BAHRAIN INTRODUCES DOMESTIC MINIMUM 15% TOP-UP TAX FOR MULTINATIONAL ENTERPRISES

10 December 2024

Josleen Deeb

The Kingdom of Bahrain has announced the introduction of a Domestic Minimum 15% Top-Up Tax (“DMTT”), effective for financial periods starting on or after January 1, 2025. This move positions Bahrain as potentially the first Gulf Cooperation Council (GCC) country to implement Pillar Two of the Organization for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) initiative. The DMTT reflects Bahrain’s commitment to aligning with international tax transparency standards and combating harmful tax practices.

Manama: This new tax regime is aimed at ensuring that multinational enterprises (MNEs) operating in Bahrain meet a minimum effective tax rate of 15%, aligning with the OECD's Global Anti-Base Erosion (GloBE) Model Rules under the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) 2.0.

Overview of the DMTT

The DMTT will be triggered when an MNE group’s annual consolidated revenue equals or exceeds EUR 750 million in the consolidated financial statements of the ultimate parent entity (UPE) for at least two of the four fiscal years immediately preceding that fiscal year. If the aggregate results of constituent entities (CEs) in Bahrain do not result in an effective tax rate (ETR) of 15%, Bahrain will impose an additional tax to bring the rate up to 15%

The legal framework for the DMTT is outlined in Bahrain’s Decree Law No. 11 of 2024 (“DMTT Law”), with regulations expected to follow, detailing the application of the law. The DMTT Law emphasizes adherence to the OECD Pillar Two model rules for interpretation and implementation.

Key Features of the DMTT Law

1. Scope: The DMTT Law applies to Multinational Enterprises (MNEs) with global revenues of EUR 750 million or more in at least two of the last four financial years. The tax is imposed on taxable income and payable by a designated filing constituent entity within the MNE group.
2. Excluded Entities: Certain entities are exempt from the DMTT, including government bodies, international organizations, non-profits, pension funds, and certain investment and real estate entities. However, revenues from these excluded entities are included when calculating the EUR 750 million threshold.
3. Tax Computation and Effective Tax Rate (ETR)
• Taxable income is calculated based on the financial accounting net income or loss, adjusted per the DMTT Law.
• The ETR for entities in Bahrain is calculated using a prescribed formula. If the ETR falls below 15%, additional tax will be imposed to meet the minimum rate.
• The law allows for substance-based carve-outs for certain payroll costs and the carrying value of specific tangible assets.
4. Substance-Based Income Exclusion: Payroll costs and the carrying value of tangible assets are excluded from the tax base under specific carve-out provisions.
5. De-Minimis Exclusion: Entities with revenue under EUR 10 million and income below EUR 1 million may elect to be excluded, subject to certain conditions.
6. Tax Registration: Entities subject to the DMTT must register with the National Bureau for Revenue (NBR). Registration deadlines are yet to be specified.
7. Tax Returns and Payment: Filing entities are required to submit tax returns for the relevant financial year and make advance payments during the year. Additional installments may be required in the following financial year.
8. Transitional Provisions: Deferred tax assets and liabilities, unless explicitly excluded, will be considered when determining the ETR for the filing constituent entity.

Impact on Multinational Enterprises

The introduction of the DMTT marks Bahrain as the first Gulf Cooperation Council (GCC) country to implement such measures. This move is expected to bolster Bahrain's tax sovereignty and curb potential revenue losses from foreign tax claims on Bahrain-sourced profits. The DMTT framework aligns Bahrain with the OECD’s core tenets while selectively avoiding the administrative burden of the income inclusion rule (IIR) and undertaxed payments rule (UTPR)

In Conclusion

The introduction of the Domestic Minimum 15% Top-Up Tax (DMTT) in Bahrain represents a significant step towards ensuring that multinational enterprises operating in the Kingdom meet a minimum effective tax rate of 15%. By aligning with the OECD's GloBE Model Rules, Bahrain aims to strengthen its tax framework and contribute to global efforts to curb base erosion and profit shifting. This new tax regime will have important implications for MNEs operating in Bahrain, requiring them to assess their effective tax rates and ensure compliance with the new regulations.

ALKETBI TOUCH

Our professional ready to assist MNEs in overcoming the complexities of Bahrain’s DMTT. With extensive experience in corporate tax across the Middle East and various industries, we provide tailored advice to help you comply with DMTT regulations and understand its implications for your organization. We can support you in achieving seamless compliance and optimizing your tax strategy under the new regime. Contact us for more…