National Bureau for Revenue (NBR) of Bahrain issued the Executive Regulations for the Domestic Minimum Top-up Tax (DMTT). These regulations complement Decree-Law No. 11 of 2024, issued in September, introducing an overall minimum tax of 15% for large multinational enterprises (MNEs) operating in Bahrain.
Summary of Pillar 2 and DMTT
The Pillar 2 rules, developed by the OECD, set a global minimum tax to ensure that MNEs pay a minimum effective tax rate of 15% on profits in all countries. If an MNE has an effective rate lower than 15%, a top-up tax applies, which can be collected through:
- Domestic Minimum Top-up Tax (DMTT): A 15% local tax on large MNEs within the jurisdiction implementing this measure.
- Income Inclusion Rule (IIR): The main collection mechanism under Pillar 2 rules, where the ultimate parent entity (SPU) accounts for the complementary tax in its own jurisdiction.
- Under-Taxed Profits Rule (UTPR): It backstops the IIR by allocating the right to collect the top-up tax to other entities in the group according to a proportion based on the number of employees and the value of tangible assets in their jurisdictions.
Key Aspects of the DMTT Executive Regulations in Bahrain
- Revenue Test: MNEs are subject to the DMTT if their consolidated revenue exceeds €750 million in at least two of the previous four fiscal years. The regulations specify that these revenues must be determined according to the MNE’s consolidated financial statements, with certain adjustments, such as including unrealized gains from investments and extraordinary or non-recurring items.
- Excluded Entities: The decree-law identifies entities excluded from the DMTT, such as government bodies, international organizations, and non-profit organizations, thus following the OECD recommendations. The regulations provide detailed definitions for these entities and the criteria to be met to be considered excluded.
- Permanent Establishments: The regulations include a definition of permanent establishment and detail the calculation of the allocation of income and expenses, following OECD standards and principles. It ensures that branches of foreign entities in Bahrain are properly considered within the DMTT’s scope.
- Qualified Domestic Minimum Top-up Tax (QDMTT) and Safe Harbor: If the DMTT implemented by Bahrain meets certain requirements, it is a QDMTT. It would enable the application of safe harbors for MNEs, reducing compliance burdens by deeming the top-up tax due in Bahrain to be zero for purposes of Pillar 2 rules.
Relationship Between the DMTT and Transfer Pricing
Implementing the DMTT in Bahrain significantly implies MNEs’ Transfer Pricing policies. Companies must ensure that their related-entity transactions comply with international standards to avoid tax adjustments that may increase their tax burden to document Transfer Pricing methodologies properly and assess their effects on compliance with the DMTT.
Implications for Multinational Enterprises in Bahrain
The introduction of the DMTT in Bahrain reflects a commitment to OECD initiatives to establish a global minimum tax and align the country with international tax trends. MNEs operating in Bahrain should assess the effects of these regulations on their tax burden and compliance obligations. Companies should review their tax structures and consider possible adjustments to ensure compliance with the new regulations and optimize their regional tax position.
