The United States of America is contemplating a legislative change that will subject non-US sovereign wealth funds to domestic business taxation by amending Section 892 of the Tax Code. This section currently exempts foreign governments and their related entities, including sovereign wealth funds and certain pension funds, from taxes on investment activities.
The potential measure will remarkably reduce the returns and profitability of such investments, negatively impacting sovereign wealth funds globally, particularly those from Gulf states, which hold substantial assets in the American stock market, real estate and other sectors. In case the US Congress approves this amendment, the restriction on investment is expected to trigger capital flight, leading to enormous losses for Gulf sovereign wealth funds, including Kuwaiti funds.
Since a large proportion of these funds is invested in the American market—the largest economy in the world, it is imperative to address the negative impact and mitigate losses arising from the proposed tax change. Furthermore, Washington’s imposition of increased tariffs compounds the losses by restricting global trade and investment. Capital seeks safe havens. Is there a safe haven for any country other than investing its sovereign wealth funds domestically? Before examining the negative consequences of the anticipated American decision, it is crucial to consider another angle – the Kuwaiti economy’s heavy reliance on oil, which accounts for 90 percent of its revenues.
If oil prices drop due to certain factors like the end of the Ukrainian-Russian war, the resumption of Venezuelan oil production or other swift global shifts, a huge financial deficit is unavoidable. The best strategy is for countries, particularly Kuwait, to invest their sovereign wealth funds domestically. Kuwait has a pressing need for diversification in various sectors like manufacturing, food production, technology, digital services and entertainment. The internal investment is vital, considering the long-standing international trend of acquiring natural and rare resources to offset the persistent financial deficits in most European, North American and South American nations. While the infrastructure development in the Gulf region is showing significant progress, it is unfortunate that Kuwait lags behind, remaining stagnant in its own development efforts.
Consequently, by allocating a substantial portion of its sovereign wealth funds to establish factories for self-sufficiency—following the example of other nations—and simultaneously developing modern digital services, promoting agriculture and strengthening food security, Kuwait will have greater economic and social stability. This enhanced stability will, in turn, ensure political stability. A major dairy and cheese company in one of the Gulf states secured its animal feed supply by acquiring large farms in Argentina.
This strategy mirrors a broader global trend of offshore production to cut costs and raise supply chain efficiency. Other countries are focusing on food security in Africa, investing in domestic food processing plants and establishing joint ventures with parent companies. It is important that these foreign investments come with sturdy domestic infrastructure, including modern transportation networks, metro and railway systems, advanced ports, educational cities and recreational facilities. This progress mitigates the risks associated with foreign investments. Otherwise, such investments are vulnerable to negative global and local developments
