The introduction of Value-added Tax (VAT) at the beginning of 2019 left the impression that the impact by VAT on development and construction sector will experience greatly as a result. However, based on the VAT laws and regulations in the UAE, we can predict the likely impact of VAT on various economic sectors. Here, BMS Auditing will explain the impact of VAT in Bahrain and GCC countries and ways to reduce VAT on the investment market and real estate.
From the time when the oil and gas fall and the whole GCC area have resorted to the non-oil sector to force their financial development and branch out their economies, the performance of the non-oil private sector in the last couple of years has proved to be flexible regardless of the adverse huge financial atmosphere of low oil prices.
One of the top growing non-oil sectors in the region is the development and construction segment. This segment is of supreme significance to the GCC as a whole as it wires large numbers of the source of revenue as well as delivers the necessary infrastructure, and commercial and residential spaces that are so important to the continued development of the region.
Though, that doesn’t essentially mean that the segment won’t face any challenges because it will; particularly those who function in this segment are still trying to figure out the effect of such a decision on the industry.
The VAT in Bahrain and its impact on the real estate segment in the Kingdom of Bahrain
Value-Added Tax (VAT) has become an unavoidable truth. The United Arab Emirates (UAE) has started charging tax on the utilization of a greater part of goods and services, starting from January 2018. But Bahrain has only formally implemented VAT by 1st January 2019.
The consultant’s opinion on VAT's impact on real estate is incomplete without saying that VAT will offer extra income to make certain sustainable economic growth and fund the government’s development projects. On an organizational/operational level, the potential impact is still not completely clear, as some parts of the local VAT regulations are not practiced yet.
To gain an enhanced perceptive of the probable impact, we should start by looking at one of the main economic sectors in Bahrain – real estate and the impact by VAT. This is because it provides the transportation, and marketable and uptown spaces necessary for essential trade and industry activities.
Starting with residential real estate, any long-term lease is likely to be classed as an exempt supply. An exempt supply does not permit the supplier to charge VAT when making it, and also prohibits the supplier from recovering any input tax which he incurs in supplying the goods or services, thus turning input tax into a business cost that makes exempt supplies. This includes houses, flats, and apartments used as permanent homes by a person. However, this does not include hotels or serviced accommodation.
Non-residential real estate leases or licenses – including offices, warehouses, shops, hotels, and serviced apartments – and the supply through the sale of any piece of real estate, are all expected to be subject to VAT at a standard 5% rate. A standard-rated supply is when the supplier charges VAT at 5% upon making it, and the supplier will be able to recover input tax incurred in making this supply.
Real estate related services are also likely to be standard-rated. The buyer will, in general, be competent to recover VAT-paid purchases if he is VAT-registered. If the buyer is not a VAT-registered entity or is a private individual, VAT paid during purchases will be an extra price to them. However, it is probable that the local tax authority, when established, might be keen to recompense input tax paid by a Bahraini citizen in the construction of his house; an approach adopted by the Federal Tax Authority in the UAE.
Private persons whose business involves buying and selling real estate will likely be indebted to register for VAT purposes and charge VAT on real estate sales. The excellent information is that these private persons will be able to recover input tax paid for the purpose of making taxable (non-exempt) supplies. They will, however, be required to put in place proper accounting processes to manage VAT compliance.
A concluding significant thought for VAT-registered businesses and individuals in the real estate sector is the VAT treatment of rental agreements, which span the pre- and post-VAT implementation period. The correct VAT treatment for such rental agreements, assuming they are standard-rated, is to only charge VAT on the rent due for the period relating to post VAT implementation
What is the impact of VAT on the real estate sector in GCC?
Before getting into this, we need first to clarify the type of VAT to be applied across the region.
1. Standard-rated and this means businesses will be subjected to 5% rate.
2. Zero-rated and this means no VAT charged to customers but can recover input tax.
3. Exempt and this means no VAT charged but no input tax recovery.And now it is fair to think about the effect of such a decision of VAT on the real estate sector.
The value-added tax law clearly states that the construction and supply of commercial, industrial and retail properties, in addition to the construction of infrastructure will be subjected to the 5% VAT rate which is a standard rate.
All of the residential assets dealings whether rent or sale will be exempt or zero-rated which means the tax value on the first sale, secondary sales and off-plan sales of any residential properties is zero; however, developers will still be obliged to report the sale on their value-added tax returns.
So, will residential assets' value climb in prospectively?
The reply to this issue would be yes. Even though residential assets aren’t subjected to VAT but property services are. And even though occupants won’t have to pay VAT as per the new law, property-owner won’t have the same luxury. Hence, any service that is related to the property such as maintenance services will surely be subjected to VAT tax. So, maintenance fees will go up, which makes lease or sale prices vulnerable to a huge and sudden increase.
Commercial properties won’t get away with VAT, regrettably; hence, all Commercial leases, offices and probably hospitality units are VAT-able. This will drive almost all landlords to increase rents.
The commercial agreement drafted before the VAT law will be subjected to the VAT law terms. Hence, contractors will have to reach an agreement with customers to charge the VAT in addition to the previously agreed fees and this is to avoid the charge becoming a cost they have to bear themselves. As for rental leases, it is worth noting that in contracts drafted before the issuing of the new VAT law and expire in 2018, the occupant will be obliged to pay the VAT cost for the remaining period even if the entire cost of the contract was paid prior to 2018.
Real Estate Developers
The new VAT law will also have its consequence on real estate developers where now development bond costs will increase since all the supplies and materials required for the construction process are now taxable. Developers can labor approximately this problem by restructuring their procedures to avoid any potential losses that might occur due to the new tax law.
In the case of mixed-use properties that comprise residential units (exempt) and commercial units (taxable), real estate developers should divide the tax value for this type of property will have complex computations, hence, developers should put that in mind before starting on any project as any lapses in such estimates will make VAT an additional cost for the business, impact its competitiveness and may give rise to penalties.
VAT and indirect taxes are transaction driven, complex, and can have a major impact on your bottom line. BMS Auditing is one of the approved Tax Agents. We cover all the elements of VAT and provide the best VAT services in UAE, KSA, Qatar, Bahrain, Oman, India, UK and USA. Our VAT services include: