Are Kuwaiti MNE Groups ready for Pillar Two?

November 2024, Kuwait: In November 2023, Kuwait joined the OECD/G20 Inclusive Framework on BEPS, collaborating with 140 members countries and jurisdictions, to support the global efforts against tax avoidance. By joining, Kuwait has committed to become a tax transparent ecosystem and be better aligned with the global tax standards.

The rules, once implemented (expected in FY 2025), would ensure that every Kuwaiti MNE (multinational enterprise) and foreign MNE operating in Kuwait with a consolidated revenue above EUR750 million will be subject to pay a minimum tax.

Every jurisdiction that is within the scope of Pillar Two is moving at a different pace to implement the legislation and we are awaiting more updates on the implementation plan in Kuwait. However, we believe Pillar Two legislation to be one of the biggest challenges tax teams will be grappling in the coming future, as tax functions may require substantial new forms of financial data that they may not currently have access to within their organizations to be compliant with the new rules. Furthermore, they may also have to understand local tax legislation of the different jurisdictions they might be operating in and must stay updated with the changing laws and regulations.

In this article, we want to share some of the key aspects that companies could take from to assess and build on their preparedness to adapt to any foreseeable tax changes associated with Pillar Two.

How should MNEs prepare?

1. Typically, performing an impact assessment will help you understand the effect of Pillar Two on your organization’s global effective tax rate, cash tax cost and compliance burden. It is also a great way to identify any gaps in your organization, identifying which may better enable you to evaluate the data requirements and associated data structure and systems needed to conform to Pillar Two.
2. MNE should assess the sources of data from where the information is extracted (ERP versus manual), stakeholders involved in the process and technology requirements. This will help the MNE to assess the requirement to invest in technology or automation tools for Pillar Two compliance after impact assessment.
3. As Pillar Two starts from accounting, understanding the accounting treatment of every transaction is critical — so involve accounting and financial reporting teams as early as possible.
4. MNEs should review the existing CbCR (Country-by-Country Reporting) process as soon as possible. Many companies are forced to scrutinize CbCR and answer questions that they never had to before (e.g., how should tax transparent entities be reflected for CbCR, should there be any adjustments, whether adjustments result in Non-Qualified CbCR). Such data at a country level will be transparent to the public. How the information will be interpreted (e.g., by investors, analysts) will impact Tax Governance.
5. Early engagement with the financial statement auditors is important to understand the financial statement disclosures they expect a group to make in relation to the impact of Pillar Two and what information they will require to audit a Group’s assessment of the impact of Pillar Two. It is likely that auditors will request information that has not previously been reviewed for audit purposes, such as details of CbCR processes and outputs.
6. It also helps to assess if your tax teams have the necessary skillset and resources to handle the complexities of a dynamic tax landscape. This is especially important as modern-day tax authorities are rapidly digitizing tax systems, necessitating talent that is proficient in technology. In addition, it is crucial to integrate tax and accounting into the Boardroom agenda as this will help set your company up for appropriate attention and timely discussions on critical tax matters, minimizing the risk of unexpected liabilities.

Conclusion

To sum up, taking into account how complex some of the rules might be and the time it may require global tax teams to implement the relevant changes, MNEs should act with urgency and start their assessment of how Pillar Two might impact their organization. The MNEs can then understand how they can overcome any complexities emerging from Pillar Two to improve upon their tax planning.

As most of the OECD’s member jurisdictions are enacting Pillar Two rules, around 40 countries are implementing the rules in 2024 followed by additional signatories expected to implement them by the end of next year (2025), we recommend that Kuwaiti MNEs must be ready by 2025. 

This article is authored by Zubair Patel who is a Partner — Tax & Corporate Services at KPMG in Kuwait and heads the Tax Steering Group in KPMG MESAC (Middle East, South Asia, Caucasus, and Central Asia) region. It is co-authored by Naveen Bohra who is a Director — Tax & Corporate Services, KPMG Kuwait.