Critics warn decision may lead to parallel markets

KUWAIT: Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre "Markaz", recently released a research note titled 'Remittance Tax in Kuwait: Is it coming finally?'. The note discusses the remittance tax bill that is being currently debated and weighs 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 1 percent for remittance under KD 99 and goes all the way to 5 percent for remittance beyond KD 500. Remittance outflow from Kuwait in 2016 stood at KD 4.6 billion ($15.3 billion) with nearly 27 percent of that sent to India, followed by Egypt at 18 percent, Bangladesh at 7 percent and Philippines and Pakistan at three percent each.

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.

Lack of clarity

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 laborers 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 laborers.

Impact on businesses

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 percent of the remittance was sent to India amounting KD 1.1 billion, followed by Egypt with KD 750 million (18.1 percent), Bangladesh with KD 290 million (seven percent), Philippines with KD 250 million (6.1 percent) and Pakistan with KD 220 million (5.3 percent).

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 100 riyals ($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 4,800 riyals ($1,280) per dependent annually.

Similar to Kuwait, Bahrain is also proposing to impose BD 1 fees on remittances below BD 300 and BD 10 for all money transfers exceeding the amount of BD 300. If implemented it would add at least BD 90 million to the state exchequer. Currently, around BD 2.5 billion annually is being transferred abroad by expatriate workers in Bahrain."