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Bahrain Value Added Tax implementation update

The Ministry of Finance (MoF) held a briefing on Monday, 3 December 2018 with Bahraini businesses, Value Added Tax (VAT) experts and business professionals.

The key messaging that came out of the meeting, was that VAT will definitively be implemented with effect from 1 January 2019 with a staggered implementation dependent on the level of turnover of the taxpayer. This appears a sensible and logical way in which to manage the large number of taxpayers that will need to be registered for VAT in Bahrain.

There were some helpful clarifications around certain aspects of how the law was intended to function and operate. In particular, the real estate sector will benefit from wide ranging zero-rating in respect of new builds; however the downside is that VAT incurred on refurbishment and maintenance is unlikely to be recoverable as leasing and sales will be exempt from VAT. An interesting lean towards encouraging new builds, perhaps. The finance sector will follow a model that is broadly very similar, if not identical, to that of Saudi Arabia with VAT being applied to explicit fees/commissions, and loans (including Sharia compliant) being exempt.

Taxpayers will be relieved to hear that invoices will not need to be issued in Arabic; this is a welcome approach that will help to avoid lot of difficulty from an IT configuration standpoint.

Finally, the National Bureau of Taxation (NBT) is undertaking a broad campaign to assist taxpayers over the coming months with a series of awareness events, a dedicated website and call-center for VAT queries.

There are only 27 days until 1 January 2019; if you have not started your implementation activities yet, you should do so as soon as possible.

VAT Law update

The implementing Regulations (IRs) are expected to be released within the next week and/or by the end of December at the latest.

An official English language version of the VAT Law is likewise expected to be issued in the near future.

VAT registration

VAT registration will be completed in 3 main stages.

  • The first stage will require large businesses with annual taxable supplies (standard and zero-rated) exceeding BD 5m to register by 20 December 2018, effective date 1 January 2019.
  • The second stage will involve businesses with annual taxable supplies more than BD 500,000 to register, effective date of 1 July 2019.
  • The third stage will involve businesses with annual taxable supplies in excess of 37,500 to register by 20 December 2019, effective date January 1, 2020.
  • Voluntary VAT registration will still be permissible for those companies, whatever their size, if their turnover is greater than BD 18,750.  Details on when such taxpayers will be registered and what their filing deadlines will be, have not yet been provided.
  • Non-resident businesses (NRB) supplying goods and services in Bahrain will be required to register for VAT on the date of the first taxable supply. There is no threshold for such supplies.  NRBs are able to register directly with the National Bureau of Taxation (NBT) and therefore unlike Saudi Arabia, there is no need to appoint a fiscal representative.

Filing deadlines, invoices

  • It is anticipated that after the initial period, that there will be two VAT filing periods; monthly and quarterly.  This will be driven by the size of the turnover of the businesses:
  • Businesses with turnover over BD5m will file quarterly in 2019
  • Businesses with turnover under BD5m who register before 20 June 2019 will file in July and then quarterly in 2019
  • Then, once the system is in ‘steady state’, businesses with turnover over BD3m will be required to file monthly returns from 1/1/2020.  Businesses with turnover of under BD3m will be required to file quarterly returns
  • Invoices will not need to be issued in Arabic and taxpayers can also issue simplified tax invoices (less than BD 500), subject to the conditions listed in the Regulations
  • VAT will be calculated in addition to or on top of, municipality fees and other similar levies

VAT grouping

  • The NBT indicated that the rules and procedures relating to the registration of a VAT group will be outlined in the IRs, however in the short term it was likely that taxpayers may need to register individually up until the Grouping system is set up.

Commercial and residential real estate

  • The supply of buildings by way of sale or lease used for commercial and residential purposes shall be exempted from VAT
  • However, the construction of buildings – regardless of whether they are residential or commercial - will be zero-rated (the goods and services that will benefit from the zero rating will be specified in the implementing regulations

Financial services

  • The supply of life insurance will be exempt from VAT; General insurance will be standard-rated
  • Islamic Banking products that are equivalent to commercial banking products will be treated the same for VAT purposes.  The principal component of financial leases or ijarah instalments received after the date of implementation for assets made available prior to the date of implementation will not be treated as taxable. In other words, the finance element is exempt from VAT
  • The standard method for partial exemption is based on turnover, similar to KSA

Food – Zero-rating

A list will shortly be issued covering “basic” foodstuffs that will be zero-rated.  In order to minimize any ambiguity, HS codes will be used.

Oil, gas and electricity

The zero-rating for oil and gas will be widely applied, down to fuel at the pump.  Zero-rating will not apply to electricity supplies

Imports

VAT will apply to imports, as expected, from 1 January 2019

It will be possible for taxpayers to account for Import VAT through the VAT return; certain conditions will need to be fulfilled.

Taxpayer communications

The NBT will be carrying out a number of initiatives to assist taxpayers in their efforts to become VAT compliant.  Amongst such initiatives are:

  • A self-review tool that will allow taxpayers to ascertain their VAT readiness
  • VAT Awareness sessions for businesses
  • Large taxpayers will be allocated a Relationship Manager.
  • Taxpayers can contact the MoF and make enquiries via email or through their call centre (80008001).
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