Bahrain is dedicated to the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and has already implemented the BEPS Action 13 (Country by Country Reporting) and Economic Substance (ES) rules (BEPS Action 5). Profits made by Bahraini companies could be subject to taxation in other countries if Bahrain does nothing about Corporate Income Tax under the Global Minimum Tax (GMT) regulations, which are set to go into effect in 2023. Bahrain will essentially automatically lose its ability to tax. Thus, Bahrain is getting ready to impose a corporate tax on businesses, following the announcement by the United Arab Emirates that it will go into effect in the middle of 2023.
Bahrain has no income, sales, capital gains, or estate taxes, except for businesses (local and foreign) that operate in the oil and gas sector or profit from the extraction or refinement of fossil fuels (defined as hydrocarbons) in Bahrain. A profit tax of 46% is levied on the income of companies active in the exploration, extraction, or refining of hydrocarbons in Bahrain, whether local or foreign.
Businesses must make sure that their current systems can handle the requirements that a CIT regime introduces, including transfer pricing, consolidation rules, and interest deductibility restrictions. Existing structures may be tax efficient or not. Even before a CIT is implemented, businesses can assess their current operations and structures to see if they are tax efficient and consider any optimization opportunities well before any transitional rules or restrictions are announced in conjunction with the implementation of a CIT. The tax base and carrying amount of assets may differ because different depreciation rates will be used for tax and accounting purposes. The introduction of a CIT will likely have an impact on Bahraini businesses, so we strongly advise them to at least perform a preliminary analysis.
For tax and accounting purposes, income and expenses may be recognized at different times, and certain income and/or expenses may be recognized for accounting purposes but not for tax purposes, or the other way around. For CIT and accounting purposes, the treatment of capital gains and losses will differ. It may be possible to use tax losses from one year to reduce future taxable income. Differences between accounting profit and taxable income will also follow from this (or the carry forward tax loss).
Bahraini businesses have historically operated under a non-domestic CIT regime, and the implementation of a CIT regime will be a significant disruption to the established order, with far-reaching financial and commercial consequences. Businesses must note the prior areas. They can even consult an expert to organize the procedures and professionally complete them.
- Organization’s current tax function’s role
- Rationalization of the capital structure, business strategy, and legal framework
- Adequate financial resources and capabilities
- The systems and technological framework used in finance.
- If the used systems and technology can be used for tax purposes.
- Any necessary policy and control updates for governance, strategy, and reporting.