Mubeen Khadir, Head of Tax and Corporate Services, KPMG Bahrain: Viewpoint

Viewpoint: Mubeen Khadir

We are witnessing tax regimes evolve around the world, especially in the Middle East. This is not only due to the shifting economic and social conditions, but also to the rapidly changing global marketplace in a digital era. With accelerated digital transformation taking place over the past few years – hastened by factors disruptions such as the Covid-19 pandemic – it is important to consider whether tax systems have kept pace with the changing landscape. Many observers are wondering if disruption to the labour market will heighten tax risks, for example, and if it may be possible to take a more ethical and fair approach to taxation practices.

In Bahrain we need to take into consideration how initiatives such as the OECD’s base erosion and profit-sharing (BEPS) framework, economic substance rules (ESR), country-by-country (CbC) reporting and ultimate beneficial ownership rules may influence tax reform. The kingdom has a limited corporate tax that only applies to companies in the exploration, production or refining of hydrocarbons. Bahrain also does not impose any personal income tax. As such, all profits, dividends and other income is essentially tax free. Bahrain also has no exchange-control regulations and no restrictions on the repatriation of capital, profit, dividends, interest and royalties.

In the GCC, Saudi Arabia, Kuwait, Oman and Qatar currently have some form of corporate tax. With the UAE announcing the introduction of corporate income tax (CIT) effective starting in mid-2023, it is important to consider what may be in the future for Bahrain. The country is committed to the OECD/ G20 Inclusive Framework on BEPS, having introduced CbC reporting in line with BEPS Action 13, and ESR as per BEPS Action 5. If Bahrain does not implement CIT under the global minimum tax rules that are to take effect in 2023, profits generated by firms in Bahrain could be subject to tax in other jurisdictions. In essence, Bahrain will lose out on taxation rights.

Moreover, Bahrain will want to ensure that it continues to not be included in the EU list of non-cooperative jurisdictions. As such, it is our view that it is likely that Bahrain will also introduce CIT. Businesses in Bahrain may want to consider their future tax liabilities, pricing strategies and the impact these will have on shareholders, recruitment, and employees’ remuneration and benefits. At the same time, foreign firms would need to analyse the implications for their global tax payments and disclosures.

One of the key areas impacted by CIT would be related party transactions. These must reflect the taxable income that would have arisen if the transactions had been carried with a third party. Related party transactions between entities within a group that have different tax profiles – such as loss-making entities or entities subject to different effective tax rates – may attract more scrutiny from a tax authority as there could be motive to shift profits to other group entities that are subject to a lower tax rate.

A CIT regime introduces several compliance concepts – such as transfer pricing, consolidation rules and interest deductability limitations – and businesses will need to ensure that their current systems will be able to handle these requirements. It will also be necessary to consider whether existing structures are tax effective. Before CIT is introduced, businesses will be able to evaluate their operations to see if they would be tax effective under the regime. They can then evaluate optimisation opportunities well before transitional rules are announced.

As different depreciation rates will be applied for tax and accounting purposes, the tax base and carrying amount of assets may differ. Another point of consideration is that income and expenses may be recognised in different periods for tax and accounting purposes. Additionally, specific income and expenses may not be recognised for tax purposes, but may be recognised for accounting reasons.