In my last article, I discussed the UAE’s announcement concerning the introduction of corporate income taxation (CIT), and hinted that Bahrain’s rollout of CIT is likely just a matter of time. Last week, the Minister of Finance confirmed that Bahrain’s introduction of CIT is not far off. This was inevitable considering:
- The plan to diversify government revenues away from the cyclical oil and gas sector,
- The global pushback against tax haven countries with reduced forms and rates of taxation,
- The minimum effective tax rate of 15% applicable to overseas profits of large MNEs. Countries imposing lower corporate tax rates (or no corporate taxes) on in-scope MNEs would effectively be ceding tax revenues to other jurisdictions.
Although supporters of CIT argue that its burden would fall on corporations, some citizens are not entirely convinced, countering that corporations will ultimately seek to recover this additional cost in the form of higher prices. In addition to how the burden of CIT will ultimately be distributed between shareholders vs consumers, the net impact to the economy will be more dependent on whether the tax revenues are ultimately spent back in the economy in the form of government expenditures, or whether they are taken out of the economy to reduce the public debt.
As for tax professionals’ favorite pastime of speculating on what the corporate tax rate will be, a rate in the range of 9% - 15% is likely, considering that 9% is the CIT rate in the UAE, which is the regional rival destination for MNE headquarters since it was also free of any major taxes until recently, and 15% is the above-mentioned minimum tax rate on overseas profits of large MNEs. Nonetheless, a tax rate of 20% is not out of the question.
Similar to the VAT regime, the CIT regime is likely to have exemptions for small businesses.
Abdulrahman Bucheeri, Tax Manager – MEA, BNP Paribas
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