24 Jan 2019
VAT LAYOUT IN BAHRAIN – PART 1
The new Value Added Tax (VAT) has been introduced into Bahrain, and certainly, all of the Gulf States has been formed in a very analogous way to the European Union VAT structure, where each country is essential to follow the course of action but each country is liable executing its own legislation around VAT. What this means is that the Gulf Cooperating Council (GCC) countries are directed have very similar VAT structures and rules but each country may have some to some extent different rules or rates, setting different items as being exempt from VAT, for example. So, what does this mean for your ERP? What do you need to know and what can you do to get VAT compliant? Of course, the new VAT system is being implemented in Bahrain as part of a GCC initiative but don’t be mystified to think this is a GCC VAT, it’s not. The first thing to recognize is that there is not going to be one GCC system. In its place, each country will have their own system. This is important as when doing business between GCC states takes place, the selling article will not charge VAT and the buying entity will need to turn around charge the VAT. More features discussed on this later. The second thing we need to know is that the GCC VAT agreement is just a set of guiding principle. At the same time as each GCC country has signed up to follow definitely approved necessities, it is still accountable for creating its own legislation and as such can understand the VAT agreement as it necessitates. This means we may have diverse tax judgment for each country. In realism, it is seen that the laws are very similar and the VAT rules approximately indistinguishable. Lastly, the time frame was set for the VAT to go live is 1st January 2018, for every country, but they are not anything to compel each country to either go live on this date or for all countries to go live together. This should not cause any issues to your ERP system’s tax automation.
What can we look forward to and how does this affect your accounting automation system?
Taxable Person. A person or entity that conducts business for the purpose of generating income.
Place of Supply (POS). Should by default follow the Ship-From location to the Ship-To location.
Free Zones. Current Free Zones may not be VAT-Free Zones.
Zero Percent Tax Rates. Don’t make the error of presumptuous that if no tax is applicable then the tax is exempt.
Reverse Charge Mechanism. usually known as ‘offset tax’ and necessary when items have no tax on them but VAT is due.
Recovery. The ability for a company to get back the tax that is paid to a supplier.
Reporting. Your answer should be put up around what you need to report such Bahrain split and GCC reporting.
Bad Debt (Treatment of VAT). Any VAT recovered from a supplier who you have not paid within 6 months will need to be paid back
Keep in mind. VAT authorities are often different from other authorities such as Customs and Excise.
Taxable Person – Definition
This, in effect, is an individual or entity that conducts business (an economic activity) for the purpose of generating income. However, for the purpose of setting up your ERP tax solution, a Taxable Person is most likely to be an entity because:- In order to be liable for charging VAT, you need to produce about USD $100,000 which rules out many persons. To be a Taxable Person, you will need to be registered for VAT. So if buying from a non-taxable person then don’t try and recover VAT from them as there won’t be in the least. To make this uncomplicated, despite whether someone is a taxable person or not, when you are selling goods or services to them, you will be a relevant tax in some variety, which from early 2019, will be Value Added Tax (VAT). When you make a purchase from a taxable person there will be VAT on the invoice. However, if you are buying from a non-registered for VAT company, then there will not be any tax on the invoice and the invoice should be treated as being out of scope for VAT.
Place of Supply (POS)
Where is the Place of Supply (POS)? For an ERP system, or for tax automation, the Place of Supply (POS) by default should follow the ‘transport-from’ location to the ‘transport-to’ location. To be aware of what POS means, ask the question to yourself, “Do I need to charge Bahrain VAT or not?” If items are shipped from Bahrain to Bahrain then the place of supply is Bahrain and the items will be taxable. If, however, the goods were instead shipped to UAE, then the place of supply is UAE and the invoice would show 0% out of scope tax (of course, when UAE receives the invoice, they will need to reverse charge the tax (more on this later). Now for goods, things get a bit awkward. If your customer is in UAE but instead of you shipping the goods to them, they come and pick it up from your location in Bahrain. This would usually be indicated by a Freight Incoterm such as EXW (Ex-works). In this case, the ‘transport-to’ is actually Bahrain (your storehouse) and so the POS is Bahrain and normal tax is applied. This can reason troubles with your customer because they still need to bring this into UAE where they will pay import tax again. So, why is tax charged in this way? The reason is that your customer may pick it up and say they are taking it to UAE but in its place deliver it locally and have saved themselves the VAT. Our advice is that in most cases, if you trust the customer or they provide proof that the goods are going out of the country, then you can still charge the out of scope rate.
POS of Services:
Services are tougher to characterize but consider this example. If you conduct training in Bahrain and your customer comes to Bahrain to have the training, then the place of supply is Bahrain and local VAT applies. If you do the same training but fly to the customer in Kuwait then this is treated as export sales and out of the scope of VAT. There are other cases to consider, however; Land and Real Estate – POS is the location of the real estate property. Passenger transportation – where transportation begins. Transportation lease services – the location where transportation means were places at customer disposal. Restaurants and hotels – the location where the services are performed. Telecommunications and electronically supplied services – the location where services are enjoyed. This also affects digital sales and the downloading of software, etc.