Bahrain considers raising taxes to reduce deficits

• Budget tax plan under discussion
• Wider corporate tax likely
• Debt burden at 130% of GDP

Bahrain’s plan to end a long string of government budget deficits could prove burdensome to both businesses and people as it considers a raft of tax measures.

The country is discussing a 12-point plan for its two-year budget, with measures including the introduction of a wider corporate tax, an increase in value added tax (VAT) from 10 percent and additional taxes on goods considered harmful to people’s health.

It is also considering a levy on carbon dioxide emissions – which would be a first in the Gulf region.

It is still too early to say which measures will finally be agreed upon. Bahrain’s two-year fiscal period started on January 1.

“The likelihood of implementation varies,” Nils Vanhassel, a senior associate in the Middle East tax team at law firm DLA Piper, tells AGBI.

“Indirect tax measures are generally easier to implement from a technical perspective and could offer a more efficient revenue-generating solution in the short term.”

Bahrain’s government debt burden has been rising with every fiscal shortfall, and it now stands at almost 130 percent of gross domestic product (GDP), according to the International Monetary Fund.

That is more than double the 60 percent ratio the European Union set for governments as they converged their finances around the euro.

Last month ratings agency Fitch placed Bahrain on “negative outlook” on concerns over persistent budget deficits, rising public debt and relatively low levels of foreign exchange reserves. This means that Fitch could downgrade its rating for Bahrain at its next review.

An initial draft of the 2025-2026 budget, which included potential savings measures, was discussed with parliamentarians this week.

“The discussions are ongoing, and every point of the 12 proposals is subject to consensus,” parliamentary financial and economic affairs committee chairman Ahmed Al Salloom was quoted as saying in the local Gulf Daily News.

With 1.6 million residents, Bahrain is the smallest country by population in the six-member Gulf Cooperation Council (GCC) and is dwarfed by its immediate neighbour, Saudi Arabia, to which it is connected by a causeway. 

The 44-year-old GCC customs union comprises Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain, which – when these countries are combined with Iran and Iraq – constitute the world’s largest oil-producing region.

Bahrain’s own oil production has declined over the years from a high of about 205,000 barrels per day to about 66,000 now. 

It is also partially reliant on revenue from the offshore Abu Safah field which it shares with Saudi Arabia, and requires an oil price of about $125 per barrel to balance its fiscal books. Oil prices are now below $70 per barrel.

If implemented, the 12-point plan would generate a budget surplus of BD25 million ($66 million) in 2026, according to Al Salloom. That compares with a deficit of BD161 million in 2024 and BD520 million in 2023.

At the start of this year and in line with its obligations to the Organisation for Economic Co-operation and Development (OECD), Bahrain introduced the so-called domestic minimum top-up tax, imposing a 15 percent levy on the profits of multinational companies with consolidated revenue of €750 million ($810 million) or more. Collection will start in the third quarter.

However, since only a few multinational companies operate in Bahrain, this tax is unlikely to generate much revenue.

“To bridge this gap, a wider corporate-tax regime that applies to most businesses would provide a more significant contribution to government finances,” says Vanhassel.

The so-called Pillar Two OECD framework of some 140 participating jurisdictions around the world is designed to ensure that multinational companies with a consolidated revenue of more than €750 million pay at least a 15 percent rate on their profit regardless of where they operate. The measure came into effect in 2024.

At the beginning of this year, the UAE increased its corporate tax rate to 15 percent from an initial 9 percent last year to meet its OECD obligations.

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There appears to be room for Bahrain to tax its businesses more. 

Businesses operating in Bahrain benefit from annual operating cost-advantage of up to 69 percent in logistics, and up to 41 percent in manufacturing compared with their GCC neighbours, according to a Cost of Doing Business in the GCC report by global consultancy EY.

"A well-designed corporate income tax would enhance Bahrain’s economic credibility whilst remaining an attractive jurisdiction for businesses,” says Vanhassel.

Plans to implement a 2 percent tax on remittances of expatriates resident in Bahrain were also discussed in January. Foreign nationals make up 55 percent of the population.