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First such tax in Gulf region
Government under pressure
Debt is 130% of GDP
Bahrain is to become the first country in the Arabian Gulf to introduce an environmental tax on companies as the island state struggles to rein in a growing budget deficit and bring government finances under control.
The government of the region’s smallest nation by population has approved in principle a levy on carbon dioxide emissions as part of a broader package of eight proposals designed to address the nation’s mounting debt burden.
The tax rate has yet to be finalised.
“The key challenge will be balancing environmental objectives with economic competitiveness,” said Nils Vanhassel, an associate in the Middle East tax team at DLA Piper law firm.
The move comes at a time when oil revenues, which account for more than 60 percent of Bahrain’s government income, are under pressure due to a general decline in oil prices, and as the kingdom seeks to diversify its economy.
The government is facing growing pressure to reduce its debt, which has surged to nearly 130 percent of gross domestic product, according to the International Monetary Fund.
Bahrain’s manufacturing sector, which makes up about 14 percent of GDP, is likely to bear the brunt of the new tax, though the government also wants the measure to incentivise cleaner production methods.
The proposed carbon tax follows similar models such as the European Union’s Carbon Border Adjustment Mechanism, which, while not an environmental levy as such, ensures that international companies exporting to the EU face carbon cost obligations similar to those of EU-based companies.
Sweden’s carbon tax, which has been in place for over three decades, is seen as one of the most successful policies in reducing emissions without stifling economic growth.
Sweden’s tax rate is EUR134 ($145) per tonne of CO2 on most fossil fuels.
“These examples demonstrate that environmental levies can be effective in driving sustainability without severely harming competitiveness,” Vanhassel said.
Alongside the environmental tax, Bahrain’s new fiscal plan includes a corporate tax, and an increase in taxes on energy drinks, sugary beverages and tobacco.
Additionally, businesses which prioritise hiring Bahrainis will be eligible for tax incentives.
The current VAT rate of 10 percent will remain unchanged.
The eight-point reform package will underpin Bahrain’s new national budget for the fiscal years 2025 and 2026, which started on January 1.
