Under Tax Law 2/2008, both the definitions of ‘taxpayer’ and ‘body corporate’ have not been changed; they appear exactly the same as they were in Income Tax Decree 3/1955416. However when it comes to the definition of agent for tax purposes, the amendments in Tax Law 2/2008 differ from Tax Decree 1955. Here, Tax Law 2/2008 clearly and explicitly exempts a distributor417 from the meaning of ‘agent’ for income tax purposes. Article 2 (f) of Tax Law 2/2008 provides: “The term ‘Agent’ mentioned in (e) means, the authorized person by his principal to practice the business or trade or any of the activities provided in article (1) of
409
Ernst & Young (2010), World Wide Corporate Tax Guide, 2010, p. 57.
410
Association of International Life Office (2007), Bahrain Tax Facts, pp. 1-2.
411
KPMG’s International Tax Centre (2006) KPMG’s Corporate Tax Rate Survey, p.23.
412
Foreign trade Barriers, The Office of the United States Trade Representative, p. 461.
413
Ernst & Young, Middle East Tax Review, 2010, p. 2.
414
In a view that revenue brought into the state by FDI can possibly create a source of income.
415
See pp. 142 - 145.
416
The definition of Body Corporate in Article 2 (e) of the 2008 amendments is the exact replica of 2 (f) in the Income Tax Decree 3/1955, see definition of body corporate on pp. 109-110 and definition of taxpayer on pp. 109-112.
417
The definition of the Kuwaiti distributor in Article 2 (f) Tax Law 2/2008 is different from the definition of ‘distributor’ in Article 286 Commercial Law 68/1980, see p. 115.
139 this law or to contract with a complied agreement with third party on behalf of his principal and for his account and within the authorized power given to him, that the profits of the Kuwaiti merchant, of his sale to some goods he bought and transfer to his own account shall not be subject to this tax.”418
So the definition of agent in the 2008 amendments differs from the definition of agent in Tax Decree 3/1955 in that it is more expansive then the interpretative notes of Tax Decree 3/1955 which defined an agent as follows:
“An agent is a person authorized by a principal to enter into a binding contract with a third party on the principal’s behalf within the scope of the authority”.419
The above definition of ‘agent’ in Tax Law 2/2008 states the functions which the agent can carry out when authorized by his principal i.e. business or trade or any of the activities provided for in Article (1) of Tax Law 2/2008. Such activities include concluding contracts, selling, leasing, granting franchises, and exploiting trademarks, patents design or copyrights, other activities include entering into representation agreements, commercial mediation, undertaking industrial and commercial businesses, disposing of assets, the selling of properties and goods, the leasing of property and finally rendering any services. To this point, the definition of ‘agent’ in Tax Law 2/2008 seems to coincide with the previous definition of agent in Tax Decree 3/1955, although the new definition adds more detail by explicitly referring to the commercial and industrial activities listed in Article 1 that can fall within the authority of the agent.
A confusion similar to that in Income Tax Decree 1955 on whether a natural person can serve as a national agent for a foreign enterprise420 or not, rises again
418
Article 2 (f) of Tax Law 2/2008.
419
The definition of agent in the interpretative notes of Tax Decree 3/1955, p. 9.
420
140 in the 2008 amendments, as Article 2 (e) of the amendments repeats the same mistake as 2 (f) of Decree 3/1955 by requiring the agent to be a body corporate421: “The term body corporate ... includes any body corporate carrying on trade or business in Kuwait... through an agent, provided such an agent is a body corporate..” 422
However 2 (f) of the 2008 amendments provides that the term agent in (e) means an authorized person , without specifying whether that person is natural or legal. Then there are the Bylaws of the 2008 amendments, where Article 1 (3) provides that an agent is:
“Every and each natural or corporate person authorized by his principal to carry out business, trade or any of the activities stipulated in the law or to enter into a binding agreement with a third party on behalf and for the account of his principal within the limits of his powers...” 423
The bylaws contradict Article 2 (e) of the 2008 amendments by asserting that a natural person can in fact serve as a national agent for a foreign enterprise carrying on trade in Kuwait. This confusion and contradiction can be attributed to the poor wording of the amendments which will be underlined again below424.
What is particularly interesting in the new definition of ‘agent’ is whether the legislator has succeeded in distinguishing between an agent and a distributor which under the previous Tax Decree 3/1955 was a matter of debate until Ministerial Resolution 287/2006 was issued425. Is it possible now under the new definition to identify clearly and easily when an agency is established for tax purposes, with the consequent effect this may have for foreign enterprises?
421
See p. 122.
422
Article 2 (e) of the 2008 amendments.
423
Article 1 (3) of the 2008 Amendments Bylaws.
424
See p. 141.
425
141 In this respect there may be some uncertainty. Although Article 2 of Tax Law 2/2008 clarifies that a national merchant buying foreign products for his own account and reselling them in Kuwait for his own account will not be an agent for tax purposes, this fact can be easily concluded as it has been established426 that national companies are excluded from income tax in practice, even when such a company is serving as a national agent for a foreign enterprise, although in this last case the foreign principal is liable for income tax.
The position of a foreign supplier under Tax Law 2/2008 has not changed either; the foreign company is not taxed on the profits it makes when it supplies a national distributor with products while the distributor sells the product to his own account in Kuwait and bears all expenses vital to the selling the product i.e. marketing and promoting, etc. This is the same practice as under Tax Decree 3/1955, where as long as the distributor does not have the authority to conclude contracts on behalf of his foreign principal, the latter will remain excluded from tax in Kuwait427. However, the later part of Article 2 (f) of Tax Law 2/2008 which exempts the national distributor from agency status is poorly drafted:
“...that the profits of the Kuwaiti merchant of his sale to some goods he bought and transferred to his account shall not be subject to this tax.428”
Despite the poverty of the drafting, this final part of Article 2 (f) of Tax Law 2/2008 appears to restate the intent of the 2006 Ministerial Resolution that domestic distributors (Kuwaiti merchants) do not qualify as agents for income tax purposes.429 Also, although this part of Article 2 (f) of Tax Law 2/2008430 appears 426 See p.100. 427 See pp. 122 - 136. 428
Article 2 (f) of the 2008 Amendments.
429
142 to exempt the distributor, it does not describe him (the Kuwaiti merchant) as a ‘sole distributor’, which is how the distributor is defined in Commercial Law 68/1980:
“a distributor promotes and distributes a product in a certain territory, as long as he is the sole distributor in that territory.”431
Not requiring that a distributor be the ‘sole distributor’ may allow more than one Kuwaiti merchant to buy and sell the same foreign principal’s product on their own account in Kuwait and still avoid being classified as an agent in Kuwait for tax purposes. What could also result from this broad exemption is that a foreign principal may supply products to more than one Kuwaiti merchant (distributor) and make profits without bearing any tax liability in Kuwait, on the basis that he (the foreign principal) is only a supplier and his relationship with the Kuwait merchant is merely a non taxable distribution relationship.
Neither does the definition of agent in the bylaw of Tax Law 2/2008432 mention the sole status of the distributor, thus echoing Article 2 (f) of Tax Law 2/2008 by not requiring that a distributor be a sole distributor.
Ministerial Resolution 287/2006 mentioned earlier433, clarifies the difference between agent and distributor for the purpose of excluding the ‘sole distributor’ as an agent for tax purposes.434
430
See p.138.
431
Article 286 of Commercial Law 68/1980.
432
See p. 139 for definition of agent in Article 1 (3) of the 2008 Bylaws.
433
See p. 125.
434
Resolution 287/2006 provides:“the agent in this law is referred to the person authorized by the principal to conclude agreements on his behalf with a third party within the given authorities, which will exclude the sole distributor from the scope of implementation of the income tax decree.”
143 The second significant reform brought by the 2008 amendments is replacing the progressive tax rate under the Tax Decree with a single flat tax rate of 15%.
4.6.2 The Tax Rates Before and After the Amendments of Tax Law 2/2008: