GCC Indirect Tax Weekly Digest

Special edition: Looking ahead to VAT implementation in Bahrain

The past few weeks have seen a number of critical developments regarding the introduction of Value Added Tax (VAT) in Bahrain. Deloitte has prepared a summary of these developments, the specific issues that businesses are likely to face, and how Deloitte can assist with achieving day one compliance. 

Key developments

• The Bahrain government has officially confirmed that VAT will be introduced on 1 January 2019.
• Bahrain’s draft VAT law has recently been published in Arabic.
• The draft VAT law sets out that the VAT regulations may be published at any time up until 15 days after the implementation date although we understand that this is likely to be sooner.
• The law is reasonably similar to that of both the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE), so other than the penalty regime (see below), there are no great surprises. Here are some of the key points:
  • Zero-rating is going to be used extensively: in addition to the standard zero-rated supplies prescribed for all Gulf Cooperation Council (GCC) states, domestic zero-rating also applies to food, education, healthcare, local transport and unusually, oil and gas as well (when compared to the UAE and KSA).
  • Supplies relating to buildings will be treated as exempt (other than construction of new buildings) – on the face of it, this is a particular headache for landlords and an additional ‘embedded’ cost of non-recoverable VAT for commercial tenants.
  • There will be transitional rules for contracts entered into before VAT regime which are generally in favor of recipients. It is noteworthy though that in Bahrain, there will be a transitional zero-rating period of 5 years for supplies to Government. This is eminently sensible insofar as it allows pre-agreed and budgeted amounts to not be impacted by the requirement to account for VAT at 5% and therefore to have to agree additional funding requirements from the Government.
  • Transitional rules for intra-GCC trade: separate provisions appear to have similarities of KSA rules in one respect and to UAE rules in another respect. It is a little unclear how this will be applied in practice; the regulations should provide further detail in this respect.
  • It is interesting to note that the authorities are seeking to charge for the VAT registration certificate; it sets an unusual precedent in the GCC although of course goes some way towards funding the activities of the tax authorities in this respect.

Penalties

Perhaps the most noteworthy aspect of the VAT law is that the lawmakers have opted to introduce a very unforgiving penalty regime as it relates to violations of the VAT law and regulations, although the extent to which the rules will be applied in practice is yet to be tested.

Prospective taxpayers will be concerned to see that the rules allow for the publication of defaulters’ names in local newspapers, and coupled with significant fines and possible criminal sanctions, this will make for a tough compliance environment. The penalty regime as proposed is certainly more severe than either the UAE or KSA.

Failure to maintain accurate compliance may result in significant costs for businesses operating in Bahrain; the focus getting it right from day one is essential.

Bahrain will be the third GCC country to implement VAT, after the UAE and KSA implemented on 1 January 2018.

Issues and uncertainties

VAT regulations

The Bahrain VAT regulations have not yet been released, and many aspects of the draft VAT law refers to or depends on the provisions of the regulations.

The regulations may be released at any time up until 15 days after 1 January 2019, although with the current pace of change, the regulations may be published in the coming weeks.

Businesses should not delay implementation activities awaiting the regulations, or expect grace from penalties due to their absence.

Compliance obligations and action to take

The announcement of the VAT implementation date and the release of the legislation means that businesses making supplies in Bahrain have just two and a half months to ensure that they are prepared for the introduction of VAT, and are in compliance with the new legislation from the date of implementation.

Any business making supplies in Bahrain that exceed the mandatory registration threshold (approximately 37,600 BHD or USD 100,000) in annual taxable supplies will be required to register for VAT and maintain full compliance with the VAT law and regulations, including submitting VAT returns and making VAT payments on time.

Pricing decisions, particularly for those in the retail sector, must be made prior to the introduction of VAT, with the relevant changes made to advertising and ticketed prices.

The VAT treatment of contracts which span the implementation date should be considered carefully, as failure to take account of VAT may leave businesses disadvantaged if they are unable to pass on the cost of the new tax.

Deloitte’s approach to VAT implementation

Businesses which exceed the mandatory registration threshold will need to embark on a substantial internal VAT implementation process in order to align their business with the new VAT regime. An effective process would include multiple phases involving personnel from various company divisions, such as finance, operations, HR, and legal – each of which must adapt its functions to the new VAT regime.

Deloitte is well-placed to provide comprehensive VAT implementation services to businesses in Bahrain. We have gained extensive experience by providing full-scale VAT implementation services to hundreds of businesses in the Middle East over the past 3 years, including many of the largest companies.

As Deloitte has observed, businesses which took a proactive approach to VAT implementation and began the process early saw a significantly better outcome than those that waited until the final weeks.

This digest is for information purposes only and should not be construed as advice. It does not necessarily cover every aspect of the topics with which it deals. You should not act upon the contents of this alert without receiving formal advice on your particular circumstances.