Kuwait: Embedding a tax culture in an oil-rich economy
Senior Public Sector Specialist
The tax department at MoF is led by a middle manager who assumes the dual role of tax and financial affairs section head– a mandate that reflects the low importance of taxes in Kuwait’s public administration. The tax team has been implementing a couple instruments (e.g., religious zakat, corporate tax on select foreign firms), utilizing basic excel-based systems and processes with a base of ~2,000 taxpayers. In other words, the tax department, and its operations generating less than 1% of state revenues, were not on the radar screen of most government official and international agency.
Fast forward to 2011, a political decision was made at the Gulf Cooperation Council (GCC) level to introduce a value added tax (VAT) to diversify revenues across this six-nation custom union. The Government of Kuwait, a signatory, asked the Ministry of Finance (MoF) and the Tax and Financial Affairs Department to execute. The task was immense for the staff who lacked specialized skills and were immersed in daily bureaucratic and transaction-type work. After some iteration between the options of seeking a consulting firm to carry out the preparations, having the Bank take on the preparations, or MOF doing the preparations with the support of the Bank, the latter option was chosen. The primary reason from MoF's perspective was their need to build their own capacity in tax administration and a corresponding concern that using a consulting firm would not have built any organic capacity in the ministry.
The World Bank engagement focused initially on reviewing and proposing a new legislative and institutional infrastructure. The work also entailed heavy on-the-job capacity building coupled with awareness raising to secure the buy-in of senior management on the required reform agenda. This was aided by the long term of presence of Arab-speaking Bank tax advisor.
The World Bank engagement was making inroads but with the Arab Spring creeping into neighboring Oman and public unrest observed on the streets of Kuwait, another political decision froze the introduction of new taxes for at least three years and with it the VAT project faced its toughest test. In similar circumstances, the parties reluctant to undertake change would have overpowered the core group of reformers and succeeded in killing the fragile project; turning it into yet another one of the numerous failed experiments that Kuwait observed in recent decades.
This was not the case. The reform agenda and progress to date had garnered enough momentum, and senior management at the Ministry requested in early 2013 from the Bank to realign its assistance towards modernizing the administration. The objective was more strategic. The administration wanted to be ready to implement any tax instruments. The Bank team went back to the drawing board, and a comprehensive long term engagement was born.
The restructured project included six main components and they were: 1) legislative and regulatory, 2) institutional, 3) processes and IT infrastructure, 4) compliance, 5) capacity building and 6) change management. To deliver on this ambitious task, the Bank adopted the “incubator” model by deploying a strong team of 4 resident advisors, all of whom spoke Arabic. Language proved to be a major factor and thus a large share of short term consultants were recruited from the Middle East. The Ministry, on the other hand, created a dedicated reform team and empowered it by putting the head of the Tax Department as its chief.
The work modality, was by and large, a joint effort driven by the three-partite team composed of the Bank resident team, regional and international experts, and the local MoF team. Together a long list of important deliverables were produced within two years. This approach allowed for on-the-job capacity building, transfer of international know-how, and exposure to regional experiences. To date, the list of outputs include draft laws (e.g., VAT law, tax procedure code), a new organization structure for headquarters, regional offices and a Large Taxpayer Office, over 60 processes reengineered and detailed, a customized IT interim solution, a strategic plan, a change management plan, draft audit selection strategy, a risk management plans, in addition to numerous workshops, study tours and the like.
The engagement is judged by the client, and by peers, to be a success and there are underlying features behind this outcome. A tax culture is indeed being created in this oil-rich economy and an administration is now adapting to good international practices and defending – internally and externally - the reform agenda. The secret to this hard fought success is attributed to more than one factor, but the key element is the presence of an embedded Arab-speaking team of tested tax experts with management experience. It is not sufficient to have any resident advisor. This expert must also be seasoned, a solid manager, and above all an Arab speaker. The approach of spaced-out missions with aide memoires at their tail end would have turned this engagement into an expensive academic exercise with no champions within MoF and no real impact achieved.
Despite all the progress registered, there are limitations to any Bank engagement and this is summarized by the challenge of implementing the reforms and rendering them operational. Implementation is now the main issue when it comes to achieving the objective of putting in place an effective and efficient tax administration. Moving towards this objective is not only a technical matter but important and key political decisions have to be taken. First of all, the government has to make a decision about the model of tax administration they want to establish. The options include a Directorate under the purview of MoF, a semi-autonomous revenue body, or another hybrid model. Vesting autonomy in tax administration has been a predominant feature of tax reforms in many regions across the globe in the past two decades. Autonomy in the areas of human resource management and procurement is expected to improve performance by reducing political interference and increasing the mandate of technical managers.
Looking ahead, and with a profit tax and a VAT looming in the horizon, the readiness of MoF is put to a real test. There are key consideration the Ministry and the reform team has to consider. First, the administration has to be assume full ownership and responsibility of key functions such as IT operations. Additionally, a special attention has to be given to HR management policies since the lack of skilled staff is one of the main concerns of the Bank team. Moreover, MoF has to promptly initiate the implementation of basic and across-the-board on-line registration and collections processes which aim at facilitating taxpayer compliance. The establishment of a full-fledged Large Taxpayer Office should be another milestone without overlooking the need to strengthen the tax audit function.
The final stages of this tax engagement remain critical and may define the lasting impact of this World Bank technical assistance. First and foremost, the phasing-out of Bank support has to be timely and well planned to avoid sudden ruptures or aborted reforms. But there are other considerations to account for. For instance, will the departure of resident advisors in the future create a void or weaken the mandate of the reformers at MoF? In other words, has the Bank struck the right balance and properly mitigated the potential risk of capture and dependency, or is the MoF staff well trained and empowered to take over and drive home the reform agenda? Time will only tell.