GloBE income. SBIE If the GloBE income is less than or equal to the SBIE, then the excess profit is considered zero, and no top-up tax would be due even if the ETR is below 15 percent. This is a crucial simplification for MNEs with substantial physical presence and employees. Step 5: Computing the gross top-up tax Now, the top-up tax percentage is applied to the excess profit to arrive at the gross top-up tax for the jurisdiction: Gross top-up tax = top-up tax percentage x excess profit. Let's continue our example: If the Aggregated GloBE income was KD 100 million, and assuming a SBIE of KD 20 million, then: excess profit = KD 100 million. KD 20 million = KD 80 million and the gross top-up tax would be: Gross top-up tax = 5 percent x KD 80 million = KD 4 million. This KD 4 million is the total top-up tax that needs to be collected to bring the MNE's effective tax rate in Kuwait up to 15 percent. Step 6: Reducing the top-up tax with Kuwait's QDMTT This is where Kuwait's strategic decision to implement a qualified domestic minimum top-up tax (QDMTT) becomes immensely beneficial. As discussed, the QDMTT ensures that any top-up tax calculated for MNE entities located in Kuwait is paid directly to the Kuwaiti tax authorities. The final top-up tax amount that would be allocated to other jurisdictions, under the IIR or UTPR, is reduced by the amount of QDMTT paid in Kuwait. Allocable top-up tax (to other jurisdictions) = gross top-up tax? QDMTT paid in Kuwait If Kuwait collects the full KD 4 million under its QDMTT, then there would be no remaining top-up tax for other countries to collect from this MNE's Kuwaiti operations. This guarantees that the revenue stays within our national borders. Importance for MNEs in Kuwait: For multinational enterprises operating in Kuwait, understanding these computations is not merely an academic exercise. It directly impacts their future tax liabilities and compliance requirements. They will need: Robust data systems: To accurately track and report GloBE income and adjusted covered taxes for all their Kuwaiti entities. Scenario planning: To model the potential impact of Pillar Two on their effective tax rates and overall tax burden in Kuwait. Expert guidance: To navigate the complexities of these calculations and ensure compliance with Law 157/2024 and its executive regulations. A fairer share for Kuwait The calculation of the effective tax rate and the resulting top-up tax is the operational core of Pillar Two. By establishing a clear, step-by-step process, the GloBE Rules ensure transparency and consistency in determining if an MNE is paying its fair share. For Kuwait, the meticulous design of its QDMTT means that our nation is not just a participant in this global tax reform, but an active beneficiary. By capturing the top-up tax arising from economic activity within its jurisdiction, Kuwait secures vital revenue, fosters a more equitable business environment, and reinforces its commitment to modern, fair international taxation. This intricate dance of numbers ultimately leads to a stronger, more prosperous future for all in Kuwait. NOTE: Hassan M Abdulrahim is a Senior Instructor (Business) at Canadian College Kuwait and CEO & Co-founder of Visionary Consulting Company
Kuwait Times
30-07-2025
- Kuwait Times
Understanding ‘Adjusted Covered Taxes' in Pillar Two framework
Kuwait's recent stride into the era of global minimum taxation, marked by Law 157/2024 and its executive regulations, brings with it a precise methodology for assessing the tax contributions of large multinational enterprises (MNEs). We have previously explored 'GloBE Income or Loss' – the specially defined profit measure for these rules. Now, we turn our attention to the other vital component, that is 'Adjusted Covered Taxes'. Together, GloBE Income and Adjusted Covered Taxes form the numerator and denominator of the Effective Tax Rate (ETR) calculation. Just as GloBE Income is not simply accounting profit, Adjusted Covered Taxes is not merely the 'tax paid' figure on a company's financial statement. It is a meticulously crafted measure designed to ensure that only the relevant taxes on GloBE Income are counted towards the 15 percent global minimum. This precision is critical for the fairness and effectiveness of Pillar Two, and particularly for Kuwait's ability to collect its Qualified Domestic Minimum Top-up Tax (QDMTT). The starting point: Current and deferred tax expense The calculation of Adjusted Covered Taxes begins with the current and deferred tax expense, or benefit, recognized in the financial statements of each constituent entity within an MNE group. This is the amount of income tax a company records in its books, reflecting not just the tax due for the current year, i.e. the current tax, but also the tax implications of future events resulting from today's transactions, that is the deferred tax. Why both current and deferred tax? Because taxes are complex. Companies often have differences between their accounting profit and their taxable profit due to timing. For instance, an expense might be recognized in accounting records now but deductible for tax purposes only in a future year. This creates a 'deferred tax asset (DTA)' or 'deferred tax liability (DTL)' on the balance sheet. Pillar Two aims for a comprehensive picture of the tax burden over time, hence the inclusion of both. The necessity of adjustments: Filtering what truly 'covers' GloBE Income Just as with GloBE Income, various adjustments are made to the financial accounting tax expense. These adjustments ensure that only taxes directly attributable to the GloBE Income are considered, and that certain non-qualifying or distorting items are excluded. The goal is to arrive at a clean measure of the actual tax burden that relates to the income subject to the 15 percent minimum tax. Here are some of the key types of adjustments: of non-income taxes: The GloBE Rules are specifically about income taxes. Therefore, taxes that are not imposed on income or profits, e.g., property taxes, customs duties, value-added tax, or even general business levies that are not profit-based, are excluded from Adjusted Covered Taxes, even if they are labeled as 'taxes' in the financial statements. They are treated as ordinary business expenses. on excluded income: If certain types of income or gains are excluded from GloBE Income, as we discussed in the previous article, such as most dividends or specific equity gains, then any income tax paid on that specific excluded income must also be removed from Adjusted Covered Taxes. This 'matching principle' is vital: if income is not counted towards GloBE Income, its related tax should not count towards Covered Taxes. tax positions (UTPs): Companies often record provisions for uncertain tax positions – amounts they might have to pay if a tax authority challenges their tax treatment. These provisions are initially excluded from Adjusted Covered Taxes. Why? Because they represent a potential future liability, not a tax currently paid or firmly committed. They are only included when the underlying tax is actually paid. This ensures that the ETR calculation reflects taxes that are genuinely borne by the MNE. refundable tax credits (QRTCs): As previously noted, QRTCs, ie tax credits that are essentially direct government subsidies because they are refundable in cash, even if there is no tax liability, are treated as income for GloBE purposes. Consequently, any reduction in current tax expense due to a QRTC is added back to Adjusted Covered Taxes. This prevents them from artificially lowering the ETR, as they are not true tax payments. Non-qualified refundable tax credits, however, reduce the Covered Taxes. tax adjustments: A complex area: This is arguably the most intricate part of the 'Adjusted Covered Taxes' calculation. While deferred tax expense is a starting point, it undergoes several important adjustments: • Recapture rule: A key safeguard is the 'recapture rule' for deferred tax liabilities (DTLs). If a DTL, which increased Adjusted Covered Taxes in an earlier year, thus improving the ETR, does not reverse into taxable income within a specified period, generally five years, it is 'recaptured.' This means the original DTL amount is reversed from Adjusted Covered Taxes, and the ETR for the earlier year is recalculated, potentially leading to a top-up tax being due. This prevents MNEs from using long-term timing differences to permanently lower their ETR. • Deferred tax assets (DTAs) from tax credits and losses: Generally, DTAs arising from tax credits are not included in Adjusted Covered Taxes unless explicitly provided for, e.g., transitional rules for pre-Pillar Two losses. Similarly, DTAs from tax losses may be limited in their use to prevent distortions. The rules focus on ensuring that only those deferred taxes that truly represent a future cash tax payment related to GloBE income are counted. • Valuation allowances: Adjustments are made for valuation allowances related to deferred tax assets. A valuation allowance is an accounting reserve against a deferred tax asset, reflecting uncertainty about whether the company will generate enough future taxable income to utilize the DTA. For GloBE purposes, these allowances are typically reversed to avoid volatility and ensure a consistent approach to the recognition of deferred taxes. • Rate cap on deferred taxes: Deferred taxes are generally taken into account at the 15 percent minimum rate, even if the domestic tax rate is higher. This caps the benefit of deferred taxes in the ETR calculation. of taxes: In certain complex scenarios, taxes may need to be allocated between different Constituent Entities or jurisdictions to ensure they are matched with the corresponding GloBE Income. For example, taxes imposed on a parent company for the income of its Controlled Foreign Corporation (CFC) are allocated to the CFC's jurisdiction to ensure the tax is paired with the underlying income. Similarly, taxes paid by an owner on the income of a 'flow-through' such as partnership entity are allocated to that entity. The role of adjusted covered taxes in Kuwait's QDMTT for the Ministry of Finance in Kuwait, correctly identifying and calculating 'Adjusted Covered Taxes' for each in-scope MNE's Constituent Entities in Kuwait is paramount for the operation of its Qualified Domestic Minimum Top-up Tax (QDMTT). The QDMTT, as implemented by Law 157/2024, works by comparing the aggregate GloBE Income of all Kuwaiti constituent entities against their aggregate Adjusted Covered Taxes. If the resulting jurisdictional ETR for Kuwait falls below 15 percent, the QDMTT applies. The accuracy of the Adjusted Covered Taxes figure directly impacts this calculation. If taxes are incorrectly included or excluded, it could lead to an inaccurate ETR, potentially resulting in either an under-collection or over-collection of the QDMTT. The Challenge for MNEs in Kuwait The detailed requirements for calculating Adjusted Covered Taxes present a significant operational challenge for MNEs with a presence in Kuwait. Companies must: Reconcile book-to-tax differences: Meticulously track and adjust for all temporary and permanent differences between their financial accounting tax expense and the GloBE definition of Covered Taxes. Manage deferred taxes: Implement robust systems to track deferred tax balances, monitor the reversal of DTLs for the recapture rule, and correctly account for DTAs under the GloBE framework. Data systems: Ensure their financial and tax reporting systems can capture the necessary data at the required level of granularity for each Constituent Entity in Kuwait. Precision for Fair Taxation Adjusted Covered Taxes might seem like a technical detail, but it is a critical pillar supporting the entire Pillar Two framework. It ensures that the ETR calculation is based on a consistent, globally comparable measure of the actual tax burden borne by MNEs on their GloBE Income. By meticulously defining what constitutes 'Adjusted Covered Taxes,' the GloBE Rules aim for accuracy and fairness, preventing companies from artificially lowering their effective tax rates. For Kuwait, this precision allows our nation to accurately calculate and collect its domestic minimum top-up tax, ensuring that large multinational corporations operating on our soil contribute their fair share, ultimately supporting Kuwait's ongoing development and prosperity. This deep dive into the numbers underscores the robust nature of Kuwait's commitment to modern, equitable international taxation. NOTE: Hassan M Abdulrahim is a Senior Instructor (Business) at Canadian College Kuwait and CEO & Co-founder of Visionary Consulting Company
