Bahrain’s new domestic minimum top-up tax: What it means for multinationals

In a pivotal move aligning with global tax reforms, Bahrain recently introduced the domestic minimum top-up tax (DMTT), effective January 2025, impacting multinational enterprises (MNEs) operating within its borders.

Here, Nilesh Ashar, senior MD and head of Tax Middle East at FTI Consulting, shares insights into the tax’s implications for MNEs, Bahrain’s economy, and how it supports the nation’s commitment to the OECD’s global minimum tax (GMT) initiative.

From investment impact to compliance obligations, Ashar explores how this tax positions Bahrain on the international tax landscape while offering strategic reliefs to boost the economy.

Give us an overview of DMTT. What are its key provisions and which businesses does it apply to?

DMTT is effective from January 1, 2025, and applies a 15 per cent tax on the taxable income of Bahrain subsidiaries/joint ventures of multinational enterprises (MNEs).

These rules are based on OECD principles that will provide for consistent calculation and administration of the rules and also include several exclusions (sovereign wealth funds, government bodies, international organisations, non-profit organisations, etc) and reliefs linked to the level of operations (revenues and profits, substance in Bahrain etc, and MNE groups that are in the initial phase of international activity).

What impact do you foresee DMTT having on multinational enterprises operating in Bahrain? How might it affect investment and expansion plans in the country?

Given the introduction of global minimum tax rules on a global scale, the introduction of this tax will have a positive impact from Bahrain’s perspective, while having a tax-neutral impact on MNEs operating in Bahrain.

In the absence of these rules,  MNEs would end up paying taxes in either the parent or other jurisdictions in respect of profits from Bahrain operations.

Contributing taxes to local Bahrain authorities will help boost the local economy where MNEs operate which would provide a further boost to the Bahrain government’s spending for priority sectors and overall growth of the country.

What was the driving force behind Bahrain’s decision to introduce this tax and how does this align with global tax reforms, such as the OECD’s global minimum tax initiative?

Bahrain is a member of the OECD/G20 Inclusive Framework (‘IF’) and has committed to supporting a two-pillar solution to ensure that MNEs pay a fair share of tax wherever they operate and generate profits and introducing DMTT is a significant step in that direction.

How does this new tax fit into the broader regional and international tax landscape? Are we likely to see similar measures in other GCC countries?

Bahrain’s corporate tax aligns with global trends and the OECD’s GMT, positioning it within a regional and international shift towards fiscal reform.

Most other GCC countries have a corporate tax system, with UAE recently introducing corporate tax law, and Kuwait announcing plans to introduce a new business profits tax regime, Bahrain is the only country in the GCC that does not have a corporate tax regime. With the new DMTT law, Bahrain has aligned itself with the global fiscal reform and we are likely to see similar measures being taken by other GCC countries shortly.

Could you elaborate on the key reliefs available under this law? Are there any industries or specific types of multinational enterprises that will benefit from these reliefs?

The DMTT law provides primarily three types of key relief, where the top-up tax will be deemed zero:

Transitional CbCR Safe Harbor: For the first two years where the MNE entities in Bahrain cumulatively meet any of the de-minimis, simplified ETR and routine profit test

1. Initial phase of international activity: MNEs operations are in less than six jurisdictions and upon meeting certain other conditions (available for first five years)
2. Permanent forms of relief: De-minimis exclusions, Simplified computation safe harbour relief

Other relief options include substance-based carve-out which is based on the payroll cost and tangible assets.

These types of relief are likely to benefit companies operating in R&D activities, priority sectors or capital-intensive industries, low profit-making MNEs and entities operating in limited jurisdictions.

What are the main compliance obligations for multinational enterprises under this new tax? Are there specific reporting requirements that businesses should be aware of?

Several compliance obligations are specified including obtaining a registration, filing of annual tax return, payment of tax in advance and instalments. These compliances are expected to be in addition to the notifications and filings as required under the OECD GMT as may be applicable to the MNE Group on an overall basis in other jurisdictions.

What challenges do you anticipate businesses might face in complying with this tax? How can they best prepare to meet these obligations?

Understanding the nuances of the DMTT law and its implications can be complex, especially for MNEs with operations across various jurisdictions. By proactively addressing these challenges, and understanding the obligations businesses can better prepare to comply with the DMTT and minimise the risk of non-compliance and penal consequences.

What enforcement mechanisms does Bahrain have in place to ensure compliance with the DMTT? Will there be regular audits or monitoring by tax authorities?

The DMTT law provides for specific provisions on enforcement via the conduct of tax audits, assessments and procedures concerning litigation and appeals. A Tax Objection Committee will be formed for this purpose.

Given the complexity of the DMTT law, the tax authority in Bahrain is likely to conduct regular audits of businesses to ensure accurate reporting and compliance with the DMTT.

 What are the consequences of non-compliance with the new tax regulations?

 Specific penal consequences are laid out in case of default like failure to obtain registration (up to BHD 100,000)/ late filing of tax return (up to 30 per cent of tax due)/ submitting incorrect data/ late payment of tax (1 per cent of the unpaid tax per month)/ failure to comply with compliance requirements (up to BHD50,000). Such defaults may trigger stringent administrative fines (without prejudice to criminal liability).

In your view, how does the DMTT tie into the broader global tax trends, particularly in light of the OECD’s base erosion and profit shifting (BEPS) initiatives?

The DMTT law aligns closely with the broader global tax trends particularly GMT rules to ensure that multinational enterprises pay a fair share of tax wherever they operate and generate profits. It aims to prevent profit shifting, enhance transparency, and support economic diversification, positioning Bahrain as a competitive business hub.

Overall, the DMTT signifies Bahrain’s alignment with international efforts to standardize corporate taxation.

What are the key considerations that multinational companies should keep in mind when seeking advice or guidance on compliance with this new tax?

MNEs should not only look for advisors familiar with the Bahrain DMTT but should look for guidance from professionals familiar with the international tax frameworks particularly OECD BEPS initiatives and who offer continuous support, including regular updates on GMT legislation in other countries.