Introduction of the Domestic Minimum Tax (DMTT)
On the 1 Sept. 2024, the Kingdom of Bahrain announced the
introduction of a Domestic Minimum Top-up Tax (DMTT) for
multinational enterprises (MNEs). Bahrain's Decree Law No. 11
of 2024 (the Law) seeks to introduce a DMTT of 15% applicable to
large MNEs with headquarters or operations in Bahrain with
consolidated revenues exceeding EUR 750 million (for at least two
of the four immediately preceding fiscal years). This release is a
further demonstration of global alignment and commitment to the
Organization for Economic Cooperation and Development's
(OECD's) inclusive framework to introduce a global minimum tax
(GMT) of 15% on large internationally operating groups. The Law
will come into effect from the 1 Jan. 2025.
What Are the Implications of This New Tax?
This communication does not provide a full overview of the DMTT
rules. However, we wanted to share with you some of our own
observations and key takeaways from the Law around the geopolitical
impact of these new rules. Our key takeaways, grouped by topic, are
as follows.
- Bahrain Tax Reform:
The intention of Bahrain to introduce a new corporate income tax has long been announced, and as one of the Inclusive Framework member countries it was also expected that Bahrain would introduce rules aligning with the GMT developed by the OECD.
The introduction of the DMTT prior to the release of a more traditional corporate income tax regime raises the question of whether Bahrain will introduce such a regime for corporations not targeted by the DMTT rules. This could potentially exclude them from paying any corporate tax in Bahrain, which would largely differ from the approach historically adopted by other GCC countries such as the UAE, Qatar and the Kingdom of Saudi Arabia (KSA). - Impact on Bahrain's economy:
The introduction of the DMTT includes Bahrain within the majority rather than the minority from a global context. Therefore, we do not expect the inception of the DMTT to disincentivize investment within Bahrain. This is due to the geopolitical shift now moving the dial closer to a united implementation of some form of Global minimum tax (GMT) rules across the world. As the global tax landscape changes, we believe large MNE's will change their market entry investment profile, applying significantly less weighting to the domestic headline rates of corporate tax and adding greater focus to available tax incentives and industry specific grants.
Bahrain may potentially exclude other corporations (that do not fall within the DMTT rules) from paying any corporate tax in Bahrain, in the absence of a more traditional and generic corporate income tax regime. This would place Bahrain competitively when compared to other GCC countries, such as the UAE, Qatar and KSA – which have corporate income tax regimes that apply to the generality of taxpayers at rates of 9%, 10% and 20%, while also being expected to implement a 15% DMTT for large MNEs with consolidated revenues exceeding EUR 750 million. - Alignment across the GCC:
The expectation across the Middle East is that Bahrain's DMTT will be the first domino to fall, with the UAE, Qatar and KSA due to release statements of intent in the coming months. We anticipate that there will be consistency of approach from the majority of the GCC countries with both the UAE and Qatar considering the impact of a DMTT in priority. Furthermore, we expect many to consider the appropriateness of an Income Inclusion Rule (IIR) within their jurisdiction based on the number of headquartered MNE's identified – as this rule allows for the jurisdictions of MNE headquarters to collect additional tax generated on low taxed foreign subsidiaries' revenues. However, the timeline of the IIR could be deferred to a subsequent period dependent on resources available within the relevant tax authorities. The Law does not include commentary on Bahrain's potential plans on an implementation of an IIR or Under taxed Profits Rule (UTPR). At this time, we will observe whether the National Bureau of Revenue (NBR) has additional appetite to seek to collect Top-up Tax created in jurisdictions outside of Bahrain (and even apply a more generic corporate tax regime like the UAE has done recently). - Compliance requirements:
The MNE's that currently operate within Bahrain should be distinctively aware of these rules, with many already assessing the Effective Tax Rate (ETR) impact the rules could bring in all of their jurisdictions of operation.
The role of finance and tax teams within MNE's impacted by the GMT rules introduced around the world could be subject to significant change by virtue of the introduction of new compliance and filing requirements, adding significant complexities to:
" The accounting for single entity data in each jurisdiction of operation
" How the data feeds up to the ultimate consolidation
" The accounting standards applied within each jurisdiction
" The tax accounting treatment for deferred taxes
MNE's would be required to ensure appropriate upskilling of their key stakeholders or identification of where they will require third party support. Due to Bahrain's habitancy of large financial institutions, the treatment of exchange rates will be of great importance when considering the compliance for MNE's within Bahrain, specifically around reporting into the consolidation packages considering different functional currencies of the international group.
However, the expectation is that the DMTT introduced in Bahrain should be considered a Qualifying Domestic Minimum Top-up Tax (QDMTT) under the OECD principles. In this case, the QDMTT safe harbour could be available to MNEs with operations in Bahrain, allowing for reduced compliance calculations in applicable cases.
Originally published 13 September 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.