Problems relating to Trade and Investment on Kuwait

14. Taxation Systems
Issue	Issue details	Requests	Reference

(1) Inadequate Provisions as to "Taxable Income attributable to Permanent Establishment"

- In January 2009, agreement in principle on tax treaty between Japan and Kuwait was reached, and in February 2010, the contents of tax treaty were disclosed. However, as to taxable income, it merely states: "taxable income attributable to permanent establishment". Thus, in the context of turnkey work such as plant construction in Kuwait, imported equipment manufactured outside Kuwait could be regarded as taxable in Kuwait.
In light of the prevailing circumstances in Kuwait, certain countries including Switzerland, Germany, Italy, the Netherlands, and India expressly stipulate in the tax treaty, "Taxable income attributable to permanent establishment is restricted only to the activity in the country where construction of the object article takes place". Consequently, these countries stand in a better bargaining position in international tender for plant construction, etc. ROK concluded tax treaty with Kuwait since a long time ago. However, it did not include the provisions relative to definition on taxable income attributable to perm6anent establishment. As a result an ROK enterprise has faced problems with the Kuwait taxation authorities and the bilateral talk takes place on the revision of the tax treaty, according to information source.

- Before the Japan/Kuwait tax treaty enters into force, it is requested that GOJ carefully takes corrective actions as necessary.
In addition, in negotiating new tax treaty or its revision with other countries, it is requested that GOJ:
-- gathers information from private business sectors already entering the countries,
-- listens to the experts' advice, and
-- researches/grasps fully the special characteristics of the individual negotiating countries.

- Japan-Kuwait Tax Treaty

(2) Irrational Retention System

- In a construction project (under the all in contract, including procurement of design, equipment and materials, and construction) for petro-refinery, petro-chemical, natural gas treatment, liquid natural gas (LNG) plant, etc., taxation authorities enforces retention system, whereby pending acquisition of no objection certificate, and tax clearance certificate (so called notice of completing tax payment obligations), the taxation authorities retains a portion (5% in Kuwait and 3% in Qatar) of the contract amount, giving rise to disbenefit of time in regard to capital fund collection.

- It is requested that GOK refrains from applying the retention system described in the left column.

(3) The Broad Scope of Object of Taxation

- In a plant export contract (all in contract for design, procurement of equipment and materials and construction), the total contract amount is taxable. Consequently, all services rendered abroad (for example, in Japan and third countries) are taxable in Kuwait. On the other hand, ROK and some other countries successfully negotiated tax free treatment on services rendered abroad, placing Japan in less favourable position for plant export from Japan in competing against ROK and other countries for which tax is exempted.

- In a plant export contract (all in contract for design, procurement of equipment and materials and construction), it is requested that all services rendered abroad (for example, in Japan and third countries) are not taxable in Kuwait.
- It is requested that GOJ negotiates with GOK to incorporate into the tax treaty a provision that expressly deducts income attributable to the permanent establishment (PE) only to the portion constructed in the country in concern (Kuwait), to ensure that Japanese enterprises may compete on an equal footing with other countries, such as ROK.

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