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Bahrain releases new VAT Law No. 48/2018

Tarek Jairwdeh

Author: Tarek Jairwdeh
Senior Lawyer.

Guiding Principle
On 9 October 2018, the Kingdom of Bahrain (Bahrain) released its Value Added Tax (VAT) Law under Royal Decree No. (48) of 2018. The VAT implementation date will be 1 January 2019.The Law sets out the general principles for the application of VAT in Bahrain. In line with the Unified GCC Agreement for Value Added Tax (VAT), VAT will be implemented in Bahrain on 1 January 2019.

A. Background information
In November 2016, the Gulf Cooperation Council (GCC) Member States executed the Common VAT Agreement of the States of the GCC (GCC VAT Agreement), outlining the framework that Member States should follow when implementing their domestic VAT rules. Saudi Arabia and the UAE implemented their VAT systems on 1 January 2018.

B. Characteristics of the VAT Law
The Bahrain VAT Law differs from the VAT rules of the United Arab (UAE) and the Kingdom of Saudi Arabia (KSA).

Some of these key differences relate to the zero-rating and VAT exemption provisions in the Law. In particular, it is expected that Bahrain will apply the zero-rate on basic food items, the construction of new buildings, education and healthcare services, local transport services, as well as oil and gas and derivatives. The sale and lease of real estate as well as certain financial services (i.e. those with an implicit fee) and life insurance/reinsurance will be exempt from VAT. Financial services provided for an explicit fee including account management, certain trade finance services and fund management will be subject to standard rate VAT. Standard rate VAT will also apply to non-life insurance/reinsurance.

C. The key features of the VAT Law
I. Effective date of implementation
In accordance with the Article 4 of the Royal Decree, the Law will come into force on 1 January 2019.

II. Scope of VAT
In accordance with the Article 2 of the Law, the supply of all goods and services made in Bahrain, as well as imports, shall be subject to VAT.

III. Rates of VAT
Article 3 of the Law provides for a standard rate of 5%, while certain goods and services may be subject to a zerorate or exempt from VAT.

IV. Tax period
In accordance with the Article 35, the Regulations will specify the duration of the tax period, which should not be less than one month.

V. VAT registration
The Bahrain Ministry of Finance (MoF) has recently announced that VAT registration will be carried out in three different phases, depending on the value of the businesses’ annual supplies.

Article 29 provides an overview of the persons required to be registered for VAT purposes.

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 if 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.

VI. VAT Groups
In accordance with the Article 30 and upon application and approval (as per the Regulations), 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.

VII. 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.

VIII. 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 businesses will be required to file on quarterly basis. VAT return and payment will be due within one month of end of the tax period.

IX. Zero-rated supplies
Article 53 of the Law sets out provisions where certain supplies and sectors will be zero-rated(subject to satisfying conditions and procedures that will be outlined in the Regulations). These include:

  • Local transport sector;
  • Oil, oil derivatives and gas sector;
  • International transportation services and the supply of related means of transport
  • Construction of new buildings;
  • Supply and importation of foodstuffs (based on a list approved by the Financial and Supply of goods under a customs duty suspension scheme
  • Economic Cooperation Committee);
  • Supply of educational services, as well as the related goods and services to nursery, pre-school, primary, secondary and higher education;
  • Preventive and basic healthcare services, as well as related goods and services;
  • Supplies or imports of certain medicines and medical equipment;
  • Export of goods to outside of the implementing states;
  • The supply or importation of investment gold, silver and platinum with a purity level not less than 99%, which is tradeable on the Global Bullion Market (and subject to obtaining a certificate);
  • Export of services to a customer residing outside the implementing states;
  • The first supply of gold, silver and platinum after extraction for commercial purposes;
  • Supply and import of pearls and precious stones (subject to obtaining a certificate);

X. Import VAT
In accordance with the Article 51, import VAT should be paid to the customs authority, where Bahrain is the first point of entry. Tax authorities may allow the taxable person to defer the payment of VAT until submission of the VAT returns.

XI. Exemptions
Articles 54 to 56 set out the scope of exemptions, which include:

  • The supply of financial services, unless payment is made by way of an explicit fee, commission or commercial discount;
  • Supply of vacant land and buildings by way of lease or sale;
  • The importation of:
  1. Goods where the supply of such goods in the final country of destination is exempt or zero-rated;
  2. Goods that are exempt from customs duty in accordance with the terms and conditions set forth in the Common Customs Law, and that are as follows:
    • Diplomatic exemptions;
    • Military exemptions;
    • Used personal effects and household items transported by nationals living abroad on return and expatriates moving to live in Bahrain for the first time;
  3. Personal luggage and gifts carried by travelers
  4. Necessities for people with special needs

XII. Issuance of a Tax Invoice
In accordance with the Article 39, tax invoices should be issued within 15 days of the month following the date of the supply.

XIII. Penalties
The law outlines the penalties that could be imposed for non-compliance. These
include penalties for failing to register for VAT (up to BHD10,000) and failing to provide the tax authority with information it requests (up to BHD5,000).

In accordance with the Article 63, the following violations could be regarded as tax evasion, and could result in imprisonment:

  • Failing to register for VAT within 60 days of the registration deadline;
  • Charging VAT on non-taxable items;
  • Failure to provide a tax invoice;
  • Failing to pay VAT within 60 days of the payment deadline;
  • Unrightfully recovering input VAT.

D. Conclusion
Although businesses (who are registered or are required to be registered) will have until 31 July 2019 to complete their first VAT return there are a number of critical activities that will need to be undertaken by 1 January. At a minimum, they will need to be able to issue VAT compliant invoices, particularly if they operate in the retail or B2C sector. In addition to this, businesses will need to understand their VAT obligations with respect to their supplier and customer contracts – this means whether the transitional rules apply or whether pricing adjustments may need to be made.

The introduction of VAT in Bahrain will affect all economic sectors. Businesses may require considerable effort and action to update their people, processes, systems, contracts and stakeholders for VAT. For businesses accustomed to operating in a tax-free environment in Bahrain, VAT compliance requirements will require a fundamental change in many business practices.

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