KPMG’s Middle East and South Asia (MESA) e-guide was recently published, providing a tax overview of GCC countries, wider Middle East countries and South Asian countries.
The reported countries include:
- Saudi Arabia
- Sri Lanka
The report provides a summary of Direct Taxes, including branches/permanent establishments, Tax Treaties, Indirect/Withholding taxes, Accounting rules including loss carryovers, and details about each country’s tax rules and requirements.
The guide is a handy reference, especially as the included countries are experiencing significant changes in their tax rules and guidance.
Kuwait’s Department of Inspections and Tax Claims (DIT) has introduced its interpretation of a Virtual Service PE, notwithstanding its nonconformity with the physical presence standard and its double tax treaties in accordance with OECD’s Model Convention.
Unfortunately, this concept is not new in the Middle East and it is hoped that other countries will not follow this breakaway interpretation.
EY’s Global Tax Alert provides additional details into this development:
- The Virtual Service PE concept takes into account only the duration of the contract itself.
- Work extending beyond the tax treaty threshold of 183 days will be presumed to have created a Service PE.
- The DIT takes the position that a nonresident is deemed to have a PE in Kuwait, particularly, if the following conditions are met:
- A nonresident furnishes services to an entity in connection with the latter’s activity in Kuwait.
- The period during which such services are rendered according to the contract, exceeds the threshold period under the applicable tax treaty.
The immediate implication of the DIT’s current approach to a “Virtual Service PE” is that the applicability of tax treaty-based income tax exemptions with respect to cross-border services has become highly uncertain.
Accordingly, all legal agreements and provision for services to Kuwait (disregarding the physical standard) should be reviewed for potential disputes based on a Virtual Services PE argument. Practically, it may also be difficult to obtain tax treaty relief from double taxation.
The recent issue of PwC International Tax News highlights a recent development for taxpayers operating in Kuwait whereby they can retain 100% ownership rights. This is a significant development in the Middle Eastern region signaling the foreign direct investment initiatives elicited by the Kuwaiti administration.
Additionally, the new regime introduces income / customs tax benefits that can be availed of.
Tax and customs tax incentives are of growing importance around the world. MNE’s should have a proactive structure in place that focuses attention on these opportunities. Most importantly, tax and customs should be integrated re: tax disputes and appeals in the future coupled with the initial attraction of tax savings.