Bahrain introduces Domestic Minimum Top-up Tax for Multinational Enterprises
Introduction
On 1 September 2024 Bahrain published the Decree- Law No. (11) of 2024 on the Taxation of Multinational Enterprises (Law) which set to introduce a Domestic Minimum Top-up Tax (DMTT) of 15% on the profits of Bahraini constituent entities of large Multinational Enterprises (MNE). The Law will come into effect for financial years starting on or after 1 January 2025.1
Prior to this announcement, Bahrain did not have a general tax on the profits of corporations. Only companies engaged in oil and gas activities were subject to a specific income tax.
This move follows on from Bahrain's position as a member of the OECD Inclusive Framework and a signatory to the statement on the two-pillar solution to address tax challenges arising from the digitalization of the economy.2 The introduction of a DMTT is meant to be a partial adoption of the Global Anti-Base Erosion (GloBE) Model Rules of Pillar II.
Scope of the rules
The Law will apply to Bahraini constituent entities of MNE groups with annual consolidated revenue of more than EUR 750 million in at least two of the four preceding years. Government bodies, international Organizations and non-profit organizations are among the excluded entities from the rules.
Key features of the Law
The rules provided in the Law are broadly consistent with those of the GloBE Model Rules and the forthcoming regulations and decisions are expected to further clarify and align the application of the rules to the GloBE Model Rules.
The computation of the profits/loss and the covered taxes paid by the Bahraini constituent entity for the purpose of determining the applicable top-up tax takes as a starting point the numbers reported for financial accounting purposes. Certain adjustments will then be made to the numbers as the forthcoming Regulations are expected to further set out.
The Law also provides for an exclusion from the share of profits subject to the top-up tax of an amount based on the tangible assets and payroll costs as indicators of substance of the Bahraini Constituent entities. This is known as the Substance Based Income Exclusion (SBIE).
The Law also establishes a transitional safe harbor as well certain exclusions from the application of the top-up tax in Bahrain for constituent entities that are part of an MNE that is in its initial phase of international activity, subject to certain conditions set out in the Law and the forthcoming Regulations.
It is noteworthy that the Law does not provide for an income inclusion rule (IIR) or Under-taxed payment Rule (UTPR) which are also part of the OECD's GloBE Model rules, but which have a lower priority in applying to under-taxed income of a non-resident constituent entity based on the rule order for the collection of top-up taxes.
Given the interlocking nature of the Pillar II rules, the introduction of DMTT seeks to safeguard against the potential that other countries may end up taxing profits of Bahraini constituent entities and that Bahrain would risk "leaving tax revenue on the table" that may be taxed by other countries who have implemented the GloBE model rules, specifically the IIR or UTPR. It is notable that over 40 countries have already taken steps to implement rules based on the GloBE Model rules.3
Dispute management
The Law also introduces special provisions on the process and the timelines of handling tax disputes, including an expected formation of the Tax Objection Committee to have jurisdiction over objections between taxpayers and the National Bureau of Revenue (NBR).
Conclusion
The Law on the Taxation of Multinationals represents an important development for Bahraini Constituent entities of in-scope MNEs. These entities should remain watchful for further updates, most notably, for the release of the Regulations to the Law, and plan accordingly.
Reference
1 National Bureau For Revenue - DMTT FAQs (nbr.gov.bh)
2 Members of the OECD/G20 Inclusive Framework on BEPS joining the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy
3 OECD tax working papers No.68, PP.8
