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| 16 April, 2018

Kuwait's tax on remittances discourages FDI inflow: analysts

Tax on remittances could be hard to enforce and increases costs, analysts say

Kuwaities crowd to the small window of a money exchange kiosk to change Kuwaiti dinars.

Kuwaities crowd to the small window of a money exchange kiosk to change Kuwaiti dinars.

REUTERS/Stephanie McGehee

As the Kuwait Parliament’s financial committee approved bills earlier this month stipulating that expatriates’ remittances should be taxed, analysts voiced concerns that the move could lower inflows of foreign direct investment into the country and harm Kuwait’s financial position as an open market.

Although the bill has been opposed by the legislative committee, it will be referred to the government and, if approved, would become law if accepted by the cabinet, making Kuwait the first Gulf country to impose a tax on remittances.

The proposed bills set a 1 to 5 percent tax on remittances based on the amount of money being transferred. Proceeds of 70 million Kuwait dinars per year are expected to be raised from the fees on remittances.Remittances below 99 Kuwaiti dinars would incur a 1 percent tax, while those above 500 Kuwaiti dinars would incur a maximum of 5 percent.

Eid Alrashidi, managing partner at FGA Partners, a financial services firm that provides private capital to companies in Kuwait, highlights three potential problems with taxing expat remittances, with the first related to implementation.

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“Such policy is hard to implement and causes (a) black market to thrive in currency exchange market. This is the case with other countries that implemented capital controls like Morocco and Egypt before they floated currency,” he told Zawya by email.

“It’s also harder to enforce because it takes the person making the transaction into consideration. Expats will rely on local citizens to do their remittances for them and avoid paying taxes, “he added.

Even the Central Bank of Kuwait stated concerns that the tax would create a parallel black market, harm the efforts to combat money laundering, and weaken the state’s financial position.

The second problem is that such a tax restricts capital movement and is effectively a capital control mechanism, according to Alrashidi.

“Such actions causes capital to flee (the) local market and becomes a deterrent for new capital coming to the country. Therefore, it will reduce foreign direct investments in Kuwait. It will also give perception that Kuwait is (a) closed economy.  Individual foreign investors will decide against bringing money to Kuwait,” he added.

Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre known as Markaz, issued a research note saying that the impact of taxing expats’ remitttances would be felt on “businesses operating in Kuwait in the form of higher salaries and wages, and on Kuwaiti nationals in the form of higher expenses to avail expat services.”

The third issue is related to Kuwait’s competitiveness, according to Alrashidi.

“Expat professionals will decide to go to countries with less or no controls on remittances. Therefore, we will not be able to attract all the talent we require. Some high skill jobs will be harder to fill and skilful expats will demand higher compensation to offset new taxes,” he said.

The tax would also constrain the supply of high-income, highly-skilled workers who would be discouraged from taking long-term employment in Kuwait, according to Marmore MENA. This would consequently be counterproductive to the Gulf state’s plan to turn into a knowledge-based economy, the note added.

According to Kuwait economist Mohammad Ramadhan, taxing remittances is generally imposed in labour-exporting countries, where it was levied on incoming remittances, and mostly proved its failure because it stimulates the creation of black markets.  For labour-importing countries like Kuwait, it is even more difficult to impose because it can be easily evaded either through illegal channels or through citizens.

“The alternative solution in my opinion is very simple and ensures the legal collection of the fees with less damages overall. Imposing a fee of around $6 to $7 on business owners as a monthly fee for every expatriate employee would achieve almost the same amount of targeted revenue by the remittance tax of 70 million Kuwaiti dinars annually,” Ramadhan told Zawya in a telephone interview.

Ramadhan notes that such an alternative fee on expat labor would not be a significant burden on the business owners, but would not entail the risks of black markets, money laundering, tension with labour exporting countries or go against ratified global human rights agreements.

While no GCC country has imposed a tax on remittances, Saudi Arabia has levied a fee on private sector foreign workers, where 100 riyals ($26.60) per month is to be paid for every dependent living in the country.

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