A Review of The Bahamas Pillar 2 Domestic Minimum Tax

General

On August 12, 2024, the Government of the Bahamas issued a consultation paper including draft legislation (the ‘Domestic Minimum Top-Up Tax Bill, 2024’ on a domestic minimum top-up tax (‘DMTT’), intended to be a Qualified Domestic Minimum Top-Up Tax (‘QDMTT’). The final law was published in the Official Gazette on November 29, 2024.

The income inclusion rule (IIR) and under-taxed profits rule (UTPR) are not being implemented in the Bahamas.

Section 1(2) of the Law provides that it will be applicable to the Fiscal Years of an MNE Group that begins after December 31, 2023, except that it does not apply to a Fiscal Year of the Group that begins before January 1, 2025 unless an IIR or UTPR is applied for a fiscal year in respect of each Constituent Entity of the Group located in The Bahamas. For all other in-scope MNE Groups, the legislation will be applicable to Fiscal Years that commence in 2025.

Section 4 of the Law states that the intention is for the DMTT to qualify as a QDMTT for the purposes of the QDMTT Safe Harbour and if there is any uncertainty or ambiguity about the interpretation or application of the provisions of Law, the interpretation or application that best achieves this purpose is to be preferred.

As the DMTT only applies in 2024 to a Constituent Entity when the MNE Group is subject to the GloBE Rules in another jurisdiction, this is classed as a Conditional DMTT for Pillar 2 purposes (similar to the DMTT in Barbados). A Conditional DMTT for 2024 can only be classed as a QDMTT providing the DMTT will not be conditional in any other year.

In the January 2025 Central Record of Legislation with Transitional Qualified Status issued by the OECD, the Bahamas DMTT is not yet treated as qualified for GloBE purposes.

GloBE Application

The Law to implement the DMTT adopts the OECD GloBE Rules by making them part of the legislation.

The DMTT applies by directly transposing the OECD Model Rules (and associated guidance).

Section 2(2) provides that any capitalised word or expression that is assigned a meaning in the GloBE Rules has the same meaning when used in the Law. For example, Constituent Entity, MNE Group and Fiscal Year are defined terms found in the GloBE Rules that are also used in the Law.

The amount of DMTT payable is calculated in accordance with Chapter 5 of the GloBE Rules. The Explanatory Notes to the Original Bill noted that as a Constituent Entity does not pay any tax to the Bahamas that would qualify as a Covered Tax, resulting in an Effective Tax Rate of 0%, the Top-up Tax Percentage determined under Section 5.2.1 would be 15%. The amount of DMTT payable is calculated by applying this 15% rate to the income of the Constituent Entity (or if there is more than one located in the Bahamas, their combined incomes) after subtracting out any amounts of Substance-based Income Exclusion.

Sections 4 and 5 of the Law provides for the application of the OECD Model GloBE rules to determine the DMTT liability.

In particular, Section 4(2) of the Law provides that whenever the Model GloBE Rules refer to the term “[insert name of implementing-Jurisdiction]”, it should be read as a reference to “The Bahamas” for the purposes of the Law.

The GloBE rules are defined as not just the OECD Model Rules, but also include the:

–2024 OECD Consolidated Commentary;

–February 2023 OECD Administrative Guidance;

–July 2023 OECD Administrative Guidance;

–December 2023 OECD Administrative Guidance;

–June 2024 OECD Administrative Guidance; and

-any further document approved by the Inclusive Framework when specified by a Ministerial Order.

Section 4(7) of the Law provides that if the GloBE Model Rules are updated, amended or otherwise changed during a Fiscal Year of an MNE Group such that the application of the changed Rules would produce a different outcome for the Group or its Constituent Entities than before the change, the Rules as they read at the beginning of the Fiscal Year shall apply.

OECD Administrative Guidance

As noted above, as the updated 2024 OECD Commentary (as amended by the June 2024 OECD Administrative Guidance) is specifically required to be taken into account when computing top-up tax, all of the OECD Administrative Guidance should be applicable in the Bahamas (aside from the January 2025 OECD Guidance), where relevant and unless specifically excluded in the Law (see below).

OECD Safe Harbours

Section 4(5) of the Law provides that all safe harbours under the GloBE Model Rules (and associated guidance) are available for DMTT purposes (where relevant).

Therefore, as the OECD Consolidated Commentary and Safe Harbour Guidance is applicable, the Safe Harbours contained within these would be applied (where relevant).

Elections in the OECD Model Rules

All of the elections included in the OECD Model Rules are transposed under Sections 4 and 5 of the Law (where relevant), including:

-Excluded Entity Election

-Stock-Based Compensation Election

-Election to use the Realization Method

-Election to Spread Capital Gains

-Consolidation Election

-Unclaimed Accrual Election

-GloBE Loss Election

-Prior Year Adjustment Election

-De minimis Election

-Substance-Based Income Exclusion Election

-Taxable distribution Election

-Tax transparency Election

-Distribution Tax Regime Election

Elections in the Administrative Guidance

As the OECD Commentary (as amended by the June 2024 OECD Administrative Guidance) is specifically required to be taken into account when computing top-up tax, all of the OECD Administrative Guidance should be applicable in the Bahamas (where relevant). As such the various elections in the OECD Administrative Guidance would be applicable. This includes the:

-Debt Release Election

-Equity Investment Inclusion Election

-Foreign Exchange Hedge Election

-Portfolio Shareholding Election

-Excess Negative Tax Carry-Forward Election

Domestic Minimum Tax Design Features

The Law provides for a domestic minimum tax (intended to be a QDMTT) for financial years beginning on or after January 1, 2025 (unless an IIR or UTPR is applied for a fiscal year in respect of each Constituent Entity of the Group located in The Bahamas, in which case it can apply to fiscal years commencing after December 31, 2023).

The amount of top-up tax under the QDMTT is based on the general top-up tax calculation in the OECD Model Rules.

However, as required in the OECD Administrative Guidance, Section 4(4) of the Law excludes the push down of taxes under Article 4.3.2 of the OECD Model Rules (taxes for PEs, CFCs, Hybrid Entities and Distributions).

A number of other aspects of the OECD Model Rules are also specifically excluded from the DMTT calculation, as they are not relevant in the Bahamas, or are addressed in other provisions, including:

-Chapter 2 (charging provisions);

-Section 5.2.4 (allocation of Top-up Tax amongst Constituent Entities);

-Section 5.2.5 (allocation of Top-up Tax amongst Constituent Entities when no Net GloBE Income for Fiscal Year);

-Section 5.4.2 (allocation of Additional Current Top-Up Tax in connection with Section 5.4.1);

-Section 5.4.3 (allocation of Additional Current Top-Up Tax in connection with Section 4.1.5);

-Section 5.4.4 (determination as Low-Taxed Constituent Entity);

-Section 6.2.1(h) (application of IIR in respect of acquisition of a target entity)

-Section 6.4.1(b) and (c) (application of IIR and UTPR in connection with Joint Venture and JV Subsidiaries);

-Section 6.5.1(e) and (f) (application of IIR and UTPR in connection with Multi-Parented MNE Groups);

-Article 7.3 (Eligible Distribution Tax Systems);

-Section 9.3 (Exclusion from the UTPR of MNE Groups in the initial phase of their international activity); and

Investment entities are specifically included in Section 5(5) of the Law, which provides that the calculation of the DMTT for an Investment Entity located in The Bahamas is based on Articles 7.4 to 7.6 of the GloBE Model Rules.

Whilst the OECD Administrative Guidance includes specific rules permitting a local accounting standard to be used for QDMTT purposes, this is not included in the Law. Section 4(6) of the law provides that the default rules in Articles 3.1.2 and 3.1.3 of the OECD Model Rules apply. As such, the general GloBE rules apply and the domestic minimum tax is calculated using the financial accounting standard of the ultimate parent entity, and, if that is not practicable, on the basis of an accepted or approved accounting standard, if:

-the constituent entity’s financial statements are prepared in accordance with that standard;

-the information contained in the financial statements is reliable; and

-permanent differences of more than EUR 1 million are conformed with the UPEs accounting standard.

Section 4(5) of the Law provides that all elections and safe harbours under the GloBE Model Rules (and associated guidance) are available for DMTT purposes (where relevant).