logo
Unpacking the scope of GloBE rules: Who pays and why Kuwait benefits

Unpacking the scope of GloBE rules: Who pays and why Kuwait benefits

Kuwait Times08-07-2025
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]
Orange background

Try Our AI Features

Explore what Daily8 AI can do for you:

Comments

No comments yet...

Related Articles

The importance of GloBE income for Kuwait
The importance of GloBE income for Kuwait

Kuwait Times

time3 days ago

  • 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

Kuwait Amir receives Saudi Crown Prince's invite to 2025 FII9 conf.
Kuwait Amir receives Saudi Crown Prince's invite to 2025 FII9 conf.

Kuwait Times

time4 days ago

  • Kuwait Times

Kuwait Amir receives Saudi Crown Prince's invite to 2025 FII9 conf.

KUWAIT: Kuwait's recent enactment of Law 157/2024, alongside its executive regulations, has set the stage for a new era of corporate taxation. This legislation, which implements the BEPS Pillar Two initiative and the GloBE Model Rules, is built up... 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...

population reaches 5.098,539
population reaches 5.098,539

Kuwait Times

time4 days ago

  • Kuwait Times

population reaches 5.098,539

KUWAIT: Kuwait's recent enactment of Law 157/2024, alongside its executive regulations, has set the stage for a new era of corporate taxation. This legislation, which implements the BEPS Pillar Two initiative and the GloBE Model Rules, is built up... 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...

DOWNLOAD THE APP

Get Started Now: Download the App

Ready to dive into a world of global content with local flavor? Download Daily8 app today from your preferred app store and start exploring.
app-storeplay-store