Bahrain's move to introduce a new tax on multinational corporations will have a major impact on the kingdom's economy by supporting its diversification strategy and ensuring that it stays competitive globally, analysts have said.
The domestic minimum top-up tax (DMTT) announced on Sunday will take effect from January, as part of plans to align with global tax reforms.
“The tax strategy for the Middle East has been to align themselves with competing international markets … to ensure that the region remains competitive and attractive to foreign investment but is not seen as an outlier to the rest of the world,” Vishal Sharma, managing director of Dubai-based consultancy Alvarez & Marsal, told The National.
“Tax revenues are a significant contributor to the economy and with the introduction of the global minimum tax across other countries, protecting fiscal revenues is a top priority for a number of the Middle East countries and, therefore, it was only a matter of time for these rules to be introduced.”
Details of the new tax
Under DMTT, multinational companies will pay a minimum 15 per cent tax on profits generated in the country, the Bahrain News Agency reported on Sunday.
The tax will apply exclusively to large multinationals operating in the kingdom, with global revenue exceeding €750 million ($830 million) for at least two of the previous four fiscal years.
Eligible businesses will need to register with the National Bureau for Revenue, which also handles VAT and excise tax.
The new framework is “fully aligned with the Organisation for Economic Co-operation and Development guidelines”, the BNA said.
What is the OECD's global minimum tax?
The OECD's Pillar Two reform programme set up a global minimum corporate tax to ensure large multinational enterprises pay a minimum 15 per cent tax on profits in each country where they operate.
The global minimum tax, which is based on Global Anti-Base Erosion (Globe) Model Rules, aims to reduce the incentive for profit shifting and places a floor under tax competition, bringing an end to the race to the bottom on corporate tax rates, the OECD said.
So far, more than 140 jurisdictions have signed up for the reform programme, which was announced in October 2021.
What would this mean for Bahrain?
Bahrain introducing the tax is viewed as part of its broader strategy to stay competitive in a global economy that is increasingly becoming more focused on fair taxation.
The kingdom aims to attract more foreign investment by offering a stable and transparent environment for global businesses, Thomas Vanhee, founding partner of Dubai-based consultancy Aurifer Tax ME, told The National.
The DMTT “is a defensive move”, he said.
“Whether Bahrain would tax those revenues or not, they would be taxed elsewhere. This is what is currently happening in 2024, where Bahraini companies have a parent in a jurisdiction which implements the income-inclusion rule.”
As an example, if a Bahraini entity that is part of such a group has a parent in Germany, profits earned in the Gulf country are also taxable in Germany, Mr Vanhee said.
The enforcement of DMTT allows the country to ensure the collection of applicable top-up tax due on Bahraini revenue, as incurred by a multinational, remains within the Bahraini tax net, Mr Sharma said.
The move serves three key purposes for Bahrain's economy as it seeks to boost its non-oil sector, Bal Krishen, chairman of Dubai-based financial advisory consultancy Century Group, told The National.
“First, it represents a crucial step towards reducing the country's reliance on oil revenues, and so supporting fiscal stability, particularly in a volatile oil market,” he said.
The new tax also highlights Bahrain's commitment to aligning with global standards aimed at curbing tax avoidance by multinational corporations and promoting a fairer global tax environment.
“This move has the potential to enhance Bahrain's international reputation and attract global businesses that prioritise compliance,” Mr Krishen said.
“Lastly, Bahrain's decision mirrors recent tax initiatives in other GCC countries, such as the UAE's corporate tax and Oman's personal tax.”
Gulf states have been actively working to diversify their economies through various policies and initiatives: The UAE and Saudi Arabia, for instance, have promoted more business-friendly frameworks to attract investments while also focusing on key sectors such as finance, tourism and hospitality.
Taxes, particularly consumption taxes, are “vital to provide governments in the Middle East [with] stable recurring revenues”, said Mr Vanhee.
Mr Krishen said the success of the OECD initiative could influence regional tax policies, potentially encouraging other GCC nations to adopt similar measures.
“While the introduction of a tax might initially seem less attractive to multinational corporations, Bahrain’s competitive rate could maintain its standing, potentially leading to broader regional adoption and a more unified GCC tax structure.”
Will other GCC countries follow suit?
Mr Sharma said the wider impact of the DMTT in Bahrain “now sharpens the focus on other GCC countries to consider their implementation strategy for the global minimum tax”.
Most jurisdictions in the Gulf have yet to publicly announce how and when they will put into effect the Pillar Two rules. The UAE made recent amendments to its Federal Corporate Law to introduce a definition for top-up tax and multinational entities, paving the way for the Emirates to potentially enforce the rules.
Qatar also recently changed its existing income tax law to include a foundation for the Pillar Two rules, including a domestic minimum tax, while Kuwait’s recent decision to become a member of the OECD's base erosion and profit-shifting framework is seen as a sign towards the country’s intent to adopt the Pillar Two Rules.
With Bahrain announcing the tax, the UAE, Saudi Arabia and Qatar are expected to release statements on their plans, with a “consistency in approach”, Mr Sharma said.
The first filing of the global information return to report on the global minimum tax is not due until 18 months after the first financial year, where the entity is subject to the global minimum tax, according to the OECD's rules.
The reporting happens based on the consolidated financial statements, which large groups have, regardless of the application of the minimum top-up tax, Mr Vanhee said.
“While there is substantial work to be done to find and collect the data, there is still time.”
