New Domestic Minimum Top-Up Tax in Bahrain
Tax Bahrain
Anuj BhasinSenior Associate,Tax
Taimur TufailAssociate,Corporate Commercial
The Kingdom of Bahrain has recently implemented a domestic minimum 15% top-up tax by way of Decree Law No. 11 of 2024 Regarding Implementation of Tax on Multinational Enterprises (“DMTT Law”). The DMTT Law aligns will the OECD Pillar Two Global Anti-Base Erosion Model Rules. The DMTT Law will be effective from 1 January 2025. The introduction of DMTT Law forms part of the much-anticipated change in the taxation regimes across the GCC, the implementation of which is in line with Bahrain’s commitment to meet international standards for tax transparency and preventing harmful tax practices. Further regulations are also expected to be passed which will contain a detailed application of the DMTT Law.
The tax would be applicable and payable by multinational entities operating in Bahrain where the annual revenue of the multinational enterprise group is equal to or exceeds EUR 750 million, as per the financial statements of the ultimate parent entity for at least two of the four fiscal years preceding the relevant fiscal year. The entities on which DMTT Law applies are required to register themselves with the National Bureau for Revenue in Bahrain. The tax will be required to be paid on the taxable income by the designated filing constituent entity on behalf of the multinational group. Such entities are required to file their tax returns for the relevant fiscal year, and the tax is to be settled by way of advance payments during the fiscal year (or through one or more instalments payments).
The DMTT Law provides a mechanism to calculate the taxable income which will be calculated based on the financial accounting net income or loss, adjusted in accordance with the rules specified under the DMTT Law. Additionally, the effective tax rate for constituent entities located in Bahrain will be calculated based on a prescribed formula. If the tax rate is less than the minimum tax of 15%, an additional tax will be imposed.
Specific entities are excluded from the applicability of the DMTT Law, which includes Government bodies, international organisations, non-profit organisations, pension funds and certain investment fund & real estate investment entities. It is however important to note that revenues of the excluded entities will be taken into consideration when calculating the EUR 750 million revenue threshold. Further, the National Bureau for Revenue may require the excluded entities to register for DMTT.
The DMTT Law provides with de-minimis exclusion whereby entities with revenue less than EUR 10 million and income of less than EUR 1 million may be excluded and tax for such entities shall be equal to zero. In order to avail the de-minimis exclusion, the entity in Bahrain will be required to notify the National Bureau for Revenue.
In addition, the DMTT Law also provides transition Country-by-Country (CbCR) safe harbour rules, where the tax may be considered nil if the de-minimis test, alternate ETR test or profit test is met.
The National Bureau for Revenue has the power to undertake tax audits to verify the accuracy of the tax return filed by the entities or to ensure compliance of the DMTT Law. In addition, certain fines can also be imposed on the entities where for example an entity fails to register itself or providing incorrect information at the time of registration (fine not exceeding BHD 100,000), or fails to submit tax return (fine not to exceed 30% of tax amount), fails to pay the tax amount or there is a delay (fine at 1% of the unpaid tax amount for each month, not to exceed 70% of the tax due amount). Similarly, a fine of BHD 50,000 may be imposed where an entity obstructs the work of the National Bureau for Revenue, fails to notify of any changes to registration application data, or otherwise fails to maintain records or provide data or documents requested by the National Bureau for Revenue.
For the multinational entities operating in Bahrain, this is the time to start considering the implications of the DMTT Law to assess how and if it would be applicable, keeping in view the implementation date of 1 January 2025. Advance planning would be beneficial for the companies to ensure uninterrupted operations in future.
For further information,please contact Anuj Bhasin and Taimur Tufail.
Published in December 2024
