Bahrain is set to implement a notable fiscal measure that will tax the profits of large multinational enterprises (MNEs) operating within its borders starting from January 1, 2025. This initiative targets MNEs with global revenues exceeding €750 million ($830 million), compelling them to pay a minimum tax of 15% on the profits generated within the Gulf nation. The policy aligns with the guidelines set by the Organisation for Economic Co-operation and Development (OECD), marking a significant shift in Bahrain's taxation landscape.

This tax, known as the Domestic Minimum Top-up Tax (DMTT), is framed under Decree Law 11 of 2024. The National Bureau of Revenue (NBR) has emphasized that the initiative aims to bolster economic fairness and transparency in accordance with international standards. The introduction of the DMTT illustrates Bahrain's dedication to global cooperation, as it has been actively engaged with the OECD since joining its Inclusive Framework in 2018.

The OECD's Global Minimum Corporate Tax reform, part of a two-pillar approach, mandates large MNEs to pay a minimum tax rate of 15% on their profits regardless of the country of operation. This reform has gained the support of over 140 jurisdictions, each aiming to curb tax avoidance by ensuring that MNEs contribute fairly to the economies where they generate their profits.

Bahrain's decision to adopt this tax measure appears to be driven by multiple factors, including a need to diversify revenue sources and reduce its economic dependency on crude oil production. As one of the smaller oil producers outside of the Organisation of the Petroleum Exporting Countries (OPEC), Bahrain, like its regional peers, is seeking to cushion its economy against the volatility of oil markets.

In recent years, other Gulf Cooperation Council (GCC) nations have initiated similar tax reforms. The United Arab Emirates (UAE), traditionally recognized as a tax haven, began levying a 9% corporate tax on businesses earning more than 375,000 dirhams (about €91,500) last year. Similarly, Oman and Kuwait have each established a 15% tax on the profits of foreign companies. Bahrain's strategy diverges slightly in that it skips intermediate steps, moving directly to enforce the OECD's standard of a 15% minimum tax.

Multinational corporations such as Amazon Web Services, Microsoft, and Pepsi, which have significant operations in Bahrain's capital, Manama, are expected to adapt to the new tax framework. This represents a considerable shift from the country's previous stance, where it resisted implementing corporate taxes to maintain its competitive edge in attracting global business operations.

Justin Alexander, the director of the economic consultancy Khalij Economics, observes that Bahrain's move is particularly significant given its historical absence of a corporate income tax. The introduction of this new tax is a response to persistent budget deficits and the regional trend towards standardized fiscal regulations. Bahrain's alignment with OECD standards underscores its commitment to economic reform and fiscal sustainability.

The anticipated tax revenue from the new measure is projected to bolster Bahrain's public finances significantly. According to the OECD, the global minimum tax rate is expected to generate an additional $220 billion (€199 billion) in annual tax revenues for governments worldwide. For Bahrain, this could mean a much-needed financial uplift amidst ongoing economic challenges.

The decision has also been discussed within broader international forums. At a G20 meeting in Rio de Janeiro, the participating nations expressed a collective intent to enhance tax fairness globally, including efforts to tax the ultra-wealthy more effectively. The initiative found varying degrees of support among members, with countries like Brazil, France, South Africa, Spain, and the African Union advocating for a worldwide tax on the wealthy. However, opposition from nations like the United States, as articulated by Treasury Secretary Janet Yellen, underscores the complexities of achieving international consensus on tax policy coordination.

Bahrain's move to align with OECD standards on multinational taxation is a strategic endeavor aimed at fostering a more equitable and transparent global economic system. By ensuring that MNEs contribute a fair share of their profits to the local economy, Bahrain is not only diversifying its revenue base but also reinforcing its commitment to upholding international fiscal norms.

This taxation policy is seen as a critical step towards economic modernization and fiscal resilience for Bahrain. As the global economy continues to grapple with issues of tax fairness and corporate accountability, Bahrain's early adoption of the OECD's guidelines positions it as a proactive player in the international economic arena. Eligible businesses must register with Bahrain's National Bureau for Revenue by the specified deadlines to comply with the new tax regulations.