On September 1, 2024 Bahrain became the first GCC country to implement a domestic minimum top-up tax (DMTT) aligned with pillar two of the OECD base erosion profit shifting inclusive framework. The DMTT law applies the global minimum tax of 15% on Bahraini constituent entities of multinational enterprises (MNEs) and contains key operative provisions of pillar two of the OECD global anti-base erosion model regulations. While the DMTT only applies to Bahraini constituent entities of large MNEs having total consolidated global annual revenue exceeding €750m, it may be a precursor to the introduction of a broad-based corporate income tax (CIT) that applies to other businesses.
We expect Bahrain to implement a CIT – like other jurisdictions – that applies to most businesses, with a potential carve out for small firms in the initial years, and exclusion for entities engaged in the exploration, production or refining of hydrocarbons. The rate is expected to be in the range of 5-10% for companies below the DMTT threshold. For firms above that threshold and Bahraini subsidiaries and branches that are part of multinational consolidated groups over such a threshold, we expect the DMTT to apply above the CIT, bringing the effective tax rate in Bahrain for such entities equal to the global minimum tax rate of 15%.
Given that Bahrain’s CIT is likely to apply to all commercial activities with limited exclusions, this will be a paradigm shift for businesses. Therefore, companies should proactively review their current legal structure and future business plans from a tax efficiency perspective while identifying potential risks and tax leakages.
It is common for closely held large business groups to have a centralised support services centre, wherein one group entity incurs all centralised costs and provides administrative support services to other group entities without passing on the cost. While this practice may entail certain value-added tax risks, once CIT is implemented, these arrangements will be monitored by the tax authority to ensure that the correct profitability is reflected in each entity on a standalone basis and that the applicable transfer pricing rules are complied with.
Companies should revisit their policies and practices for payments to related parties – shareholders, directors and key executives – as such payments could be scrutinised by the tax authorities in cases where a deduction is claimed by the taxpayer for reducing the taxable income. Some countries allow a deduction for related party payments up to a limit prescribed in the legislation. Where the tax authority has concluded that the related party transactions have not been carried out, they can make transfer pricing adjustments at the time of reassessing the taxable income. There have been cases where assets, such as real estate, are held under the firm’s beneficial interest – whereas the legal ownership may still be with the individual shareholders. In such cases, the discrepancy between the legal and the beneficial ownership of the assets creates multiple issues from a tax perspective, such as taxability of regular income generated from the asset, deductibility of expenses related to the asset and taxability of capital gains arising from the sale of such assets.
The existing systems and technology infrastructure used by businesses should be assessed to determine whether they are adequate for tax purposes. In a CIT environment, businesses will be required to maintain a separate set of accounting books for tax and financial reporting purposes. This is because there may be key differences in the treatment of certain fundamentals such as methods and rates of depreciation, provisions, and the period for recognition of income and expenses.
To comply with Bahrain’s DMTT law, MNEs with a presence in Bahrain should prepare for the DMTT to become effective as of January 1, 2025. Although there has yet to be any formal announcement regarding the implementation date of a broad-based CIT, we strongly recommend Bahrain businesses falling outside the scope of DMTT to conduct a preliminary analysis of the impact of the introduction of a broad-based CIT.
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