Kuwait’s ministry of finance is considering imposing a tax on Kuwaiti firms that is levied on the earnings of foreign companies, in an effort to diversify the economy.

The government “may adopt proposals to extend the current corporate income tax to include Kuwaiti firms besides the foreign firms”, the finance minister Sheikh Salem Abdulaziz Al Sabah told Bloomberg yesterday.

Under Tax Law No 2 of 2008, the net income of foreign companies is taxed at a flat rate of 15 per cent.

Arnaud Louis, an associate director at Fitch Ratings, said the move would help to develop Kuwait’s economy.

“One of the key factors in determining Kuwait’s credit rating is the economy’s dependence on oil revenues,” he said. “So any move that leads to greater tax receipts and decreases that dependence would be a positive one.”

The Economist Intelligence Unit (EIU) last month lowered its forecast for Kuwait’s economic growth to 2.7 per cent from 4.4 per cent previously, citing the modest growth of Kuwait’s oil production.

GDP growth is likely to reach 3.1 per cent next year, and would accelerate to 4 per cent in 2015, bolstered by projected higher oil prices, according to the EIU.

Abdulaziz Al Yaqout, the regional managing partner of the law firm DLA Piper, said the tax move would have a positive social impact.

“It’s not about the Kuwaiti state requiring money,” he said. “The underlying aspect to the proposed change is that Kuwaiti businesses participate more in the development of of the country.

“It’s about moving them into a world where things like water and electricity are not free or as cheap as they used to be. It’ll take time, it won’t happen overnight.”

The Kuwaiti prime minister Sheikh Jaber Al Mubarak Al Sabah warned in October that the welfare state that Kuwaitis were accustomed to was unsustainable.

“It is necessary for Kuwaiti society to transform from a consumer of the nation’s resources to a producer,” he said.

Mr Al Yaqout said key aspects of the proposed tax remained unclear, such as when it would be introduced, and whether it would be a flat or progressive tax rate.

He also said Kuwait’s tax collection regime was still in its infancy, and would require a significant upgrade should local Kuwaiti firms be taxed as well.

Of immediate concern is whether the tax proposal would be accepted by Kuwaiti lawmakers, who traditionally have had an often stormy relationship with the government.

The current Kuwaiti parliament, which was elected in July, has only been sitting since October, and it remains to be seen whether such a radical proposal will pass smoothly, according to Fitch Ratings’ Mr Louis.

The current parliament was regarded as less supportive of the government than its immediate predecessor, but it was much less hostile to the government’s agenda than the parliament last year, he said.

“The fact that the move’s been announced by a minister means that the government thinks that the amendment has a chance of clearing parliament,” Mr Louis said.

jeverington@thenational.ae