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|Further to the publication of the VAT Law in October, Bahrain has published its VAT Regulations in Arabic. The VAT Regulations contain detailed rules on the application of the VAT Law and the related procedures.
The key features of the VAT Regulations are as follows:
VAT Registration – Transitional VAT registration measures will be put in place during 2019. Businesses with annual taxable supplies exceeding BHD 5 million will be required to register by 20 December 2018 effective for 1 January 2019. Businesses with annual taxable supplies of more than BHD 500,000 will be required to register by 20 June 2019 effective for 1 July 2019. All other businesses that exceed the mandatory registration threshold of BHD 37,500 will be required to register by 20 December 2019 effective for 1 January 2020. Businesses may register on a voluntary basis during the transitional period provided that the value of their annual taxable supplies exceeds the voluntary registration threshold of BHD 18,750. Non-residents will be required to register for VAT if they make taxable supplies on which they are required to account for VAT regardless of the value of supplies.
VAT Groups – Two or more taxable persons resident in Bahrain may apply for registration as a VAT group, provided that they are related parties and are registered for VAT at the time of application. Each member of the VAT group is responsible for the VAT payable by the group and other VAT obligations. Supplies made between members of the VAT group are not considered as taxable supplies.
Financial Services – Most financial services are exempt from VAT unless such services are carried out in return for a fixed fee, commission or discount. The supply of general insurance will be subject to VAT at the standard rate of 5%. Life insurance is exempt from VAT. Islamic finance products will be treated the same way as the equivalent non-Islamic financial product for VAT purposes.
Real Estate – The supply of commercial or residential buildings by way of sale or lease is exempt from VAT. Effectively, this means that the VAT incurred on such supplies will not be recoverable. However, the construction of residential or commercial buildings will be zero rated, allowing the recovery of VAT on some costs during the construction phase. Hotel accommodation and car parking rental for less than one month are not considered as supplies of real estate and are therefore subject to VAT at 5%.
Oil & Gas – A broad zero-rating applies to cover upstream and midstream activities and includes sale of fuel to consumers at petrol stations. However, downstream activities are subject to VAT at 5%.
Food – The supply and import of certain food items will be zero rated. The VAT Regulations do not set out further detail on the type of food items that are zero rated, but this is expected to include essential foods such as meat, bread, rice, flour, fruit, vegetables and dairy products.
Other zero rated supplies – Other zero-rated supplies include education services supplied by licensed schools or educational institutions, preventive and basic healthcare services supplied by qualified medical practioners or qualified medical institutions, the supply of medicine and medical equipment listed in a decision issued by the competent medical authority, local and international transportation of goods and passengers, supply of means of transport to be used for international transportation of goods or passengers and related services.
Imports – VAT will be payable to Customs on the imports of goods. However, it may be possible for VAT-registered businesses to defer import VAT through the VAT return subject to certain conditions.
Domestic Reverse Charge – Businesses that export more than 50% of their turnover may request for the reverse charge mechanism to apply on certain domestic purchases to minimise cash flow burden.
VAT Recovery – Input VAT attributable to taxable supplies is recoverable while VAT attributable to exempt supplies not recoverable. Input VAT that is attributable to both taxable and exempt supplies will be recoverable based on a prescribed formula, i.e., the output method (based on taxable supplies over total taxable and exempt supplies). The capital assets scheme requires the adjustment of input VAT if the use of capital assets changes over its lifetime (i.e., over a period of 5 years for moveable tangible and intangible assets and 10 years for immovable tangible assets). Input VAT recovery on expenses related to motor vehicles for personal use is blocked.
Implementing States – A Ministerial Decision will be issued which will specify the GCC countries that will be considered as Implementing States. Until this decision is issued, all GCC countries will be treated as non-Implementing States.
Record Keeping – Generally, businesses must keep records in electronic or physical form for a period of 5 years after the end of the tax period to which the record relates to. Records relating to capital assets must be kept for the adjustment period and a further 5 years from the duration of the adjustment period. Records relating to real estate must be maintained for 15 years from the end of the tax period to which the record relates to.
VAT Returns – Under the transitional measures for 2019, VAT returns will be due on quarterly basis for businesses with an annual turnover of more than BHD 5 million and who are required to register for VAT for 1 January 2019. All other businesses that register on 1 January 2019 or before 20 June 2019 will be required to submit a single return for the tax period from the date of registration to 30 June 2019 and two quarterly VAT returns for the remaining six months of 2019. Subsequently, businesses with annual turnover exceeding BHD 3 million will be required to file VAT returns on monthly basis and all other businsses will be required to file on quarterly basis. VAT return and payment will be due within one month of end of the tax period.
Tax Invoices – Tax invoices may be issued in either Arabic or English and do not need to include VAT registration number of customer. A simplified tax invoice may be issued where the customer is not registered for VAT or where the value of the supply does not exceed BHD 500. Bank statements may qualify as tax invoices subject to certain conditions reducing the compliance burden on banks.
What should you do next?
Large businesses with annual taxable supplies exceeding BHD 5 million will have less than 15 days to prepare for the implementation of VAT. On the other hand, other businesses have more time until July 2019 and the end of 2019 to prepare for VAT due to the transitional VAT measures. However, businesses should also consider registering for VAT on a voluntary basis to enable the recovery of input VAT on expenses incurred.
Based on our experience of assisting clients with VAT implementation in the UAE and KSA, businesses typically require between three and six months in order to be ready for VAT. As such, it is important for businesses to start preparing for VAT immediately.
How can we help?
As the largest law firm in the Middle East and with strong VAT expertise and significant experience of VAT implementation in both the UAE and the Kingdom of Saudi Arabia, across all industry sectors, Al Tamimi & Company is well placed to assess the impact of VAT on your organisation and assist you with all VAT requirements in Bahrain.
With the issuance of the VAT Regulations, we can provide you with more detail on your VAT compliance obligations, assess how the VAT Law and Regulations will impact your business, perform a second review of your transactions, and advise you on the VAT treatment of your affected transactions as well as the requirement to register for VAT.
Please click here for our brochure on VAT implementation in Bahrain.
Please do not hesitate to contact Al Tamimi’s Tax Team if you require any assistance.