The Government of The Bahamas enacted the Domestic Minimum Top-up Tax Act (“DMTT Act”) on 29 November 2024 to implement Pillar Two of the Organization for Economic Cooperation and Development (OECD)/G20 Two-Pillar Solution to base erosion and profit shifting (BEPS). Pillar Two seeks to establish a global minimum tax of 15% for multinational enterprise (“MNE”) groups with revenues of 750 million euros or more (“in-scope MNE Group”).
What is Pillar Two?
The Pillar Two provisions are intended to be implemented in domestic legislation and applied consistently across jurisdictions to achieve the minimum tax in 3 different ways:
- The Qualified Domestic Minimum Top-Up Tax (“QDMTT”) allows the country in which the low-taxed group entities are located to impose the top-up tax. Where a QDMTT has been implemented, it takes priority over the other rules.
- The Income Inclusion Rule (“IIR”) allows the country in which the group’s ultimate parent entity (“UPE”) is resident to impose the top-up tax on the UPE if the effective tax rate (“ETR”) for the group entities is less than 15% in any country where the group operates. In some circumstances, an IIR may be imposed by a country in which a parent entity other than the UPE is resident.
- The Under-taxed Profits Rule (“UTPR”) is a back-stop rule to the IIR. The UTPR allows any top-up tax that is not collected under an IIR (or QDMTT) to be levied by and shared among the jurisdictions in which the group has a presence.
What is the purpose of the Domestic Minimum Top-up Tax Act?
The Bahamas is a low-tax jurisdiction. Businesses pay Business Licence Tax on their gross revenues at a low percentage rate, but prior to the enactment of the DMTT Act, there was no corporate income tax on the income and profits of a business.
The DMTT Act seeks to impose a QDMTT to ensure that in-scope MNE groups pay a minimum tax of 15% on their Bahamian profits. The DMTT Act also seeks to impose a DMTT in respect of which the QDMTT Safe Harbour may be applied. The QDMTT Safe Harbour deems the top-up tax payable in other jurisdictions with respect to the Bahamas Constituent Entities (“CEs”) to be zero.
The DMTT Act incorporates the Global Anti-Base Erosion Model Rules—Pillar Two (“GloBE Model Rules”) by reference. This includes the Administrative Guidance and Consolidated Commentary issued when the DMTT Act was enacted. The Minister of Finance may also make an order incorporating any further documents issued by the OECD Inclusive Framework in relation to Pillar Two.
Articles within the GloBE Model Rules relating to the IIR, UTPR, and allocation of top-up taxes among CEs have been excluded from the DMTT Act.
Has the DMTT Act been granted QDMTT status?
The OECD Inclusive Framework has not yet approved the DMTT Act as a QDMTT. However, the Government of The Bahamas has initiated the qualification process and is expected to soon complete the self-certification to obtain transitional qualified status.
Which entities are in scope of the DMTT Act?
The DMTT Act applies only to large MNE groups with global revenues of 750 million euros and above that have group entities located in the Bahamas. Therefore, regardless of a business’s revenue, this new tax is not applicable if the business only operates in The Bahamas.
An entity is included in an MNE group if its financial results are reported on a line-by-line basis in the consolidated financial statements (“CFS”) of the group’s UPE. The DMTT Act also applies to 50%- owned joint ventures whose financial results are reported under the equity method in the CFS.
Excluded entities in an MNE group (e.g., pension funds) are not within scope, but their revenue is included to determine whether the MNE group meets the revenue threshold.
How is the revenue threshold determined?
The determination that an MNE group meets the revenue threshold of 750 million euros is made based on a review of two of the four fiscal years immediately preceding the fiscal year under review. Therefore, an MNE group meets the revenue threshold for the 2025 fiscal year if it has global revenues of 750 million euros and above in at least two fiscal years from 2021 to 2024.
How is the location of an entity determined?
An entity is located in The Bahamas if it is a tax resident there or if it is a branch or other place of business in The Bahamas that is a permanent establishment of a non-resident entity. An entity is deemed to be a tax resident in The Bahamas if it is incorporated, created, or organized in The Bahamas or if its place of effective management is The Bahamas.
When does the DMTT Act start to apply to a business?
The DMTT Act was enacted on 29 November 2024. However, it is deemed to have retroactively come into operation on 1 January 2024, and it applies to fiscal years of in-scope MNE groups that commence after 31 December 2023. The application to fiscal years that commence in 2024 is conditional upon an IIR or UTPR being required to be applied in 2024 in respect of all The Bahamas CEs of the MNE group. Therefore, if an IIR or UTPR is not required to be applied for 2024 in any jurisdiction in respect of any of The Bahamas CEs, the MNE group will only be liable for DMTT for fiscal years that begin after 31 December 2024.
Is the DMTT Act applicable to in scope MNE groups that operate in Freeport, Grand Bahama?
Section 3 of the DMTT Act expressly states that it applies to The Bahamas, including the Port Area as defined in the Hawksbill Creek, Grand Bahama (Deep Water Harbour and Industrial Area) Act (Ch. 261) and (b) in section 2 of the Freeport Bye-laws Act (Ch. 29). Therefore, the minimum tax of 15% will apply to Port Licensees that are constituent entities of in-scope MNE groups.
Is each group entity liable for DMTT on their own profits?
DMTT is calculated on a jurisdictional basis and all The Bahamas entities within an in-scope MNE group are jointly and separately liable for DMTT due in any fiscal year.
What are the registration and filing requirements?
There are no registration requirements under the DMTT Act. Returns are required to be filed within 15 months after the last day of the Fiscal Year in the template developed by the OECD Inclusive Framework.
However, within the Transition Year, returns are due within 18 months after the last day of the Fiscal Year.
When are DMTT payments due?
DMTT payments are due within 15 months after the last day of the Fiscal Year. However, payments in the Transition Year are due within 18 months after the last day of the Fiscal Year.
Will businesses be required to pay both business licence tax and DMTT?
The DMTT Act initially amended section 38 of the Business Licence Act, 2023 to exempt businesses liable for DMTT from paying business licence tax to prevent double taxation.
However, amendments to both the DMTT Act and the Business Licence Act, 2023 were recently tabled in the House of Assembly to allow business licence tax payments to be credited against DMTT due. If enacted, the proposed amendments will limit the amount of the credit to DMTT due in the fiscal year when the applicable business licence expires.
AUTHOR
