Bahrain's National Bureau for Revenue has issued a new transfer pricing guide under Decree-Law No. 11 of 2024, outlining arm's length pricing principles, approved transfer pricing methods and documentation requirements for multinational enterprise groups subject to the country's global minimum tax regime.
Bahrain’s National Bureau for Revenue (NBR) has published the DMTT Transfer Pricing Guide, providing guidance on the application of transfer pricing requirements under Decree-Law No. 11 of 2024, which introduced a global minimum tax through a Domestic Minimum Top-up Tax (DMTT) for Multinational Enterprises (MNEs).
Aligning with OECD standards
The guide sets out the general principles governing transfer pricing within the DMTT framework and aligns Bahrain’s approach with the OECD Transfer Pricing Guidelines. It aims to ensure that transactions between related entities reflect economic reality and market conditions, supporting the accurate allocation of taxable profits where economic value is created.
Arm’s Length Principle and analytical requirements
At the centre of the transfer pricing framework is the Arm’s Length Principle, which requires transactions between related parties—including Constituent Entities, Joint Ventures and their subsidiaries—to be priced as though they were conducted between independent enterprises under comparable circumstances. According to the guide, compliance with this principle is demonstrated through two key analyses: a functional analysis and a comparability analysis.
The functional analysis examines the economically significant activities performed by each party to a transaction, as well as the assets employed and risks assumed. The comparability analysis assesses the characteristics of controlled transactions between related parties against comparable uncontrolled transactions between independent enterprises. Factors considered include contractual terms, the nature of the property or services involved, commercial and economic circumstances, and business strategies.
Approved transfer pricing methods
The guide also outlines five approved transfer pricing methods for determining arm’s length pricing. These methods are divided into traditional transaction methods and transactional profit methods.
Among the traditional transaction methods, the Comparable Uncontrolled Price (CUP) Method directly compares the price charged in a controlled transaction with that of a comparable uncontrolled transaction and is identified as the preferred method when it is as reliable as any alternative. The Resale Price Method (RPM) is primarily intended for distribution businesses and begins with the resale price to an independent party before deducting an appropriate gross profit margin. The Cost Plus Method (CPM) determines arm’s length pricing by adding a suitable mark-up to the costs incurred by a supplier of goods or services
Transactional profit methods
The transactional profit methods focus on profitability rather than individual transaction prices. Under the Transactional Net Margin Method (TNMM), the net profit margin earned from a controlled transaction is assessed against an appropriate base such as costs, sales or assets. The Profit Split Method (PSM) allocates combined profits from related-party transactions based on the relative value of each participant’s contribution and is particularly relevant where business operations are highly integrated.
Documentation requirements
In addition to pricing methodologies, the guide sets out documentation obligations for related parties operating in Bahrain. Taxpayers must prepare and maintain both a Local File and a Master File to demonstrate compliance with transfer pricing requirements.
The Local File contains detailed information on controlled transactions involving Bahraini entities, including descriptions of business activities, identification of related parties, financial indicators, and comprehensive functional and comparability analyses.
The Master File provides a broader view of the MNE Group’s global operations, covering organisational structure, business strategy, intangible assets, financial activities, and overall financial and tax positions.
Supporting DMTT implementationÂ
The publication of the DMTT Transfer Pricing Guide forms part of Bahrain’s implementation of its global minimum tax framework and provides MNE groups with guidance on meeting transfer pricing obligations under the DMTT regime while maintaining consistency with internationally recognised OECD standards.
