Latest news with #PillarTwo
Kuwait Times
a day ago
- Business
- 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
Kuwait Times
23-07-2025
- Business
- Kuwait Times
The importance of GloBE income for Kuwait
Beyond the balance sheet: Cornerstone of global minimum tax calculation KUWAIT: Kuwait's financial landscape is evolving rapidly with the recent implementation of the BEPS Pillar Two initiative, as enshrined in Law 157/2024. While the headline figure of a 15 percent global minimum corporate tax rate often captures attention, the mechanics behind this calculation are equally important. At the very core of determining whether a large multinational enterprise (MNE) owes additional tax under these new rules is a concept called 'GloBE income or loss'. This is not simply the profit you see on a company's financial statements or its taxable income under local Kuwaiti tax laws. GloBE income or loss is a specially defined and adjusted measure, designed to create a consistent and comparable tax base across all jurisdictions where an MNE operates. Understanding this foundational concept is crucial for grasping how the Pillar Two system truly works. The starting point: Financial accounting net income or loss The journey to calculating GloBE income or loss begins with the familiar: the financial accounting net income or loss (FANIL) of each individual 'Constituent Entity', ie, a company or branch that is part of the MNE group, in a particular jurisdiction. This is the 'bottom-line' profit or loss figure that companies prepare for their consolidated financial statements, typically in accordance with recognized accounting standards like International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (GAAP). This starting point makes sense because financial statements are already widely prepared by MNEs and provide a comprehensive view of their economic performance. However, different accounting standards and national tax laws can lead to significant variations in how profits are reported or taxed. This is where the necessary adjustments come in. Why adjustments are essential: Bridging the gaps If the GloBE Rules simply used accounting profit, they would not achieve their goal of a consistent global minimum tax. Accounting rules are designed for financial reporting to investors and stakeholders, not primarily for tax purposes. Similarly, domestic tax laws are shaped by national economic and social policies, leading to deductions, exemptions, and timing differences that vary widely from country to country. The purpose of GloBE adjustments is to neutralize these differences, ensuring that the 15 percent minimum tax is applied to a uniform and comparable profit base worldwide. Think of it as creating a common language for profit that all countries can understand and apply for Pillar Two purposes. Key adjustments: What gets added back or taken out? The GloBE Rules specify a comprehensive list of adjustments to the financial accounting net income or loss. While the details can be highly technical, we can group them into several common categories to understand their intent: Tax-related adjustments: • Net tax expense: A crucial adjustment is to exclude the income tax expense itself from the accounting profit. This is because we are calculating the effective tax rate, so we need to start with profit before taxes to correctly determine the tax burden. Non-income taxes, like property taxes or payroll taxes, are generally not adjusted out, as they are considered operating expenses. • Certain tax credits: Qualified refundable tax credits (QRTCs) – which are tax credits that are refundable in cash even if the company has no tax liability – are treated as income for GloBE purposes, not as a reduction in tax. This prevents them from artificially lowering the ETR. Non-refundable tax credits, however, are treated as a reduction in covered taxes. Exclusions for specific types of income or gain: • Excluded dividends: Dividends received from ownership interests, especially those where the MNE holds a significant stake, are generally excluded from GloBE Income. This prevents the same profits from being taxed multiple times as they flow up an MNE's ownership chain, ensuring that profits are taxed once at the operating entity level. • Excluded equity gains or losses: Gains or losses arising from the revaluation or disposal of certain equity investments, eg, holdings in other companies that are not part of the MNE group's core business, are often excluded. This aims to focus the GloBE calculation on the MNE's core operating profits. • Revaluation gains and losses: Gains or losses from the revaluation of property, plant, and equipment, if recognized in Other Comprehensive Income rather than the main profit and loss statement, are typically excluded unless they relate to certain types of financial instruments. Adjustments for policy reasons and distortions: • Illegal payments, fines and penalties: Expenses related to illegal payments, bribes, or fines and penalties that are not deductible for tax purposes in most jurisdictions are generally added back to profit for GloBE purposes. This ensures that a company cannot reduce its effective tax rate through illicit activities. • Asymmetric foreign currency gains/losses: Certain foreign exchange gains or losses that are treated differently for accounting and tax purposes, leading to asymmetric outcomes, are adjusted to ensure consistency. • Prior period errors and changes in accounting principles: Adjustments are made to ensure that the impact of correcting errors or changing accounting policies in the current year does not distort the GloBE Income of that specific year, especially if they relate to periods before Pillar Two applied. • Accrued pension expenses: Adjustments are made for certain pension-related expenses or income to align them with actual contributions or distributions. • Stock-based compensation: Differences in accounting and tax treatment of stock-based compensation can lead to adjustments. • Intra-group financing: Specific rules apply to inter-company financing arrangements to prevent artificial shifting of income or expenses. Allocation rules: Where does the income belong? Once the adjustments are made at the individual entity level, the GloBE rules also provide for specific allocation rules. For instance: • Permanent establishments (PEs): The income or loss of a PE, ie a fixed place of business in another country, like a branch, is generally considered to belong to the jurisdiction where the PE is located for GloBE purposes, reflecting its separate economic activity. • Flow-through entities: For entities that are transparent for tax purposes, meaning their income is taxed directly in the hands of their owners, eg partnerships, specific rules determine how their income or loss is allocated among the MNE group members. The importance of GloBE income for Kuwait For Kuwait and its implementation of Pillar Two, the precise calculation of GloBE Income or Loss for each Constituent Entity within our borders is paramount. When we talk about the qualified domestic minimum top-up tax (QDMTT) – Kuwait's strategic mechanism to collect its share of the top-up tax – the QDMTT relies directly on this GloBE Income figure. If an MNE's constituent entities in Kuwait collectively have a positive GloBE Income, but their effective tax rate (ETR), GloBE Income divided by Adjusted Covered Taxes, falls below 15 percent, then a top-up tax will be triggered. This top-up tax is calculated on the 'excess profit' which is directly derived from the GloBE Income, after accounting for a 'substance-based income exclusion (SBIE)', which allows for a routine return on tangible assets and payroll. ETR, top-up tax, excess profit and SBIE are the subject matter of our next articles, so please stay tuned! Challenges and preparations for MNEs in Kuwait For MNEs operating in Kuwait, preparing for GloBE Income calculations presents significant challenges: • Data granularity: Companies need to collect and analyze financial data at a highly granular, entity-by-entity and jurisdictional level – often far more detailed than their current tax or even accounting systems might readily provide. • System readiness: Existing accounting and enterprise resource planning (ERP) systems may not be configured to automatically generate GloBE-compliant income figures, necessitating significant system upgrades or manual adjustments. • Expertise: Understanding and correctly applying the numerous GloBE adjustments requires specialized tax and accounting expertise. A new era of profit measurement The concept of GloBE Income or Loss is a cornerstone of the global minimum tax framework. It represents a shift from diverse national tax bases to a standardized, internationally agreed-upon measure of profit, specifically designed to identify and tax undertaxed income. For Kuwait, mastering the intricacies of GloBE Income calculation is not just about compliance; it is about effectively leveraging the Pillar Two rules to secure our fair share of global corporate profits, ensuring a more stable and prosperous economic future for our nation. As companies adapt, the precision in defining and measuring this 'GloBE Income' will be fundamental to the success of this transformative tax reform. NOTE: Hassan M Abdulrahim is a Senior Instructor (Business) at Canadian College Kuwait and CEO & Co-founder of Visionary Consulting Company
Daily Maverick
20-07-2025
- Business
- Daily Maverick
Norway's Stoltenberg lauds SA's meeting of G20 finance ministers and central bank governors
The Norwegian finance minister said that despite their differences, the countries around the table had been able to agree on a communique 'that sets out important principles'. South Africa's final G20 meeting of finance ministers and central bank governors was a success, said Norway's finance minister, Jens Stoltenberg. The meeting at the Zimbali beach resort north of Durban on Thursday and Friday produced the first communique of SA's G20 presidency. So far, the sherpas track of the G20 has only managed to issue 'chairpersons' statements' because they were unable to achieve consensus. Norway is not a member of the G20 but was invited by President Cyril Ramaphosa to attend all the G20 meetings as a guest. Stoltenberg, a former Norwegian prime minister and the previous secretary-general of Nato, said agreeing on a communique — despite the wide variety of countries around the table, including the European countries, the US, China and Russia, which disagreed on many issues — was good news and a recognition of South Africa's chairing of the G20. 'And despite these differences, we have been able to agree on a communique that actually sets out some important principles and charts a way forward on issues like a global minimum tax, like how to handle countries with debt problems, and to create a better framework for addressing debt problems for indebted countries, and also language on climate market and climate financing, which helps us to move that agenda forward,' Stoltenberg told Daily Maverick. US Treasury Secretary Scott Bessent skipped the meeting and sent a lower-ranking official, but, as Stoltenberg noted, the US was represented and endorsed the communique. Some analysts would have liked stronger language on important issues such as debt relief, climate financing and the minimum global tax. 'But in these kinds of negotiations, it is important not to make the best the enemy of the good,' said Stoltenberg. It was an achievement that, after many meetings which failed to agree on a communique, there was now an agreement, he said 'And the issues that are addressed, including debt, climate financing and minimum tax, are important issues, where we actually have taken some important steps. 'And I also think that … it is important that Africa has a central place in the communique, where the G20 countries commit to work more closely together, to also assess how these different development banks [like the World Bank and International Monetary Fund] are set up to support Africa. 'Debt relief and management of debt are, of course, important for many African countries. 'And we also looked into how we can facilitate more private investments, more trade with Africa.' Debt and taxes On a global minimum tax, the communique said the G20 countries would address concerns about the G20/OECD Pillar Two global minimum taxes 'with the shared goal of finding a balanced and practical solution that is acceptable for all'. Pillar Two sets out rules to ensure that large multinational corporations pay a minimum 15% tax on their profits in every country where they do business. The aim is to prevent such corporations from avoiding taxes by domiciling in tax havens. The G20 members also 'committed to addressing debt vulnerabilities in low- and middle-income countries in an effective, comprehensive and systematic manner'. This included reaffirming the G20's commitment to further strengthen the implementation of the G20 Common Framework, which enables debt relief and restructuring for highly indebted countries. So far, it has focused on Africa. The communique noted that the Multilateral Development Banks (MDBs) — such as the World Bank and International Monetary Foundation (IMF) — were implementing the G20 MDB Roadmap and the recommendations from the Capital Adequacy Framework Report that the MDBs should more efficiently utilise their existing resources, share more risk with the private sector and utilise new instruments to increase lending capacity over the next decade. The G20 members acknowledged the 'strategic importance' of an enhanced G20 partnership with African economies, including through strengthening the G20 Compact with Africa. On climate financing, the communique noted a commitment to strengthen global sustainable financing through effective coordination among MDBs, vertical climate and environment funds (like the Global Environment Facility), which provide concessional finance to developing countries, and national development banks. The members looked forward to continued work for more effective funding of climate adaptation and addressing natural catastrophe insurance protection gaps in countries. The communique noted the potential of high-integrity, voluntary, private-sector-led carbon markets. The members reaffirmed the G20's commitment to a strong, quota-based, and adequately resourced IMF at the centre of the Global Financial Safety Net and acknowledged 'the importance of realignment in quota shares to better reflect members' relative positions in the world economy while protecting the quota shares of the poorest members'. They underscored 'the need for enhancing the representation and voice of developing countries in decision-making in MDBs and other international economic and financial institutions'. They welcomed the creation of a 25th chair on the IMF executive board 'to enhance the voice and representation of sub-Saharan Africa'. The finance ministers and central bank governors recognised the importance of the World Trade Organization (WTO) to advance trade issues, and acknowledged the agreed-upon rules in the WTO 'as an integral part of the global trading system'. They underscored the importance of the independence of central banks. SA officials particularly welcomed the agreement on this, as well as the agreements on carbon markets and the importance of multilateral institutions like the WTO, as the Trump administration has not been enthusiastic about any of these. Historic ties Apart from attending the G20, Stoltenberg said he had visited the nearby Albert Luthuli Museum, which honours the late ANC leader who received the Nobel Peace Prize in 1961, 'from the Norwegian Nobel Peace Prize Committee. 'And that demonstrated … the long and strong bond between South Africa and Norway,' he said, which was in many ways initiated by that peace prize, which inspired the anti-apartheid and solidarity movement in Norway. He noted that Norway had provided economic and other support to the ANC in exile, which created the foundation for the bonds between the two countries that have lasted until today. He said that despite Norway being a strong supporter of free trade, it had imposed sanctions on South Africa during the apartheid era 'because freedom is more important than free trade. 'And that's also the reason why we are imposing sanctions on Russia, because of the illegal invasion, blatant violation of international law, invading a neighbour, Ukraine. 'And why Norway has imposed sanctions on Israel for the illegal settlements on the West Bank … and the warfare in Gaza, violating international law. 'So we don't believe in double standards. And there's a long line, from supporting self-determination of the people of South Africa, to supporting the people of Ukraine in their right to decide their own future, and recognising Palestine as an independent state.' In his intervention in the G20 meeting, Stoltenberg said, 'We need to find the right balance between political tools — when it comes to sanctions — and ensuring free trade and open economies. 'We are concerned about increasing tariffs. We believe that increased tariffs will reduce growth and reduce our ability to foster prosperity. So … we should not misuse the idea of political tools to impose tariffs which are not needed. We believe in free trade, it's good for all of us.' Road to peace Daily Maverick asked Stoltenberg, as a former Nato secretary-general, if he saw any prospects for a peace settlement in Ukraine. 'Yes, of course,' he replied. 'But the only way to get peace is to support Ukraine, because everyone wants this war to end. At the same time, we know that the quickest way to end the war is to lose the war. But that will not bring peace, that will bring occupation. 'And occupation is not peace. So if we want peace, we have to convince [Russian] President [Vladimir] Putin that he will not achieve his goals on the battlefield. 'And the only way to get there is to provide military support to Ukraine, because the stronger Ukraine is on the battlefield, the stronger they will be around the negotiating table. 'And therefore, if we want peace, we need military support to Ukraine. And it is fundamental, not least for African countries, to uphold the right of territorial integrity. 'Russia has recognised the borders of Ukraine many times, and now they have violated the same borders by blatant violation of international law. So we cannot allow double standards. 'We need to criticise Israel's war against Gaza, and we need to be very clear on Russia's blatant violation of international law. And peace, we can get peace tomorrow if Putin stops invading a neighbour. 'If Putin stops fighting, then we have peace. If [Ukrainian President Volodymyr] Zelensky stops fighting, then we have occupation. And occupation is not peace.' DM
Kuwait Times
08-07-2025
- Business
- Kuwait Times
Unpacking the scope of GloBE rules: Who pays and why Kuwait benefits
A closer look at the global minimum tax in the land of prosperity KUWAIT: Kuwait's recent publication of executive regulations for Law 157/2024 has ignited a significant shift in our nation's tax landscape. This legislation, centered on the OECD's BEPS Pillar Two initiative and the Global Anti-Base Erosion (GloBE) Model Rules, represents a global movement towards fairer corporate taxation. While the overarching goal of a 15 percent global minimum tax is clear, understanding who exactly falls under the purview of these complex rules, and why this is particularly advantageous for Kuwait, is crucial. This article delves into the 'scope' of the GloBE Rules – clarifying which multinational enterprises (MNEs) are targeted, which are exempt, and how Kuwait's strategic decision to implement a Qualified Domestic Minimum Top-up Tax (QDMTT) ensures our nation secures its rightful share of global corporate profits. The threshold: Identifying in-scope multinational enterprises The very first step in applying the GloBE Rules is determining if an MNE group is even 'in scope.' The rules are not designed to apply to every business, but rather to the largest global players. The primary determinant is a revenue threshold: an MNE group is generally subject to the GloBE Rules if its annual consolidated revenues, as reflected in its consolidated financial statements, equal or exceed EUR 750 million (approximately KWD 250 million) in at least two of the four fiscal years immediately preceding the tested fiscal year. This threshold is a deliberate design choice by the OECD/G20 Inclusive Framework, a coalition of over 160 countries, including Kuwait. By setting this high bar, the aim is to minimize the compliance burden on smaller businesses and focus enforcement efforts on the companies with the largest global footprints and the greatest potential for profit shifting. It ensures that the spirit of Pillar Two – addressing large-scale base erosion and profit shifting – is maintained. Beyond the numbers: What constitutes an 'MNE group'? It is important to understand that the GloBE Rules apply to an 'MNE Group.' This is not just a single company; it encompasses all the entities that are part of a multinational enterprise and are included in its consolidated financial statements for accounting purposes. This broad definition ensures that the rules capture the entire structure of a large global business, including its subsidiaries, branches, and even permanent establishments (PEs) operating in different jurisdictions. For instance, if a large international corporation has its headquarters in one country and operates through a subsidiary in Kuwait, that Kuwaiti subsidiary would be considered a 'Constituent Entity' within the MNE group and would be subject to Kuwait's Pillar Two rules if the overall group meets the revenue threshold. Key exclusions: Who is not affected? While the scope is broad for large MNEs, the GloBE Rules also provide for specific exclusions. These are important for clarity and to avoid unintended consequences for entities that serve a public or specific policy purpose. Generally, the following entities are excluded from the application of the GloBE Rules, even if they are part of an MNE group that meets the revenue threshold: •Governmental entities: Public bodies, ministries, and state-owned enterprises that fulfill governmental functions. •International organizations: Bodies established by international treaties or agreements (e.g., the United Nations). •Non-profit organizations: Entities whose primary purpose is charitable, religious, educational, or similar, and whose income is not primarily for the benefit of private individuals. •Pension Funds: Entities that are established and operated exclusively or almost exclusively to administer or provide retirement benefits and ancillary or incidental benefits to individuals. •Investment funds that are Ultimate Parent Entities (UPEs): Certain types of investment funds, when they are at the top of an MNE group's ownership structure. •Real Estate Investment Vehicles (REIVs) that are Ultimate Parent Entities (UPEs): Similar to investment funds, specific REIVs are excluded when they are the UPE of an MNE group. These exclusions reflect a policy decision to exempt entities that are not engaged in commercial activities aimed at generating private profit in the same way as typical MNEs. Their inclusion would complicate the rules unnecessarily and would not align with the core objective of ensuring large commercial enterprises pay a minimum tax. The 'de minimis' exclusion: A practical simplification Beyond the fundamental exclusions, the GloBE Rules also incorporate a 'de minimis exclusion.' This practical simplification is designed to reduce the compliance burden for MNEs in jurisdictions where their operations are very small. If, in a particular jurisdiction, an MNE group has: •Average GloBE revenue of less than €10 million, and •Average GloBE Income or Loss that is either a loss or less than €1 million (computed on a three-year average basis), then the top-up tax for that jurisdiction is considered to be zero. This means that even if the Effective Tax rate (ETR) in that small jurisdiction falls below 15 percent, no top-up tax would be due, simplifying reporting for MNEs with minor presences in many countries. Kuwait's strategic move: The qualified domestic minimum top-up tax (QDMTT) This brings us to a crucial aspect for Kuwait: The implementation of a Qualified Domestic Minimum Top-up Tax (QDMTT). Kuwait's Law 157/2024 explicitly incorporates a QDMTT (also sometimes referred to as a Domestic Minimum Top-up Tax, or DMTT). This is a strategic and highly beneficial decision for our nation. Under the GloBE Rules, if a constituent entity of an MNE group is located in a country where its effective tax rate is below 15 percent, a top-up tax is due. Without a QDMTT, this top-up tax would primarily be collected by the parent company's jurisdiction under the Income Inclusion Rule (IIR) or, as a backstop, by other countries under the Undertaxed Profits Rule (UTPR). IIR and UTPR are the subject matter of our next article, so please stay tuned! By implementing a QDMTT, Kuwait ensures that any top-up tax arising from low-taxed profits of MNE entities within Kuwait is collected by Kuwait itself. This means the revenue stays within our borders, directly benefiting our national budget and allowing for greater investment in our public services and infrastructure. It is about securing our rightful share of the tax base generated by economic activity on our soil, rather than letting it be collected by another country. Estimating the impact in Kuwait While specific official figures on the exact number of MNEs in Kuwait that will be subject to Pillar Two are still emerging, preliminary estimations suggest a meaningful impact. Recent statements from the Ministry of Finance indicate that the MNEs Tax Law is expected to apply to approximately 20 Kuwaiti-headquartered companies, 25 GCC-headquartered companies, and around 255 foreign companies with a presence in Kuwait. These numbers, while subject to refinement, highlight that a significant segment of the large corporate landscape in Kuwait will be directly impacted by these new rules. This also underscores the importance of the QDMTT. For these hundreds of in-scope MNEs, any shortfall below the 15 percent minimum effective tax rate on their Kuwaiti profits will now lead to a direct tax payment to the Kuwaiti tax authorities. This mechanism ensures that the benefits of Pillar Two are realized domestically. A fairer future for Kuwait's economy In effect, the meticulous design of the GloBE Rules' scope, coupled with Kuwait's proactive implementation of a QDMTT, marks a pivotal moment for our nation's economic future. By clearly defining who is in scope and who is not, the rules target significant global players while providing necessary carve-outs and simplifications. For Kuwait, this translates into: •Secured Revenue: Our ability to collect top-up tax on low-taxed profits within our jurisdiction. •Enhanced Fairness: A level playing field for our local businesses, ensuring large MNEs contribute their fair share. •Global Alignment: Strengthening Kuwait's position as a responsible and cooperative member of the international financial community. As MNEs in Kuwait and globally adapt to these new realities, the focus on the scope of the GloBE Rules reminds us that this is a precisely targeted, internationally coordinated effort to build a more equitable and sustainable global tax system, with direct and tangible benefits for countries like Kuwait. Note: Hassan M Abdulrahim is a Senior Instructor (Business) at Canadian College Kuwait and CEO & Co-founder of Visionary Consulting Company. Contact him at [email protected]
The Guardian
02-07-2025
- Business
- The Guardian
The G7 has once again put multinationals' profits over the interests of people
The US Treasury just made a deal with the other G7 countries that global minimum taxes that were already agreed upon will not apply to American companies. The G7 governments caved under intense pressure from President Donald Trump and lobbying from multinationals in Washington, London, Brussels, and beyond – just as India, and now, sadly, Canada have caved on digital taxation. Years ago, the international community recognised that too many global companies were not paying their fair share of taxes, and some weren't paying taxes to the country where the economic activity actually occurs. The complex agreement that emerged in 2021 at the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting comprised two pillars; only Pillar Two, a global minimum corporate tax, has been adopted. (The other pillar allocated taxation rights among countries and spurred opposition from developing countries and the US.) While there has been a global consensus on the need for such a minimum, the version the US adopted during Trump's first presidential term was different, and weaker, than that of the rest of the world, allowing multinationals to 'make up' for what they didn't pay in tax havens with the 'extra' they paid in the US or other high-tax jurisdictions. While far from perfect, Pillar Two was a first attempt to ensure a minimum tax rate of 15% on the profits of multinationals everywhere, a crucial step to end harmful tax competition between countries. There were, of course, some carve-outs and exemptions, which lowered the effective rate somewhat below 15%. And the 15% rate was already lower than the rate imposed by many developing countries; it should have been higher, and the carve-outs smaller. Still, the Pillar Two deal halted the race to the bottom, whereby countries offered lower tax rates to attract businesses to their jurisdictions. For the world as a whole, this race didn't generate much new investment; the real winners were the rich corporations who pocketed the savings from paying almost no taxes at all in some countries. But once again, G7 governments have decided to put multinationals' interests before the interests of developing countries, small and medium-size businesses (which can't avail themselves of the shenanigans that multinationals have found so profitable), and their own citizens – who, as a consequence, will pay higher taxes. By exempting US multinationals from Pillar Two, this deal will allow some to continue to benefit from zero or near-zero taxes on profits they book in low-tax jurisdictions or tax havens such as Puerto Rico and the Cayman Islands. This will make them more competitive than non-US multinationals. Because modern multinational corporations are willing to move their nominal headquarters to wherever they get the most favourable tax treatment (and other goodies), with the real economic activity occurring elsewhere, giving US companies preferential treatment incentivises companies to move their official headquarters to the US. This is another sad example of a race to the bottom. By acceding to US demands, the G7 deal risks undermining the worldwide implementation of the minimum tax. It also makes a mockery of the inclusiveness of the OECD/G20 Inclusive Framework. There was a pretence that the new global framework was crafted by more than 140 countries working together. To be sure, many developing countries complained this was an unfair agreement for them and that powerful countries did not listen to their concerns. Now that facade has crumbled. The non-G7 countries, including dozens of emerging markets and developing countries, are now being asked to rubber-stamp a decision imposed on them by just one country. Pillar Two should be strengthened, not gutted. It currently applies only to large multinationals (with a global turnover at or above €750m), and the global minimum tax rate of 15% is set very low. The Independent Commission for the Reform of International Corporate Taxation has always advocated a minimum rate of at least 25%. According to some estimates, Pillar Two's minimum tax would have yielded between $155bn and $192bn (£112bn-£140bn) annually in additional global corporate income tax revenue. While this is a significant amount, a minimum rate of 25% could generate more than $500bn a year in additional revenue. In a world facing converging crises of inequality, climate change, and underfunded public services, leaving such substantial resources on the table is fiscally irresponsible and morally indefensible. Pillar Two represented a starting point – a global floor on corporate taxation that could have curbed the race to the bottom and restored some degree of tax justice. The G7's decision to let US multinationals off the hook weakens even that modest floor and sends the wrong message to the rest of the world. Just two weeks ago at the UN, there was a global consensus about the need to strengthen international tax cooperation and to implement progressive tax systems, and a large majority of countries voted for and support ongoing negotiations toward a UN framework convention on international tax cooperation. But the US government recently walked away from the UN negotiations, stating that the goals of the proposed UN convention 'are inconsistent with US priorities and represent an unwelcome overreach'. In the adoption of the 'Compromiso de Sevilla,' the outcome document of this week's UN Fourth International Conference on Financing for Development (FfD4), the US was the only major country that was absent. Allowing the US to bypass the already modest Pillar Two rules not only undermines multilateralism; it also flies in the face of the commitments that have been made, and further deepens the inequity in global tax governance. The members of the OECD/G20 Inclusive Framework should reject the deal made at the G7. The US must not be allowed to dictate global policy. It is powerful, but still represents less than 20% of global GDP. Countries meeting in Seville for FfD4 can either accept the US undermining every effort to ensure multinationals pay their fair share, or redouble efforts to create a new international tax system at the UN that works for all. For the sake of the world economy and people everywhere, they should do the latter. Joseph E Stiglitz is a Nobel laureate in economics, a university professor at Columbia University and a former chief economist of the World Bank. José Antonio Ocampo is professor at Columbia University and former finance minister of Colombia. Jayati Ghosh is professor of economics at University of Massachusetts Amherst. Ⓒ Project Syndicate
