Bahrain has announced that it will start taxing multinational corporations next year, in line with a global coalition seeking to eliminate tax evasion.
Nominally, the move provides a welcome boost to the government’s coffers in a manner unlikely to induce capital flight. The deeper impetus is the country’s multidimensional commitment to global partnerships, a central pillar of its security strategy.
Bahrain has been facing fiscal pressure since 2010, when it recorded its first budget deficit of the new millennium. While it has used a wide range of tax instruments to improve its finances, most notably value-added tax, it has so far shunned a tax on business profits. Several factors contributed to this decision, most notably a concern that it might affect Bahrain’s reputation as an attractive destination for foreign direct investment.
Since 2000, the kingdom’s economic strategy has emphasised creating an environment that draws in foreign capital through regulatory and fiscal inducements, including the absence of corporation tax. Once the need to increase government revenues become more acute, policymakers felt that – among the menu of available tax instruments – a tax on profits would be the most damaging, as it could induce some businesses to exit the Bahraini market and relocate elsewhere in the Middle East.
In fact, Bahrain’s FDI strategy was not conceived in a vacuum. It is part of a broader identity of openness, conciliation and tolerance that the kingdom has been cultivating since King Hamad’s accession to the throne in 1999. As a small state with large, well-armed neighbours in a politically unstable region, Bahrain is keenly aware of the need for it to use partnerships, alliances and respect for international law to protect its sovereignty and prosperity.
An international superpower might view adherence to international rule of law as an option that is favourable only intermittently, and it might sometimes regard taking things by force as the best choice. In contrast, countries such as Bahrain are highly alarmed when big countries start invading smaller ones or imposing economic sanctions arbitrarily, as promoting respect for international rule of law constitutes a central pillar of their security strategy.
One of the most salient manifestations of Bahrain’s worldview is its enthusiasm to join calls for assembling an international coalition, especially if the alliance’s goal is to enforce rule of law.
This can be seen in the kingdom’s contribution to several international maritime coalitions in the Middle East, in addition to the coalition against Islamist extremism. Bahrain’s entry into the Abraham Accords was motivated by several factors, but one of them was reinforcing its reputation as a country that is willing to make bold diplomatic moves if it believes they are conducive to de-escalating conflict.
The softer elements of this national identity are reflected in Bahrain’s commitment to religious and cultural tolerance.
It has launched several international prizes relating to education and peace, and established a centre for religious tolerance that facilitated a visit in 2022 by Pope Francis to the kingdom along with a variety of other global religious leaders. Bahrain also appointed homegrown Jewish and Christian women to the post of US and UK ambassador, respectively, during the 2010s, reflecting the diversity of the local population.
When compared to security, diplomacy and culture, international co-operation in the economics domain is distinctly unglamorous, conjuring up images of bespectacled paper pushers discussing financial minutiae. For all the good work it does, the International Monetary Fund is unlikely to be the subject of a thrilling novel. However, every now and again, the suits in charge of global economic policy put forward something more eye-catching, offering countries such as Bahrain the opportunity to embed their contribution in their reputation as willing partners.
The 2013 book by the French economist Thomas Piketty, Capital in the 21st Century, was one such moment, as this bestseller motivated fiscal policymakers around the world to get serious about cornering multinational corporations.
His book’s main thesis is that inequality has been rising, and that one of the reasons was the ability of large corporations to move capital around the world to avoid redistributive taxation. Given how damaging to the social fabric this inequality was becoming, a key recommendation was international co-operation in the levying of profit taxes on transnational giants such as Amazon and Facebook.
The OECD took the lead, assembling a large coalition of more than 140 countries committed to a 15 per cent corporation tax on multinationals. That this came at a time when Bahrain was facing fiscal pressure was a fortuitous coincidence, especially since the breadth of the coalition meant that it alleviated the kingdom’s fears about capital flight that had previously made it shy away from taxing business profits.
Equally important was that it offered Bahrain a rare, eye-catching opportunity in the economic domain to demonstrate its commitment to global co-operation and rule of law, as tax evasion by multinationals was considered a legal grey area in addition to being ethically unsound. This helps us understand, at least to some extent, why Bahrain was the first country in the Gulf to impose the 15 per cent tax, in contrast to VAT, when it was the third: there are no international agreements on VAT, and a country’s decision to levy it or not has little bearing on it being perceived as a constructive member of the international community.
Whether or not the tax ultimately succeeds in decreasing global inequality, or in improving Bahrain’s fiscal situation, remains to be seen. However, by virtue of its status as an early adopter to a bold move grounded in helping the world become a better place, Bahrain will be satisfied.
