Short summary of Pillar 2 and Domestic Minimum Top-Up Tax regulation:

The Pillar 2 (GloBE) rules constructed by the OECD set out global minimum tax rules designed to ensure that Multinational Enterprises (“MNEs”) pay a minimum effective tax rate of 15% on profits in all countries.

In instances where an MNE has an Effective Tax Rate (“ETR”) that is lower than the 15% minimum rate, additional tax (or Top-up Tax) is due. This Top-up Tax would be collected under one of the following collection mechanisms: (i) Domestic Minimum Top-Up Tax (“DMTT”); (ii) Income Inclusion Rule (“IIR”); or (iii) Under Taxed Profits Rule (“UTPR”).

• The IIR is the primary tax collection mechanism under GloBE. Under this collection mechanism, the Ultimate Parent Entity (“UPE”) accounts for the Top-Up Tax in its own jurisdiction. If the jurisdiction of the UPE has not implemented the GloBE rules, or does not apply the IIR, then the right to account for the Top-Up tax flows down to the next parent entity within the MNE group.
• The UTPR operates as a backstop to the IIR, so that if not all Top-Up Tax is allocated under an IIR, the right to account for the Top-Up tax falls on other group entities based on a ratio based on the number of employees and the value of tangible assets in their jurisdictions.
• Jurisdictions may also consider imposing a DMTT, this equates to a 15% local level tax on large multinational businesses within the implementing jurisdiction. The DMTT seeks to apply a top-up tax charge on the jurisdiction's local tax calculation. This will lift an entities effective tax charge to 15% to ensure priority in collection of taxes due on revenues generated within a jurisdiction. A DMTT is expected to erode much of the top-up tax that the IIR and UTPR could seek to collect. If the DMTT implemented by a certain jurisdiction meets certain requirements, it could become a Qualified Domestic Top-Up Tax (“QDMTT”). A QDMTT allows for possible application of the QDMTT Safe Harbour which could provide MNE’s with less burdensome compliance requirements.

On the 15^th of December 2024, the National Bureau for Revenue (“NBR”) released the Executive Regulations (the “Regulations”) for the DMTT in Bahrain.  This release follows the publication of the Decree-Law No. 11 of 2024 (the “Law”) back in September 2024, which aims to introduce a Global Minimum Tax (“GMT”) of 15% on large Multinational Enterprises (“MNEs”) operating globally. These new Regulations provide further clarification on the DMTT rules provided by the Law. We have summarized the key highlights below:

Key Highlights:

Revenue Test: According to the Law, MNEs are subject to the DMTT when their consolidated revenues exceed EUR 750 million for at least two of the four preceding fiscal years. The Regulations now clarify that such revenues shall be determined in accordance with the MNE’s Consolidated Financial Statements, following certain adjustments (e.g., inclusion of certain unrealized gains from investments and income or gains separately presented as extraordinary or non-recurring items).

Excluded Entities: The Law sets out entity exclusions (e.g., for government bodies, international organizations, non-profit organizations) for DMTT purposes, in line with the OECD recommendations. The Regulations now define the excluded entities and provide

For example, the Regulations determine that a Government Body is an entity that meets all of the following criteria: (i) it is part or wholly owned by a government; (ii) it has the principal purpose of fulfilling a government function, or managing or investing that government’s or jurisdiction’s assets, and does not carry on a trade or business; (iii) it is accountable to the government on its overall performance; and (iv) its assets vest in such government upon dissolution and to the extent it distributes net earnings, such net earnings are distributed solely to such government with no portion of its net earnings inuring to the benefit of any private person.

Other entities: as expected, the Regulations now provide specific rules for Minority-Owned Constituent Entities (“MOCEs”), multi-parented MNEs, Investment Entities, Flow Through & Hybrid Entities and Insurance Investment Entities.

Permanent Establishment: The Law determined that Permanent Establishments of foreign entities in Bahrain are included within the scope of the DMTT legislation. The Regulations now include a definition of Permanent Establishment and the expected apportionment calculation of income and expenses, which follows the OECD standards and principles.

Constituent Entities that are located in more than one jurisdiction: The Regulations set out a tie breaker for Constituent Entities that are considered to be located in more than one jurisdiction, which is particularly relevant in cases where Bahrain does not have a double tax treaty in force with the other jurisdiction.

Change in a Constituent Entity’s location: The Regulations provide that Constituent Entities re-domiciled to or from Bahrain shall be considered located in the jurisdiction where it was located at the start of the fiscal day of that Fiscal Year.

Constituent Entity Income or Loss & Adjusted Covered taxes: The Regulations provide details on the adjustments to determine the Constituent Entity Income or Loss, as well as to determine the Adjusted Covered Taxes. These concepts form the basis to determine the Effective Tax Rate (“ETR”) for Constituent Entities of MNEs located in Bahrain.

Elections: The Law indicated that DMTT elections would be introduced by the Regulations, in line with the OECD Model Rules. The Regulations confirmed the introduction of most elections recommended by the OECD, such as: the Excluded Entity Election, Election to use the Realization Method, Stock-based Compensation Election, Election to Spread Capital Gains, Consolidation Election, GloBE Loss Election, Tax Transparency Election, Taxable Distribution Election, Unclaimed Accrual Election, Substance-Based Income Exclusion Election, Transitional Safe Harbour Election, De Minimis Election, Portfolio Shareholding Election, Foreign Exchange Hedge Election, Excess Negative Tax Carry Forward Election, Debt Release Election and Equity Investment Inclusion Election.

Material Competitive Distortions: The Regulations provide adjustments where the application of a specific principle or procedure under a set of generally accepted accounting principles results in a material variation in a Fiscal Year as compared to the amount that would have been determined by applying the corresponding IFRS principle or procedure. The Regulations indicate that further clarifications will be issued in the future in this respect.

Restructuring and Holding Structures: Similarly to the OECD Model Rules, the Regulations also introduce specific rules to account for group mergers and demergers, as well as to account for Constituent Entities joining or leaving an MNE group. These rules could have an impact on the computation of the DMTT revenue threshold mentioned above.

Substance-based Income Exclusion Rule: When calculating the Taxable Income for the In-Scope Entities, the Law allows for the deduction of a percentage of certain payroll costs, as well as a percentage of the carrying value of certain tangible assets to the Net Constituent Entity Income. The percentages set out by the Regulations are in line with the OECD Model Rules.

De minimis exclusion: This exclusion constitutes a permanent safe harbour, which allows the Tax Due in Bahrain to be considered zero (0) if the following conditions are met: (1) the Average revenue of all In-Scope Entities is below EUR 10 million; and (2) Average income of all In-Scope Entities is below EUR 1 million. Although the Law had already introduced the de minimis exclusion, the Regulations provide further details on the application of this exclusion (e.g., how to calculate the Average revenue in cases where there were no Constituent Entities located in Bahrain for the two fiscal years preceding the current year, in cases where the two preceding fiscal years are shorter than 12 months, and in cases where the MNE group acquires a Constituent Entity located in Bahrain through a merger).

Safe Harbours: The Law provided two Safe Harbour provisions (the temporary Country by Country Report (“CbCR”) Safe Harbour and the permanent Simplified Computation Safe Harbour), which allow for the Tax Due to be considered zero (0) if certain conditions are met. The Regulations also provide further details with respect to the CbCR Safe Harbour, including defining “Qualified CbCR Report” and further describing the three CbCR Safe Harbour tests, as per the OECD Model Rules.

In addition, the Regulations also clarify that the rules, conditions and controls necessary for the application of the Simplified Computation Safe Harbour will be issued in the future.

Exclusion for Initial Phase of International Activity: This exclusion constitutes a permanent safe harbour, according to which the Tax Due shall also be considered to be zero (0) for MNEs in their initial international activity stage, provided certain conditions are met (such as the MNE not operating in more than six (6) jurisdictions and the sum of the net book value of assets of all Constituent Entities located in all jurisdictions not exceeding EUR 50 million). Although the Law had already introduced the Exclusion for initial phase of International Activity, the Regulations on the application of this exclusion (e.g., application of the exclusion to Stateless Constituent Entities and definition of Net Book Value of Tangible Assets).

Qualifying taxpayers are required to prepare and maintain a Local File and Master File if they have cross-border related-party transactions with other constituent entities within their MNE group. The executive regulations do not currently specify transactional value thresholds for the preparation of these files. Further guidance could be reasonably expected in this regard.

Transfer Pricing: Article 13 of the executive regulations outlines transfer pricing requirements for qualifying taxpayers in Bahrain. These requirements are largely aligned with the OECD Transfer Pricing Guidelines, both in terms of acceptable methods and the required contents of the Local File and Master File. It is important to note that this is the first time that Bahrain has formally incorporated transfer pricing regulations in its domestic tax law.

Qualifying taxpayers are required to prepare and maintain a Local File and Master File if they have cross-border related-party transactions with other constituent entities within their MNE group. The executive regulations do not currently specify transactional value thresholds for the preparation of these files. Further guidance could be reasonably expected in this regard.

Furthermore, the Regulations state that existing Advance Pricing Agreements (APAs), whether bilateral or multilateral, shall form the basis for any income or loss adjustments in accordance with the agreed arm’s length price established in the APA.

Finally, for Bahrain-based constituent entities, any income adjustments arising from losses on the sale or transfer of assets between them must be made in accordance with the arm’s length principle.

General Anti-abuse rule: The Law sets out a General Anti-abuse rule. The Regulations now clarify the aspects that the NBR will consider when assessing potentially abusive transactions or arrangements.

Administrative Procedures: The . For example, the Regulations specify that the Filing Constituent Entity shall submit to the NBR a written consent including confirmation from all group entities of the MNE Group, consenting to their appointment of this entity being the Filing Constituent Entity on behalf of the MNE group.

Registration: For MNEs that are within the scope of the DMTT from 1 January 2025, where the revenue test mentioned above is met for two of the four Fiscal Years immediately preceding the date in which the Law comes into effect, the Filing Constituent Entity shall submit this registration within 30 days from 1 January 2025. For MNEs that may be within the scope of the DMTT in the future, the Regulations provide that the Filing Constituent Entity shall apply for the DMTT registration with the NBR within 120 days from the first day of the Transition Year (i.e., the first Fiscal Year for which an MNE comes within the scope of the DMTT).

Qualifying Domestic Minimum Top-Up Tax (“QDMTT”) Safe Harbour: MNEs headquartered outside of Bahrain may be required to apply the GloBE rules (in the context of the Income Inclusion Rule (“IIR”) and Undertaxed Profits Rule (“UTPR”) collection mechanisms) to Constituent Entities located in Bahrain, irrespective of whether Bahrain has implemented a DMTT. However, if the DMTT implemented by Bahrain is to be considered a QDMTT, qualifying to avail to the QDMTT Safe Harbour, this would result in the Top-up tax due in Bahrain to be deemed to be zero (0), for GloBE purposes. In order to be considered a QDMTT for the purposes of thus applying the QDMTT Safe Harbour, a DMTT introduced by a jurisdiction must meet the following three standards:

1. Accounting standard – the DMTT legislation should either adopt the financial accounting standard used for preparing the Consolidation Financial Statements of the Ultimate Parent Entity (“UPE”) or the local financial accounting standard rule is met.
2. Consistency standard – the computations under the DMTT must be the same as those under the GloBE rules, except where the Administrative Guidance explicitly requires the DMTT to depart from the GloBE rules.
3. Administration Standard – the DMTT jurisdiction is subject to the same ongoing monitoring process as the GloBE rules.

Although the DMTT implemented by Bahrain is silent on the QDMTT Safe Harbour, we expect the Bahrani DMTT to be considered a QDMTT under the OECD principles.

IIR and UTPR: The Regulations remain silent on the potential introduction of further OECD collection mechanisms such as the IIR and UTPR. As of now, we believe it is unlikely any of these collection mechanisms would be introduced and in turn would not come into effect from 1 January 2025.

In conclusion, as the Bahrani DMTT rules come into effect, MNEs operating in Bahrain should start identifying the impact that these rules have on their local and global operations. We recommend performing this activity as early as possible due to the extensive changes to data collection, and accounting & consolidation reporting that these rules bring. MNEs should consider their current data capabilities i.e. the ability to provide the data points now required under the GMT rules, the organization’s capability to identify and collate these data points and the impact on their current technology setup to ensure compliance with these new obligations.

How can A&M help? A&M has developed a detailed phased approach to support MNEs across the Middle East, and beyond, navigate the entire Pillar 2 operational readiness journey so feel free to reach out to any of our subject matter experts.