Bahrain is on the cusp of a major economic policy shift with the imminent introduction of a new corporate tax law.
This significant move, aimed at strengthening fiscal sustainability and aligning with global standards, is expected to be a game-changer for all businesses.
However, experts say the impact will be especially transformative for the financial services, insurance, and oil and gas sectors, warning that delaying preparations could be a “high-stakes gamble.”
While the specifics of the new law are yet to be revealed, the direction is clear: strict compliance, intense scrutiny of cross-border transactions, and mandatory, comprehensive documentation.
“The biggest risk companies face is underestimating the complexity of what’s coming,” said Grant Thornton Abdulaal head of tax Shashank Arya.
“We saw what happened in the UAE, where businesses that didn’t act early had to play catch-up while already under audit. That’s not a position anyone wants to be in,” he added.
A tax impact assessment is considered the most crucial first step. More than just a technical exercise, it is a strategic review of how the new tax will affect every aspect of a business – from cash flow and reporting systems to legal structures and operational models.
For banks, insurers, and energy firms, which often have international and asset-heavy operations, the tax assessment must be comprehensive.
It needs to cover several key areas, including bookkeeping (with a likely requirement to keep detailed records for at least five years), the rules for tax loss carry-forward (including any limitations on pre-incorporation or non-operating losses), and the tax implications of intra-group transfers like asset transfers and mergers.
The assessment must also address potential exposure to withholding tax on payments abroad for royalties, services, or interest, as well as the need for robust documentation to ensure transfer pricing adheres to the arm’s-length principle. Finally, it must evaluate any risks related to Permanent Establishment (PE) rules based on the company’s cross-border presence.
These sectors are particularly exposed due to their intricate regulatory environments, extensive international operations, and complex inter-company transactions.
In finance and insurance, intra-group loans, reinsurance agreements, and shared services will require meticulous documentation. Oil and gas firms, meanwhile, must carefully consider the tax treatment of exploration costs, depreciation of capital assets, and legacy joint ventures.
Jatin Karia, a senior partner at Grant Thornton Abdulaal, said these sectors are most exposed due to their intricate structures. “It’s critical to assess the tax position of each legal entity – many groups are structured across multiple jurisdictions, and one weak link could create exposure for the entire business,” Mr Karia added.
By conducting an assessment now, companies can optimise their structures, upgrade financial systems, and avoid potential penalties. Experts say that businesses that plan ahead will be better positioned to navigate the new landscape, while those that wait risk being overwhelmed by audits and reputational damage.
avinash@gdnmedia.bh
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