Bahrain businesses have been advised to assess their tax situation now in preparation for the anticipated introduction of corporate income tax (CIT).
Experts from leading audit and advisory firm Grant Thornton Bahrain urged enterprises to carefully plan and analyse their current business structure in light of the potential implementation of CIT.
It is critical for businesses to have a reliable and efficient tax accounting system, they said.
Noting that Bahrain was currently the only GCC country without a broad-based CIT, senior partner Jatin Karia recalled that the government had confirmed during the parliamentary session on May 23, 2023 that it would introduce corporate tax in the future.
This would be in line with the Organisation for Economic Co-operation and Development (OECD)’s base erosion and profit shifting (BEPS) initiative for global minimum taxation and to meet international standards, he explained.
“The BEPS initiative aims to prevent multinational enterprises (MNEs) from shifting profits to low-tax jurisdictions. The CIT would ensure that MNEs pay a minimum tax of 15pc on their global income in the local Jurisdiction.”
According to Shashank Arya, director for tax advisory at Grant Thornton Bahrain, CIT in the kingdom is expected to be a two-tiered system with a zero rate for taxable income not exceeding BD37,500 and a standard rate in the range of 5 per cent to 10pc for taxable income exceeding BD37,500.
He further said that a generous ‘zero rate’ bracket would be a welcome step as Bahrain is home to many small businesses and start-ups, allowing these businesses to continue growing without being burdened by CIT until they have reached a comfortable taxable income level of BD37,500.
“This means that Bahrain’s CIT rate would be the third lowest in the world followed by Turkmenistan (8pc) and Barbados (5.5pc),” he added.
“By comparison, the average statutory rate amongst the OECD member states is 23.57pc. It will also make the Bahrain’s CIT rate the lowest in the Middle East, with the UAE coming in a close second at 9pc.”
Mr Arya explained that taxable income is calculated by taking a company’s net profit and subtracting or adding any deductions or allowances that they are entitled to.
He listed business expenses, such as rent, utilities, and salaries; interest expense; entertainment expenses (up to a certain limit); depreciation and bad debts as examples of deductible expenses.
On the other hand, examples of non-deductible expenses include: donations (except to qualifying public entities); grants and gifts; corporate tax; indirect taxes; fines and penalties; dividends and profit distributions to the owners.
“In general, the goal of deductions and allowances is to allow taxpayers to subtract the genuine costs of earning their net income and to prevent harmful tax practices. This helps to ensure that taxpayers are only taxed on their actual profits,” Mr Arya added.
Allaying concerns, Mr Karia said: “We are confident that Bahrain would draw inspiration from neighbouring countries as well as jurisdictions which are well developed and are known for having implemented tax regimes that are straight forward, business friendly and relatively easy to administer.
Finally, if CIT were to get introduced in Bahrain, said Grant Thornton managing partner Jassim Abdulaal, “I’m sure Bahrain will succeed in designing and implementing a robust CIT regime that is aligned with global best practices while remaining attractive for businesses.”
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