Richard Bregonje – Specialist with more than 25 years of experience in Tax & Legal services, PwC Middle East, stated that the Kingdom of Bahrain’s decision to implement a Domestic Minimum Top-up Tax (DMTT) at a rate of 15% on the profits earned by Bahraini members of MNE groups sets a pioneering precedent within the GCC region, potentially serving as a model for neighboring countries.
“This initiative aligns with Bahrain’s broader economic vision, emphasizing sustainable growth and a commitment to developing robust policies aimed at fostering a stable and diversified economy.” stated Mr. Bregonje.
“Furthermore, it seeks to enhance the financial environment. This tax will not impact domestic Bahraini companies that are not part of Multinational Enterprises (MNE) groups, and the revenues generated could be utilized to improve public services, advance infrastructure development, and support major projects. These measures are expected to drive economic progress, reinforcing the significance of the DMTT as a vital contributor to Bahrain’s economic future.”
He added that the failure to implement this additional tax in the Kingdom of Bahrain would have deprived the Kingdom of tax revenues, as the constituent entities located in Bahrain and belonging to a MNE group would have paid that tax on their profits earned in the Kingdom to the tax authorities in the jurisdictions where the ultimate parent entities of the MNE group are located. This is in accordance with the provisions of the Pillar Two rules, which require the subsidiaries of MNEs to pay a fair minimum tax rate on their profits, regardless of where they are earned.
Mr. Bregonje described Bahrain’s decision to impose DMTT as a crucial step in the right direction, aligning with the government’s policies and the economic recovery plans outlined in Bahrain’s Economic Vision 2030. The decision is part of a broader strategy aimed at maintaining competitiveness in an increasingly global economy that values fair taxation, it also represents an important shift towards reducing reliance on oil revenues, supporting economic stability and financial balance, especially given the volatility in today’s global oil market.
Ms. Fatima Alshamaa – Senior Associate – Tax & Legal services, PwC Middle East, described the implementation of DMTT as a significant milestone in Bahrain’s tax landscape for multinational enterprises. The tax is applicable exclusively to Bahraini entities that form part of MNE groups with annual revenues of EUR 750m or more as per the consolidated financial statements of the ultimate parent entity of the MNE. The DMTT does not apply to local Bahraini groups which do not have entities or establishments outside of the Kingdom.
Ms. Alshamaa added, “The introduction of DMTT in Bahrain exemplifies the alignment of Middle Eastern countries with global taxation standards. Scheduled to take effect on January 1, 2025, this legislation provides multinational companies with a preparatory period to assess its impact on their operations. Companies are advised to undertake thorough evaluations and seek specialized professional consultations to ensure full compliance with the forthcoming requirements.”
On the overall landscape in the region related to taxation on foreign companies, Mr. Bregonje noted that All GCC countries and other countries in the Middle East such as Egypt and Jordan are members of the G20/OECD Inclusive Framework on BEPS. These countries have officially committed to supporting the Pillar Two initiative, although this commitment does not require the introduction of rules to subject in-scope MNEs to a minimum effective tax rate of 15%, noting that similar to Bahrain, it is anticipated that the other GCC and Middle East countries will also introduce certain ‘defensive’ measures to ensure the global minimum tax on local profits is paid locally by MNEs operating in their respective jurisdictions.
Other Middle East countries are expected to follow suit in due course, particularly as the EU and other countries have introduced Pillar Two rules.
Furthermore, Mr. Bregonje considered that tax reform is high on Middle East governments’ agenda and has driven unprecedented levels of change in the last 24 months. The importance of taxes to diversify away from traditional oil-based revenues and create new long-term sustainable revenue sources for the Middle East countries is set to increase as a result of the Pillar Two initiative and their commitments to complying with international standards in line with their commitment as members of the Inclusive Framework on BEPS.
