Bahrain introduced VAT on 1 January 2019. The standard rate will be 5%. Certain goods and services will be subject to a zero-rate (0%) of VAT and others will be exempt from VAT.
Generally, VAT applies at 5% if a supply of goods and services is made:
• By a taxable person;
• In Bahrain; and
• The supply is not specifically exempted from VAT or subject to the zero rates.
As a tax on consumption, VAT is paid and collected at every stage of the supply chain, with end consumers of goods and services bearing the cost.
The National Bureau for Taxation (NBT) is the government body responsible for the implementation and administration of VAT in Bahrain. The NBT is responsible for the registration of taxpayer and their tax liability, the validation of VAT return filing and the related assessment, the payment of refunds and collection of any amount due, the auditing and processing of any appeal and the monitoring and enforcement of compliance. The NBT is a department of the Ministry of Finance and National Economy of Bahrain and works closely with it.
The NBT set some transitional rules to follow during the 2019 year of implementation. These rules are:
i) The temporary rise of the mandatory VAT registration threshold for the year 2019
ii) A phased mandatory VAT registration with three registration deadlines depending on the value of annual supplies: 20 December 2018, 20 June 2019 and 20 December 2019
iii) Longer tax periods (i.e., reporting period) allocated to registered persons for the year 2019
iv) Special tax due date rules applicable to transactions contracted prior 2019 and spanning 1 January 2019
v) Special VAT treatment for contracts signed with Government prior to 2019
It is also important to note that Bahrain does not currently recognize any other GCC member states as the Implementing States for the purpose of VAT. Until further notice, any transaction involving another GCC member state is treated, for VAT purpose, as a transaction involving a non-Implementing State.
Only taxable persons are authorized to charge VAT on their supplies. A “taxable person” is: “A Person carrying out an Economic Activity independently for the purposes of generating income and who is registered or obliged to register for Tax purposes in accordance with the provisions of this Law.
There are cases where VAT registration is mandatory and cases where a VAT registration can be applied for on a voluntary basis. (For the year 2019, kindly refer to the Section 19 of VAT General Guide v1.1 issued by NBT, which provides further details on the 2019 transitional rules applicable for VAT registration of residents in Bahrain.
Mandatory VAT registration
When you are resident in Bahrain and meet the criteria to qualify as a taxable person, you are required to register for VAT if:
i) The amount of your annual supplies during the previous 12 months exceeds the threshold of BHD 37,500; or
ii) The number of your annual supplies to be provided in the next 12 months is expected to exceed the threshold of BHD 37,500.
If you exceed the mandatory registration threshold under one of the above, you must apply to the NBT for VAT registration within 30 days starting from the last day of the month where you exceeded the mandatory threshold or within 30 days prior the first day of the month where you expect to exceed the mandatory threshold. Late application for registration may result in the application of penalties.
Exception from registration where all supplies are zero-rated
If you only supply goods or services which are subject to the zero-rate of VAT, and you do not receive services or goods for which you are liable to account for standard rated VAT under the reverse-charge mechanism, you can apply to the NBT for an exception to register for VAT if your zero-rated supplies exceed the mandatory threshold for registration.
If you apply for an exception from VAT registration and this is approved by the NBT, you will not be considered as a taxable person. You will not be entitled to charge VAT on your supplies and you will not be able to recover the VAT incurred on your business expenses
For non-resident in Bahrain
If you are a non-resident taxable person, you must register for VAT in Bahrain as soon as you start making taxable supplies in Bahrain where no one else is liable to account for the VAT due on your supplies. You must apply to register for VAT with the NBT within 30 days of his first supply in Bahrain for which he is required to pay tax. A late application may result in the application of penalties.
Voluntary VAT registration
A taxable person can still decide to register for VAT on a voluntary basis even if their supplier does not exceed the mandatory threshold provided that:
i) Their amount of annual supplies and/or annual expenses in Bahrain exceeds the voluntary registration threshold of BHD 18,750 in the previous 12 months, or
ii) Their amount of annual supplies and/or annual expenses in Bahrain is expected to exceed the threshold of BHD 18,750 in the next 12 months.
A person who is not required to register for VAT and which does not qualify for a voluntary registration cannot register for VAT in Bahrain. As a result, that person may not charge VAT on its supplies or recover the VAT incurred on business expenses
The scope of VAT:
For a taxable person, the following are transactions that fall within the scope of VAT:
i) Supplies of goods and services
ii) Imports of goods
iii) Imports of services by a VAT registrant
iv) Deemed supplies
Out of Scope VAT
“Out of scope” transactions are those which either do not meet the criteria to fall within one of the categories above or are specifically excluded from the VAT scope by a provision of the VAT Law. A taxable person should not account for VAT on an out of scope transaction.
The below are examples (non-exhaustive) of transactions that do not fall within the scope of VAT:
i) Intra tax group transactions
ii) Head office-branch transactions
iii) Tips paid on top of a bill, where the customer tips due to his own independent choice
iv) Penalties for late payment or infringement of the law. Such transactions are not a consideration for a supply, but merely punitive in nature
v) Goods that are returned (e.g., deficient or unsatisfactory). The customer does not supply the goods to its supplier, the return is a reversal of the initial supply
vi) The receipt of inheritance through a will
vii) The replacement of goods under a warranty. The replacement goods are not seen as being separately supplied to the customer, provided the replacement is covered under the warranty
viii) Receipt of an indemnity payment as part of an insurance contract or in the context of litigation. Such payments are not a consideration for a supply of goods or services made by the insured person or by the party to the litigation as they are paid to compensate for loss or damage
ix) The receipt of dividends. This is because the exercise of shareholder rights is generally not considered as an economic activity for VAT purposes
What documents must be kept?
A taxable person, or its tax representative (where applicable), is required to retain the following documents:
i) Accounting books related to the taxable person’s transactions (the transactions must be maintained in chronological order)
ii) Records of all supplies and imports of goods and services, including:
– All tax invoices and alternative documents received
– All tax credit/debit notes and alternative documents received
– All tax invoices and alternative documents issued
– All tax credit/debit notes and alternative documents issued
iii) Balance sheet and profit and loss accounts
iv) Wage and salary records
v) Fixed assets (capital assets) records
vi) Inventory records and statements including the quantities and values for each tax period
vii) All customs documents related to import and export transactions
viii) Any other records as determined by the NBT
It is advisable to also keep records of the following:
i) Records of goods and services that have been disposed of or used for non-business purposes
ii) Records of goods and services purchased in respect of which input tax was not recoverable
iii) Records of any deemed supplies
iv) Records of corrections of errors
The records and documents relating to tax should be kept either in Arabic or in English.
A taxable person must maintain the relevant records for a period of five years after the end of the tax period to which they relate or from the end of the tax period where the adjustment period ends (for capital assets). Records which relate to real estate must be kept for a period of 15 years after the end of the tax period to which they relate.
The NBT may notify the taxable person to retain these records for a longer period, without this additional period exceeding five years.
Penalties for non-compliance:
i) Delay in VAT return filing/payment of due tax: Between 5 and 25 percent of VAT payable,
ii) Failure to register within 60 days of the deadline provided for registration: Less than BHD10,000
iii) Understating the value of imports or supplies of goods and services: Between 2.5 and 5 percent of the unpaid tax for every month in which it is outstanding,
iv) An administrative penalty not exceeding BHD5,000 is imposed for persons involved in the following:
– Failure to cooperate with the tax authority’s employees in their duties to enforce the provisions of the VAT Law.
– Failure to disclose to the tax authority changes in the applicant’s registration status or VAT return-related information.
– Failure to display VAT-inclusive prices on products and services in the local market (retail sales).
– Failure to submit information requested by the tax authority.
– Failure to abide by the rules and conditions surrounding the issuance of tax invoices.
– Violation of any other provision of the VAT Law and VAT Regulations.
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