Bahrain NBR publishes VAT guide on Financial Services

The Bahrain National Bureau for Revenue (NBR) has released the first edition of its Financial Services VAT guide (FSI VAT Guide).

Who is this alert for?

This alert is relevant to businesses in the financial services industry making both taxable and exempt supplies, such as banks (retail, corporate, investment and all other types of banking), (re-)insurers, funds and fund managers.  

Additionally, we would expect this alert to be of interest to any other business providing intercompany loans and similar activities for which it gets remunerated by way of interest or implicit margin.

Financial Services VAT Guide

In the FSI VAT Guide, the NBR elaborates on the definition of a “financial service” in respect of the VAT law. 

Where a service qualifies as a “financial service”, the VAT treatment in general can be summarized as follows*:

• Standard rated (5%): where the payment for the services is made by way of fees, commissions or commercial discount.
• Exempt: where the payment for the services is made by way of an implicit margin or spread, including interest.
• Zero-rated: when provided to a recipient resident outside Bahrain, if all conditions for a zero-rated export of services are met. When the zero-rating conditions are met, this treatment will always supersede exemption or standard rating.

* It should be noted that there are a few exceptions to the above rule, such as the provision of life insurance, which is considered to be VAT exempt, irrespective of how payments are conducted.

The NBR has further provided a non-exhaustive list of (categories) of fees and services, along with practical examples on how suppliers and recipients should treat the respective service from a VAT perspective.

In addition to the above, the FSI VAT Guide also discusses the following key issues:

• Where a financial service is remunerated by way of both a fee and interest/implicit margin, the fee component will be standard rated while the margin will be exempt.
• While from a regulatory perspective financial services must be supplied by businesses regulated and licensed as such by the Central Bank of Bahrain, for VAT purposes any service which falls under the definition specified in Article 81(B) of the Executive Regulations will be treated as financial services. 
  
  The above effectively means that any taxable person could be providing a financial service and could potentially fall subject to the rules of guide.
• Precious metals (gold, silver and platinum) are zero-rated if the supply is of investment (>99% purity) gold, silver or platinum, or if the first supply of the precious metal after extraction is for trading purposes.
• (Life) insurance and re-insurance products are not specifically defined in the VAT Law or Executive Regulations.
  
  
  • The guide defines them as “a conventional or Takaful insurance contract or other form of Islamic insurance which results in the payment of a sum contingent on death or other significant event of human life.”
    
  • However, any life insurance products considered as such by the Central Bank of Bahrain will also be treated as life insurance for VAT purposes.
  • These products are exempt unless they meet the conditions for a zero-rated export of services.
• Islamic Finance products generally have the same VAT treatment as their conventional financial product counterpart. As the provider of an Islamic Finance product usually receives a profit margin, this profit margin will be treated the same as interest under a conventional financial product.
• In principle, the NBR expects for a Taxable Person to issue a valid tax invoice for any supplies of goods or services (including deemed supplies) made by him in the Kingdom.
  
  As an exception to the above rule, the NBR is allowing for Taxable persons supplying exempt financial services remunerated by way of interest or a margin, to not issue tax invoices for these services, provided they are able – upon request of the NBR – to electronically extract and provide the details of their exempt financial services income.
  
  It should be noted that the above exception does not seem to apply to exempt life insurance products and that tax invoices would need to be issued in those instances.

• Input tax cannot be recovered on expenses incurred in making exempt supplies. Businesses such as banks which engage in partly taxable and partly exempt activities must apportion their input tax to recover only the amount they are entitled to. The guide details the requirements and conditions for this often complex process.

The VAT FSI Guide is welcomed by businesses active in the FSI industry, as it provides for the necessary guidance on how the NBR interprets the VAT Law in what is generally considered the most complex industry in which VAT can be applied.