If you keep up with the latest business developments in the region, you have probably come across the announcement of a new tax in Bahrain. Who will be affected by this tax, and what does the law actually entail?
To provide some context, Bahrain’s National Bureau for Revenue released a new law in September introducing a 15% domestic minimum top-up tax (DMTT) on companies in the country that are part of large multinational enterprise (MNE) groups.
Effective from January 1, 2025 onwards, the law is largely based on the Organization for Economic Cooperation and Development’s (OECD) Model Rules in terms of calculation of the tax, exclusions and reliefs. Additionally, the new law contains specific provisions on procedures, enforcement, and anti-avoidance measures applicable in the Kingdom.
Who will be affected?
The new law applies a 15% tax on the income of Bahrain entities that are part of an MNE group with annual revenue exceeding €750 million for at least two of four preceding fiscal years. However, the tax does not apply to foreign subsidiaries of a Bahraini-headquartered group or other foreign group companies that are part of the same MNE group.
The DMTT is also not applicable to excluded entities as specified in the law, including government bodies, international organisations, non-profit organisations, sovereign wealth funds, pension funds and certain investment funds.
Additionally, the law lists specific transitional and permanent reliefs from the levy of DMTT, including transitional country-by-country safe harbor relief, exclusion for initial phase of international activity, de-minimis exclusion and simplified computation safe harbor relief.
Key considerations for businesses
Since the law is effective from January 1, 2025, we expect detailed rules (Executive Regulations) to be published in the coming months. It now becomes imperative for businesses to assess the impact of the DMTT on their Bahrain presence, evaluate the availability of any reliefs, and prepare for the compliances to be undertaken based on the law read in conjunction with the OECD Model Rules.
In terms of taxable income, this is defined in the law as the financial accounting net income or loss for the fiscal year, before making any consolidation adjustments eliminating intra-group transactions. Detailed rules on calculation of taxable income will be prescribed in line with the OECD Model Rules.
Several compliance obligations are specified in the law including obtaining a registration, filing of annual tax returns, and payment of tax in advance over the relevant fiscal year. These compliances are expected to be in addition to the notifications and filings as required under the OECD Model Rules.
The law also provides specific provisions on enforcement via conduct of tax audits, assessments and procedures in relation to litigation and appeals. A Tax Objection Committee will be formed for this purpose.
Penal consequences are laid out in case of defaults, like failure to obtain registration, file tax returns, or submitting incorrect data. Such defaults may trigger stringent administrative fines, without prejudice to criminal liability.
A general anti-avoidance rule empowers the National Bureau of Revenue to disregard any transaction if it is not genuine or its primary purpose is to obtain a tax advantage against the objective of the law.
Furthermore, the law specifies certain acts to qualify as ‘tax evasion,’ resulting in onerous consequences, including criminal liability for legal persons if held responsible for such evasion. Dispute resolution through a settlement process is acknowledged.
Final thoughts and looking ahead
The DMTT is a significant milestone in the Middle East, with Bahrain emerging as a front-runner to implement the DMTT on large MNEs having a presence in the Kingdom. It underscores Bahrain’s international commitment as part of the OECD’s inclusive framework to address base erosion and profit shifting by MNEs.
The Executive Regulations to the law are yet to be issued and are expected to prescribe detailed rules, controls and manner of calculation and application of DMTT in a manner consistent with the Model Rules.
It should be noted that the law is published in Arabic, and our views are based on an unofficial translation of the law.
