On September 1, 2024, the regional tax landscape underwent a major change with the release of Decree-Law No. (11) of 2024 (DMTT Law) regarding the implementation of taxes on Multinational enterprises (MNEs) located in Bahrain. Bahrain is the first country in the Gulf Cooperation Council (GCC) to implement a DMTT aligned with the Organization for Economic Cooperation and Development (OECD) Base Erosion Profit Shifting (BEPS) Pillar Two Inclusive Framework. The DMTT Law imposes a global minimum tax of 15% on Bahrain Constituent Entities (CEs) of Multinational Enterprises (MNEs). It encompasses the essential operative provisions of the OECD Pillar Two Global Anti-Base Erosion Model Rules (GloBE rules). The DMTT Law imposes a global minimum tax of 15% on Bahrain Constituent Entities (CEs) of MNEs. It encompasses the essential operative provisions of the OECD Pillar Two Global Anti-Base Erosion Model Rules (GloBE rules). Bahrain’s DMTT is essentially a domestic corporate income tax (CIT) that only applies to major MNEs and complies with GloBE regulations.
The executive regulations and decisions for the implementation and enforcement of the DMTT Law will be released subsequently after Cabinet approval. In accordance with the GloBE regulations, rules, and commentary issued by the OECD, the regulations will define specific guidelines, requirements, and methods for bringing the DMTT Law into effect. Below, we have outlined certain key features of the DMTT Law.

Key Aspects and Details

SCOPE: MNE groups that have total consolidated global annual revenues exceeding EUR 750 million (approximately BHD 312 million at the current FX rate) in at least two of the last four fiscal years will fall under the scope. An MNE group consists of a group of entities operating in multiple jurisdictions, including subsidiaries, branches, joint ventures, or other forms of presence. Additionally, independent entities will be classified as an MNE group if they have at least one permanent establishment in another jurisdiction.

APPLICABILITY: Commencing from 1 January 2025, the fiscal year refers to the accounting period utilized by the Ultimate Parent Entity (UPE) of the MNE Group.

KEY DEFINITIONS: Key concepts such as Multinational Enterprise Group, Permanent Establishment, Constituent Entity, and Ultimate Parent Entity have been provided. The definitions reflect the guidelines established by GloBE.

EXCLUDES ENTITIES: The excluded entities comprise investment funds, UPEs (unlisted preferred equity) for real estate, government agencies, and multinational organizations. While these entities are excluded, they may still be required to register and are pertinent in assessing whether a multinational enterprise (MNE) group surpasses the EUR 750 million thresholds.

CALCULATION OF TAX DUE: Specific criteria have been established for calculating the Effective Tax Rate(ETR), Top-Up Tax, Taxable Income, and Tax Due, in alignment with the Global Anti-Base Erosion (GloBE) rules. However, there is no explicit reference to the Income Inclusion Rule (IIR) or the Under taxed Payments Rule (UTPR).

REGISTRATION, RETURN FILING AND TAX PAYMENT: In Bahrain, multinational enterprises (MNEs) must appoint a filing CE who handles registration for the National Bureau for Revenue (NBR), annual tax return filing, tax payment, election-related tasks, and other tax administration duties.

DE MINIMUS EXCLUSION: The Filing Constituent Entity (CE) may opt to apply the De Minimis Exclusion if the following conditions are satisfied:

• The average revenue of all Bahrain CEs is less than EUR 10 million;
• The average income of all Bahrain CEs is less than EUR 1 million.

ACCOUNTING STANDARDS: International Financial Reporting Standards (IFRS) and any other financial accounting standards approved by a globally recognized accounting authority by the Regulations.

EXCLUSION FOR INITIAL INTERNATIONAL ACTIVITY: Limited period relief available to Bahrain CEs of MNE Groups which meet the following conditions:

• The MNE Group operates in not more than six jurisdictions;
•  The total net book value of assets for all CEs, excluding those in the jurisdiction with the highest net book value of assets, does not exceed EUR 50 million;
• Bahrain CEs are not owned by a parent entity located in a jurisdiction that applies the Income Inclusion Rule (IIR). If the first two conditions are met, this provision suspends the application of Bahrain’s Domestic Minimum Tax Top-Up (DMTT). However, the International Interest Reporting (IIR) may still apply to a Multinational Enterprise (MNE) Group during the early stages of its international operations if the parent entity is in a jurisdiction enforcing the IIR. To address this, Bahrain has included the third condition, thereby limiting the relief to specific cases.

SAFE HARBOUR RULES: Transitional safe harbor based on Country-by-Country Reporting (CbCR) is available to MNE Groups meeting specific criteria for a limited period. The simplified computation safe harbour will permit the MNE to rely on simplified income, revenue and tax calculations in determining whether it meets the De minimis, routine profits or EIR test under the GloBE rules. Further guidance is expected in the Regulations

GENERAL ANTI-ABUSE RULES: Transactions or arrangements that lack a genuine commercial purpose and are primarily aimed at obtaining a tax advantage may be disregarded.

TRANSITIONAL PROVISIONS: Transitional rules prescribed for consideration of deferred tax assets/liabilities for calculation of ETR and valuation of assets transferred between CEs of the same MNE Group.

STATUTE OF LIMITATION & RECORD KEEPING: Limitation period for taking action is 5 years from the date of tax payment, and this limit may be interrupted in certain situations. Relevant records may be retained in either paper or electronic format. The rules will specify the kinds of records, limitations, and length of retention.

PENALTIES: A strict administrative penalty includes:

• A fine of up to BHD 100,000 for offenses such as failure to register within the prescribed time frame;
• A penalty of 1% per month of the unpaid tax amount for late payment;
•  A fine of up to BHD 50,000 for offenses such as failure to update registration details or maintain required records
• Additionally, violations classified as tax evasion may result in imprisonment of up to 5 years, along with fines up to three times the amount of tax due.

NOTABLE OMISSIONS:

• There is no exclusion for defined shipping income, unlike the provisions outlined in the GloBE Rules.
• There is no reference to Qualified Refundable Tax Credits, as provided in the GloBE Rules, to encourage investment.
• There is no mention of a transitional penalty relief regime, which would ensure that no penalties or sanctions apply during a specified transitional period for filing GloBE Information Returns, provided an MNE has taken & reasonable measures to comply with the GloBE Rules.

These aspects may potentially be addressed in the forthcoming regulations.

Calculation of DMTT

Upon confirmation that an entity is covered by the DMTT Law, the following course of action is to determine whether any exclusions or safe harbor regulations apply. The Effective Tax Rate (ETR) needs to be determined if none apply.

Effective Tax Rate (ETR) for Bahrain Constituent Entities (CEs)

Adjusted Covered Taxes: The current tax expense reported in the financial statements serves as the starting point. This category includes taxes related to retained earnings, taxes on distributed profits, and taxes applicable to corporate income tax (CIT) that is generally imposed. Typical adjustments include:

• Amounts accrued as an expense before taxation,
•  Adjustments for temporary differences,
• Taxes paid related to uncertain tax positions,
• Taxes on excluded dividends and capital gains.

Net GloBE Income: It refers to Financial Accounting Net Income or Loss (FANIL) calculated under IFRS or other acceptable accounting standards (such as AAIOFI standards). It is calculated before any consolidation adjustments for intra-group transactions and is then adjusted for items such as excluded dividends, capital gains, pension expenses, and stock-based compensation.
Further details on the adjustments are expected to be included in the regulations.

Top-Up Tax Rate Calculation:
Once the ETR is calculated, the next step is to calculate the Top-Up Tax rate. Where the ETR is less than the minimum rate of 15%, the Top-Up Tax rate is calculated as follows:

For Bahrain CEs, it is expected that the Top-Up Tax rate will approach 15%.

Taxable Income Calculation:
To calculate the total amount of tax due, multiply the Taxable Income by the Top-Up Tax rate. Here is
the formula for taxable income:

Substance-Based Income Exclusion (SBIE): This is calculated as the sum of a percentage of eligible payroll costs (starting at 9.6% and tapering to 5%) and the tangible asset carrying value (starting at 7.6% and tapering to 5%) for each CE. Further guidance on SBIE calculation will be included in the forth-coming regulations.

Total Tax Due Calculation
The formula for the total tax due is:

Additional Top-Up Tax may include adjustments related to covered taxes, changes in ETR due to recalculation of FANIL for prior years, or additional taxes for permanent differences. Under GloBE Standards, these administrative rules prevent prior-year tax returns from being changed.

The rules prescribed under the DMTT Law are complex and will have a direct impact on MNE Groups operating in Bahrain. With less than 4 months to implement, it is advisable for MNE Groups to assess the impact on their Bahrain operations for a smooth transition.