| Summary: | Kuwait does not only depend on oil as a sole source of revenue, but has also nullified all taxes since the discovery of oil in 1938. Under the request of foreign oil companies extracting and exporting Kuwaiti oil, the Kuwaiti government founded a primitive tax law which imposes a tax instead of a royalty on foreign oil companies in order to enable them to credit taxes paid to the Kuwaiti government against taxes they owe to their home states. This poorly drafted piece of legislation which is criticised for being ambiguous and lacking the adequate provisions to regulate crucial tax related issues is Income Tax Decree 3/1955, the Decree continued to govern taxation in Kuwait even after the full nationalization of the oil company in 1979, imposing income tax upon the profits of foreign enterprises carrying out trade and business in Kuwait. Depending on a sole source of wealth and a highly unstable one such as oil means that the Kuwaiti economy fluctuates considerably; from the oil boom in the 1970s to the sharp economic stagnation in the 1980s this economic instability coupled with the fast depletion of oil reserves, the government’s over spending, the poor social responsibility due to the absence of individual tax and finally the extravagant welfare system, have all contributed to the current deficit in the Kuwaiti budget and have stimulated the government to rethink the possibility of introducing taxes back into the state. With taxation being an infinite source of revenue, this thesis argues that there is an imminent need for Kuwait to advance its fiscal system in an attempt to possibly turn taxation into a secondary source of revenue in the state. Kuwait has the potential to attract foreign direct investment which in turn can yield more tax revenues to the state; however, much improvement needs to be made to Kuwait’s fiscal law. The government’s attempt to reform the Income Tax Decree of 3/1955 through the 2008 Amendments did not eliminate much of the Decree’s shortfalls. This thesis studies the Kuwaiti tax system closely from a legal economic point of view and provides realistic recommendations on how to reform the current system in order to make Kuwait a more attractive jurisdiction for foreign investment.
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