Bahrain Exchange of Information OECD peer review

25 October 2018 - Bahrain Exchange of Information OECD peer review

On 15 October 2018, the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes released the second round peer review reports assessing compliance with the international standards on tax transparency and exchange of information upon request for seven jurisdictions, including Bahrain. 

The report rates Bahrain as “compliant” in comparison with the first-round review of “largely compliant” in 2013. Bahrain is one of 25 jurisdictions that have received a “compliant” rating to date and is the only country to do so in the Middle East. Currently, Morocco, Qatar, Saudi Arabia and the United Arab Emirates (UAE) have received “largely compliant” ratings, whilst other countries in the region have yet to be peer reviewed.

The following table summarizes the peer review ratings for Middle East countries received to date:

C = Compliant; LC = Largely compliant; PC = Partially compliant; NC = Noncompliant

* Subsequent to this PC rating, the UAE was reviewed under the fast-track review procedure and assigned a provisional “largely compliant” rating. The UAE is scheduled to undergo a full review before the end of 2018.

Implications for transfer pricing and CbC reporting

As part of the peer review, jurisdictions are assessed against the EOI standard that provides for relevant information to be available, accessed and exchanged to allow provisions of a tax treaty or domestic tax laws to be enforced. Whilst the review did not specifically focus on transfer pricing matters, it marks an important development in this area as the introduction of country-by-country (CbC) reporting is anticipated in Bahrain and other jurisdictions in the region. This is causing Middle East and North Africa-based multinational entities (MNEs), as well as foreign groups operating in the region, to consider how to manage the disclosure of sensitive financial information.

The OECD peer review highlights a number of important elements that will be relevant to MNEs operating in Bahrain and in the UAE, which has forged a similar relationship to Bahrain with the OECD and the Financial Action Task Force (FATF).

What is CbC reporting?

Once introduced, the CbC reporting rules are likely to require MNEs headquartered in Bahrain with turnover exceeding USD 850 million to provide tax authorities with visibility over their global operations. MNEs will be expected to recognize key CbC reporting risk areas and possibly provide explanations for their effective tax rates, should these be queried by the tax authorities. The CbC report contains aggregated information on a jurisdictional basis of an MNE’s revenue, profits, taxes, stated capital, accumulated earnings, employees and assets. The report also will provide tax authorities with the location(s) and business activities of the MNE’s operations.

When will Bahrain implement CbC reporting?

Bahrain joined the Inclusive framework for the global implementation of the BEPS project in May 2018, demonstrating a commitment to implement the four minimum standards which include actions 5, 6, 13 and 14, relating to harmful tax practices, treaty abuse, transfer pricing compliance and dispute resolution, respectively. The implementation of action 13 in Bahrain is likely to include some form of transfer pricing documentation requirements in addition to CbC reporting. The obligation to exchange financial information with other tax authorities resulting from CbC reporting, together with the October 2018 peer review rating and other commitments made by Bahrain, such as joining the inclusive framework, appear to be paving the way for an imminent introduction of CbC reporting legislation.

EOI treaty partners

Bahrain’s EOI network now covers 50 jurisdictions; 47 of the agreements currently are in force and permit Bahrain to exchange information effectively. Since 2013, Bahrain has added 10 new bilateral agreements and has ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which entered into force in respect of Bahrain on 1 September 2018, resulting in the addition of approximately 70 new EOI partners that also are signatories to the convention.

Data sensitivity and data security

MNEs may have concerns relating to the security of financial information, although the peer review report has assessed Bahrain as compliant with respect to confidentiality, rights and safeguards. Morocco, Qatar, Saudi Arabia and the UAE received the same ratings in these areas.

Exchange of CbC report information

To exchange CbC report information, jurisdictions would need to agree on the scope of the automatic exchange and the process to be followed. In this respect, jurisdictions typically are expected to become signatories to the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (CbC MCAA) and/or to activate exchange relationships through double tax treaties or tax information exchange agreements. Bahrain is not a signatory to the CbC MCAA (Qatar and the UAE are) and does not have any active CbC reporting exchange relationships. Therefore, it may take time for Bahrain’s treaty partners to access information filed in CbC reports and this may be a consideration for groups that have elected to file in a “surrogate” location, discussed below.

Surrogate filings

Bahrain-headquartered MNEs with operations in countries with CbC reporting rules in place may have been required to file a CbC report in another jurisdiction through a surrogate parent entity (SPE) for 2016. Once CbC reporting rules are introduced in Bahrain, Bahrain MNEs will be required to submit the CbC report locally, rather than in the jurisdiction of the SPE. This may create some practical issues as, depending on when CbC reporting rules enter into effect, Bahrain MNEs may have to resubmit CbC report notifications, resulting in a potential additional burden.

Comments

Bahrain has taken steps to improve compliance with internationally accepted and agreed EOI principles. CbC reporting regulations are expected in the near future and there now is a mechanism for Bahrain to share financial information reported with a multitude of treaty partners.

Bahrain’s parliament recently issued the value added tax (VAT) law and approved the introduction of VAT as from 1 January 2019. The peer review confirms that Bahrain’s Ministry of Finance still is “considering the possibility of introducing a more comprehensive tax system, looking to see what tax developments occur within other Gulf Cooperation Council member jurisdictions.” The UAE is expected to adopt a similar process, which may herald the start of a move towards the introduction of corporate income taxation in the region.