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