Corporate Income Tax Bahrain
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 Income Tax Bahrain on businesses, following the announcement by the United Arab Emirates that it will go into effect in the middle of 2023.
The developments should be on the radar of businesses in Bahrain and a proactive assessment of readiness should be undertaken to ensure accounting systems, financial reporting and tax structures are in place to meet the expected corporate income tax obligations in good time.
Corporate Income Tax Bahrain:
Bahrain has no income, sales, capital gains, or estate taxes, except for businesses (local and foreign) operating in the oil and gas sector or earning profits from the exploration, extraction, or refining of fossil fuels (hydrocarbons) in Bahrain. A 46% Corporate Income Tax Bahrain is levied on the taxable profits of companies engaged in the exploration, extraction, or refining of hydrocarbons in Bahrain, regardless of whether they are locally or foreign owned.
Businesses must make sure that their current systems can handle the requirements that a Corporate Income Tax Bahrain regime introduces, including transfer pricing, consolidation rules, and interest deductibility restrictions. Existing structures may be efficient for Corporate Income Tax Bahrain 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 Corporate Income Tax Bahrain 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 Corporate Income Tax Bahrain 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).
With proactive preparation and expert support, organizations will be able to manage this change successfully and assuredly.
What steps should businesses in Bahrain take right away to prepare for a smooth transition to a Corporate Income Tax environment?
Bahraini businesses have historically operated under a non-domestic Corporate Income Tax (CIT-Corporate Income Tax Bahrain) 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.
What areas must a business concentrate on?
- 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.