Kuwait's Tax Authority defined Disclosure of criteria for random sampling approaches for tax inspections

On 14 May 2023, the Kuwait Tax Authority (KTA) hosted a conference and discussed the definitions, conditions, and application criteria for the new random sampling approaches for implementing tax inspections under Ministerial Order no. 24 of 2023.

The tax inspections under the following laws are affected: Decree no. 3 of 1955, as amended by law no. 2 of 2008 (income tax law); Law no. 23 of 1961 (partitioned neutral zone law); Law no. 46 of 2006 (zakat and contribution law); and Law no. 19 of 2000 (national labor support tax law). 

Inspection approaches

Comprehensive tax inspection

A comprehensive tax inspection involves a detailed review of a company's financial records and may be applied in a given year to:

·Large-volume companies with revenue of KWD 10 million or more;

·Companies that incur a loss;

·Companies newly registered with the KTA and in the first year of operations;

·Companies undergoing structural organizational changes (e.g., merger, acquisition, joint venture, sale of shares, etc.);

·Companies with a double taxation treaty in place or with operations in the Saudi Arabian-Kuwaiti neutral zone; or

·Companies undergoing liquidation due to insolvency or that are expected to cease operations or discontinue business due to finalization of contractual agreements.

Targeted tax inspection

Unlike the comprehensive tax inspection, the targeted tax inspection involves examining certain items within tax filings based on their materiality and the assessor's analytical judgment of the company's current volume of earnings or incurrences compared to the previous year. This type of inspection may be applied in a given year to:

·Small to medium-sized companies filing tax declarations on an actual basis; or

·Companies previously inspected by the Department of Inspections and Tax Claims and assessed tax through the issuance of an     assessment order.

Inspection of tax returns filed on a deemed profit basis

The inspection of tax returns filed on a deemed profit basis involves performing a typical tax inspection process on companies filing tax declarations on a deemed-profitability basis. The declared revenue is examined by the KTA to determine its eligibility for exemption under any relevant tax treaty; however, if there is no such tax treaty, the declared revenue is examined and taxed in the normal course of action by the KTA.

Acceptance of filed tax declaration

An acceptance of filed tax declaration (i.e., no inspection) is an approval of the basis on which the tax declaration has been filed, with no amendments to its results. This may be applicable in the case of:

·Companies filing a tax declaration on a deemed-profitability basis while conforming to the allowable profitability range accepted by the KTA (i.e., 35%);

·Companies that maintain operational business continuity; or

·Companies that have no outstanding taxes due as per the respective tax declaration.

 This type of inspection is subject to the following requirements:

·Presentation of letters from customers confirming the billed revenues as reported in the tax return;

·Compliance with the provisions and executive regulations specified in the income tax law; and

·Submission of all mandated enclosures with the tax return.

The adoption of these approaches is designed to enhance the consistency of tax inspections and streamline the process by establishing predefined criteria. The specific criteria of the approaches also help to reduce the time needed to obtain tax assessments and, thus, tax clearance certificates.