Kuwait evolved as a major regional trading centre in the 18th century and became increasingly importantas a result of the unstable political situation in Persia during the 18th and 19th centuries and the war between the Persian and Ottoman Empires. Al-Sabah (1980) argues that these political problems forced a number of trading families to leave their home countries and move to Kuwait, re-establishing their business activities there and playing a significant role in the country’s development. As result, the East India Company moved its offices from Iraq to Kuwait, and in turn became the firm’s southern terminal.
Prior to the discovery of oil, the Kuwaiti economy was based on fishing and the export of pearls (Al-Sabah, 1980). According to Al-Yaqout (2006) these activities were mainly undertaken by small family companies with limited capital resources; in fact, the businesses were able to finance their investment needs without any recourse to external sources (Al-Sabah, 1980). Therefore, accounting operations were very simple, confined to operations recording the quantities sold and the quantities purchased by merchants. However, there was no legal requirement for accounting and auditing, or indeed any business-oriented regulations. During this period of time before the discovery of oil, accounting was characterised by its simplicity (Alanezi, 2006). At this time, the Kuwait government played
a very low key role in the affairs of small family-run businesses and so corporate and personal taxes were the main source of national revenue (Al-Yaqout, 2006).
The discovery of oil in 1938 led to dramatic changes in the Kuwaiti economy, particularly following the export of the first shipment eight years later. Since then oil has become the nation’s dominant economic resource. As a consequence, a large proportion of the Kuwaiti people were employed directly or indirectly in the industry, while the country earned substantial revenues from the taxes and royalties paid by the firms that extracted the oil (Al-Shamali, 1989).
In 1958, further concessions were given to foreign companies planning to extract oil; such a concession was signed with the Arabian Oil Company, a subsidiary of a Japanese trading firm (Al-Omar, 1990). In 1960 the Kuwait National Petroleum Company (KNPC) was established as a joint venture between the government and the private sector.5 To the present day, this organisation assumes responsibility for selling Kuwaiti oil in both local and international markets (Almujamed, 2011).
As a result of developments in the economy of Kuwait during the period between 1938 and 1959, and since no accounting regulations were announced during this period, it was reasonable to suppose that among those immigrants who brought with them the accounting practices and regulations which applied in their home countries (Al-Mousawi, 1986;
Alanezi, 2006). Such exporting of accounting regulations and practices is common in developing countries (Roberts, et al. 2008) where accountants have different backgrounds and knowledge that can be expected to trickle down into accounting disclosure practices and contribute to the diversity of both accounting and auditing practices, as evidenced in Kuwait at that time. During this period, Kuwaiti organisations began to incorporate and the
5 Initially, Kuwait held a 60% stake in the KNPC and the rest was owned by the private sector; later on, the government bought the 40% share from the private sector and assumed ownership of the whole company (Al-Yaqout, 2006).
first accounting firm emerged in 1946 by British professionals (Alanezi, 2006). A few years later, in 1952, the National Bank of Kuwait (NBK) was set up as the first Kuwaiti joint-stock company. Two years later, the National Kuwaiti Cinema Company was established, by the establishment of the Kuwaiti Oil Tankers Company. Several expansions in the industrial sector of Kuwait (the establishment of the above Kuwaiti companies, the work of foreign oil companies in Kuwait and the emergence of the first accounting firm in Kuwait) led the Kuwaiti authorities to recognise the importance of regulation and supervision of corporate activities which led them initially to draw up several tax laws (Alanezi, 2006).
Table 2.1 summarises Kuwaiti Gross Domestic Product (GDP) data over the years 1962-2011. The Kuwaiti economy grew rapidly during the 1950s and 1960s as oil production increased, but the speed of growth rose even further in the 1970s, as a result of the high global oil price; between 1970 and 1980 GDP increased dramatically from $2.87 billion to
$28.63. GDP fell back as a result of the first Gulf war, before rising again dramatically in the 1990s following the end of the second Gulf war. By 2008, it had reached $148.78 billion as a result of further increases in oil prices (Almujamed, 2011). Since then GDP has fluctuated; in 2009 it decreased by 28.8%, however, it rose in both 2010 and 2011 by 17.4% and 42% respectively (World Bank, 2011).
Table 2.1: Kuwaiti GDP (in US$ billion)
Note: The table reports Kuwaiti GDP in $ billions and % growth rates.
Income Tax Laws
As Al-Anzi (2000) notes, Kuwaiti companies do not have to pay taxes on their income, although there is no formal law exempting Kuwaiti firms from paying income taxes. In the Kuwaiti business community there is a general acceptance that became common practice whereby only foreign companies are required to pay income taxes. However, Kuwaiti joint-stock companies are required to pay 1% of their annual profits after their transfer to the statutory reserve and offset loss carry-forwards to the Kuwait Foundation for the Advancement of Sciences (KFAS). This foundation works to support and develop scientific research. The KFAS provides sponsorship and grants for different types of scientific research projects in the state of Kuwait. Kuwaiti companies are required to pay 2.5% of their net annual profits as a national labour support tax, irrespective of whether such annual profits are distributed to shareholders (Alanezi, 2006). However, tax is not an important consideration in Kuwaiti companies, because it was at the time that foreign oil companies were dominant in the economy that income Tax Laws No. 3/1951 and No. 3/1955 were
introduced. They were specifically designed to target the foreign oil companies and other firms that conducted business in Kuwait (Alanezi, 2006).