Bahrain Officially Adopts the OECD Pillar 2 Framework

Bahrain businesses should prepare for the broader introduction of corporate tax in the coming months, say experts, adding that the adoption of Organization for Economic Co-operation and Development’s (OECD) Pillar 2 global minimum tax framework signals a shift towards a more internationally aligned tax system.

According to Shashank Arya, director for tax advisory at Grant Thornton Bahrain, the adoption of Pillar 2 aligns the kingdom with international standards for tax transparency and fairness. Mr Arya explained that Pillar 2 is a global effort to prevent multinational companies from avoiding taxes by moving their profits to low-tax jurisdictions. “For years, some multinational companies have been able to reduce their tax bills by shifting profits to countries with lower or no corporate tax rates. This practice, known as ‘tax haven shopping,’ has been criticized for being unfair and undermining the tax systems of countries with higher rates,” he added.

Earlier this week, Bahrain became the first country in the Middle East and North Africa to adopt the OECD Pillar 2 framework. The kingdom published Decree Law o (11) of 2024 on September 1, introducing a Minimum Domestic Top-up Tax (DMTT) for multinational enterprises (MNEs) meeting certain criteria. Effective January 1, 2025, the DMTT will impose a 15 per cent tax rate on MNEs with global annual revenue exceeding 750 million euros in two of the four preceding years.

However, government bodies, international organizations, non-profit organizations, pension funds, investment funds and real estate investment vehicles are exempt. Bahrain’s decision to implement DMTT demonstrates its commitment to a level playing field for businesses operating within its borders, Mr. Arya said. A de minimums exclusion applies to MNEs with average constituent entity revenue and income below specific thresholds. Additionally, a substance-based income exclusion is provided for certain payroll costs and tangible asset carrying values.

While the decree law provides the framework, executive regulations will be issued to clarify procedural aspects such as resignation, tax returns and dispute resolution. Under the new rules, if a multinational company’s effective tax rate in a country is below 15pc, it will be required to pay a ‘top-up’ tax to reach that minimum. This ensures that no matter where a company operates, it contributes a fair share to the tax systems of the countries it does business in.