19 December 2024 • 6 minute read
Bahrain issues Executive Regulations to the Domestic Minimum Top-Up Tax Law on Multinationals and Registration Guides
Introduction
Further to the issuance of Decree-Law No. (11) of 2024 regarding the Implementation of Tax on Multinational Enterprises ("DMTT Law") on September 2024 (our alert on key aspects of the DMTT Law can be accessed here), the executive regulations to the DMTT Law have been released by the National Bureau of Revenue ("NBR").
In addition, the NBR also published the following guidelines on its website:
I. Guide to the Scope of the DMTT Law and Registration
II. DMTT Registration Manual
Broadly, the DMTT Law seeks to ensure that in-scope entities of MNEs pay a minimum 15% CIT in Bahrain. We have summarized below key considerations for Bahraini in-scope entities based on these publications.
In-scope entities
The DMTT Law applies to constituent (member) entities of MNE Groups with annual consolidated revenue exceeding Euros 750 Million in at least two of the four preceding fiscal years in the consolidated financial statements of the ultimate parent entity of the MNE (this is referred to as the Revenue Test).
Thus, notwithstanding excluded entities and appliable reliefs, all Bahraini incorporated entities (or entities that are effectively managed in Bahrain) and permanent establishments of non-resident entities in Bahrain that are members of an MNE Group, irrespective of the entities' size or sector, are in scope of the DMTT Law. In-scope entities also include JV entities, where at least 50% of the JV entity is owned by the MNE Group.
Excluded entitiesinclude government bodies, international organizations, pension funds, investment funds/ real estate vehicles that is a UPE are excluded entities. These entities are not within the operative scope of the DMTT Law, however their revenue is taken into account for purposes of meeting the Revenue Test. These entities are also subject to administrative provisions, including registration and maintenance of books and records.
Registration and timelines
In-scope entities must complete a dual registration with the NBR: the first is a general registration with the NBR and the other registration specifically for DMTT purposes. Entities which are already registered with the NBR for VAT/excise purposes do not need to complete the first registration.
Where there are multiple in-scope entities of the same MNE group in Bahrain, one entity should be nominated as the filing constituent entity ("filing CE") for DMTT purposes. The filing CE will register, file tax returns and pay tax due on behalf of the in-scope entities in Bahrain.
The registrations must be completed through the NBR portal, within the following timelines:
I. No later than 31 December 2025 for in-scope entities meeting the Revenue Test for two out of the four preceding years
II. In all other cases, no later than 120 days from the beginning of any later fiscal year in respect of which entities in Bahrain come within the scope of the DMTT Law.
Tax determination
The determination of top-up taxes due begins a computation of the jurisdiction ETR which is the "covered taxes" paid by in-scope entities in Bahrain divided by their adjusted income/loss for DMTT purposes. A substance-based income exclusion is available which potentially reduces the income subject to the top-up tax.
Many in-scope entities in Bahrain have not been subject to income tax on their profits in Bahrain and thus should carefully analyze the impact of these rules. The executive regulations and the guidelines detail the rules for top-up tax calculation and available reliefs under the DMTT Law, which may significantly reduce the tax payable.
Transfer Pricing Documentation and Advance Price Agreements
The executive regulations require entities to ensure their related party transactions or arrangement are in line with the arm's length principle ("ALP"), and if required, conduct TP adjustments to ensure alignment with the ALP. The term "related party" is not defined in the DMTT Law or the executive regulations.
The executive regulations also have provisions requiring in-scope entities to prepare and maintain Transfer Pricing documentation – Master File and Local File. No specific thresholds are mentioned and thus, it is expected that these documents should be maintained by all in-scope entities, most likely on annual basis.
The executive regulations refer to the consideration of "bilateral and multilateral APAs" in the course of making TP adjustments.
Advance pricing agreements are generally agreements entered into by a taxpayer with one or more tax authority to agree an appropriate set of criteria for the determination of the transfer pricing of these transaction for a specified number of years and subject to critical assumptions.
APAs are generally used to grant taxpayers certainty relating to their (typically, complex/material) related party transactions by minimizing the probability of costly disputes with one or multiple tax authorities once an APA is reached on any particular transaction/arrangement.
While there are no official published rules and procedures on Bahrain accepting APA requests (whether unilateral or bilateral/multilateral), this may be an area to watch for.
Tax objections Committee
The executive regulations provide further details on the composition of the objection committee as well as on minimum information required to be submitted by a taxpayer in the course of objecting against decisions of the NBR. Objections will need to be submitted using a prescribed form and within specific timelines detailed in the DMTT Law to be accepted in form.
Next steps for Bahraini Businesses
The immediate next steps for businesses operating in Bahrain are:
- Determine whether the business is in-scope or could become in-scope of the DMTT Law.
- For in-scope entities, assess their current position, overall tax exposure and possibility to benefit from some of the exclusions/reliefs provided in the DMTT Law.
- Plan for registration and compliance obligations
- Review related party transactions and consider preparing/reviewing existing TP policies and TP studies to support these policies.
- Remain vigilant for updates or further guidance from the NBR throughout the process.
Conclusion
The executive regulations on the DMTT Law provide valuable clarifications on the operation of DMTT rules for Bahraini constituent entities and introduce new TP documentation requirements. Our Middle East tax team assists entities in Bahrain and the wider Gulf in analyzing and planning for the impact of the new global minimum tax rules on their operations. For any queries, please feel free to reach out.
