Monday 09, April 2018 by Jessica Combes

Remittance tax in Kuwait could expel highly qualified labour

 

Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre (Markaz), recently released a research note titled Remittance Tax in Kuwait: Is it coming finally?, which discusses the remittance tax bill that is being currently debated and weights the implications of introducing remittance tax from a wider economic perspective.

 

Marmore report stated that the Parliamentary Financial and Economic Affairs Committee of Kuwait has approved bills for imposing tax on remittances of expatriates, based on their income level. The tax rate suggested starts at a modest one per cent for remittance under KD99 and goes all the way to five per cent for remittance beyond KD500.

Remittance outflow from Kuwait in 2016 stood at KD 4.6 billion ($15.3 billion) with nearly 27 per cent of that sent to India, followed by Egypt at 18 per cent, Bangladesh at seven per cent and Phillipines, and Pakistan at theree per cent.

The bill approved by the financial committee has been opposed by the legislative committee citing constitutionality. If the draft bill is approved, it will then be referred to the government and in case if it is accepted by the cabinet, it would become a law. Kuwait would then be the first country in the GCC region to impose remittance tax.

While the bill discussed about imposing taxes on remittances, it failed to clearly define the category of people who will be paying the taxes. The bill in its current form also failed to describe what would constitute as remittance, would it include income or even loans availed from banks that is being sent abroad. Lack of clarity and proper definition could hinder the upcoming debate in the parliament.

Critics of the bill have warned that introduction of taxes on remittances would lead to mushrooming of alternative channels or parallel black market to route money back home. The Central Bank of Kuwait had also voiced similar concerns in the past.

Higher taxes for high-income, knowledge workers could be dissuaded from pursuing long-term stint in Kuwait and this could constrain their supply. This may be counterproductive at a time when Kuwait strives to transform itself as knowledge-based economy and has a large scale need for highly skilled professionals.

Unskilled labourers and semi-skilled workers whose wages are low and fall under the lower tax bracket would also stand to lose on the amount of money that they could save. A problem exacerbated by the rising cost of living, especially at a time when fuel and utility costs are on the rise. This could result in demand for higher wages across workers like electricians, plumbers, mechanics, and construction labourers.

Overall, the impact of remittance taxes on expatriates 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.

Kuwait is currently ranked seventh among the countries from which foreign money transfers are done. Out of the total foreign remittance, 26.6 per cent of the remittance was sent to India amounting KD1.1 billion, followed by Egypt with KD750 million (18.1 per cent), Bangladesh with KD290 million (seven per cent), Philippines with KD250 million (6.1 per cent) and Pakistan with KD220 million (5.3 per cent).

Elsewhere, UAE imposes a Value Added Tax (VAT) on all expatriate remittances. The VAT on remittances is not a tax on the remittances themselves but is specifically placed on remittance services implying that the VAT will apply only to the fee charged rather than the amount of funds being remitted.

Saudi Arabia in contrast imposes an ‘expat levy’ which requires foreigners working in the private sector to pay a family tax of SAR100 ($26.60) per month for every minor or unemployed relative living in the country. An estimated 11 million foreigners work in the Saudi private sector, with 2.3 million of their dependents based in the Kingdom, according to the Public Authority for Statistics. The tax is expected to increase every year until 2020, reaching SAR4,800 ($1,280) per dependent annually.

Similar to Kuwait, Bahrain is also proposing to impose BD1 fees on remittances below BD300 and BD10 for all money transfers exceeding the amount of BD300. If implemented it would add at least BD90 million to the state exchequer. Currently, around BD 2.5 billion annually is being transferred abroad by expatriate workers in Bahrain.

 

 

  

Features & Analyses