The recently released VAT in Bahrain Rate Change Transitional Provisions Guide describes how contracts for one-time and recurring supplies executed as well during the Law Enforcement Date (“24 December 2021”) are considered for VAT purposes when supplies are made before and after January 1, 2022.While the Bahrain National Bureau of Revenue (NBR) has yet to announce transitional regulations, we have developed the following as a guidance based on Saudi Arabia’s transitional rules when the VAT rate was raised to 15% in July 2020. – please note that the ‘Transitional VAT treatments and invoicing’ document is only a guide based on the assumption that Bahrain follows Saudi Arabia’s lead and implements similar transitional rules.
The NBR is expected to announce transitional guidelines soon. If Bahrain does not implement unique transitional rules for the VAT rate adjustment, the regular transitional rules that were in place when VAT in Bahrain was first introduced in 2019 will apply. It’s worth noting that, based on what Saudi Arabia did the year before, any transitional rules that are implemented will almost certainly be optional – that is, any transitional rules that are implemented will almost certainly be a concession made available to businesses, and businesses will not be required to register them.
How VAT in Bahrain Works:
A VAT registered person must charge VAT and pay it to the NBR if he makes a VATable supply (i.e. deliveries of goods or services that are subject to VAT). This is referred to as “output VAT.” His “input VAT” is the VAT levied by suppliers on business expenditures spent by a VAT registered person, as well as the he pays VAT on items and services he imports. A VAT registered person can claim input VAT on purchases and imports from the NBR to the degree that these costs and imports are used to manufacture VATable items. VAT paid on costs made for non-business purposes or to make exempt supply cannot be recovered. A VAT registered individual must file a VAT return with the NBR on a regular basis and pay the excess of output VAT over input VAT. A refund from the NBR can be requested if input VAT is higher than output VAT, or the difference can be carried forward as a credit against future VAT liabilities.
The new VAT rate is expected to generate BHD 288 million in revenue.
According to local news sources, the Bahrain government expects to earn BHD 288 million from a 10% VAT increase in 2022. The government forecasts the entire budget deficit to fall to BHD 823.528 million in 2022, down from BHD 1.112 billion in 2017. Bahrain notice and reporting update on a country-by-country basis
CbC notice and reporting apply to all enterprises that have a legal entity or branch in Bahrain, according to Ministerial Order (MO) No (28) of 2021, which was announced on 3 February 2021 and are members of a Multinational Enterprise (MNE) group with annual consolidated sales of at least BHD342m. (USD906m). The new CbC reporting requirements are effective for fiscal years starting on or after January 1, 2021. The first Bahrain CbC notification deadline is December 31, 2021, for MNE groups with a financial year end of December 31, 2021.
Impact of Vat in Bahrain:
Outside of the retail sector, the ability to increase the price of supply of goods and services by an additional amount of VAT is determined by the contract between the provider and the client. If the contract authorizes the provider to impose VAT on top of the agreed-upon price, the final price paid to the client will rise by 10%. (Assuming the good or service supplied is subject to VAT at the standard rate).
The price charged will not increase if the contract does not enable the provider to add VAT on top of the negotiated price, However, the provider is still accountable for the goods or service’s VAT (assuming it is subject to VAT at the standard rate). In this case, the price agreed upon with the customer in the contract is assumed to already include a 10% VAT component (i.e., the price is inclusive of VAT), and the supplier must divide the agreed price by 11 to calculate the VAT due on the delivery.
In general, when supplies are provided to another VAT-registered firm that may claim the VAT it paid on its business expenditures, that business should accept the additional VAT on top of the agreed price. This is because the VAT added to its expenditures will have no effect on this client as long as it is allowed to deduct the input VAT from the output VAT it charges on its supplies.
Only end-consumers, or those who aren’t registered for VAT, will be unable to reclaim the VAT levied on their purchases. These end-consumers will see a rise in the price of products and services purchased that are subject to the usual 10% VAT rate.
A firm that isn’t VAT registered may raise its pricing to reflect the VAT it pays on goods that it can’t reclaim from the NBR. This is typically the case when a supplier attempts to protect its margin after the application of VAT.
Contracts for one-time supplies signed before December 24, 2021 and delivered on or after January 1, 2022:
Deliveries made under contracts for one-time supplies of standard rated goods and services made before December 24, 2021, and delivered before January 1, 2022, will be subject to a 5% VAT rate. One-time supplies will be subject to the 5% VAT rate if a contract for their delivery was signed before December 24, 2021, even if the supply is made on or after January 1, 2022. If the contract is changed before the supply is made or the supply is made after January 1, 2023, the supply will be subject to 10% VAT.
Contracts for one-time supply signed after December 24, 2021 and delivered on or after January 1, 2022 are not eligible.
If a supplier issues a tax invoice or receives consideration for a one-time supply of goods or services to be made after January 1, 2022, after December 24, 2021, but before January 1, 2022, he must account for VAT at 10% on the tax invoice or on the consideration received, and issue a tax invoice for these supplies by the normal tax due date. If the provider planned to make such a delivery before 1 January 2022 under contracts entered into after December 24, 2021, but the supply was not made until after that date, then:
Contracts for Continuous Supplies signed before December 24, 2021, with delivery on or after January 1, 2022:
The following applies to normal rated supply made under these contracts:
If the expiration, modification, or renewal happens before January 1, 2023, the value of supplies made before January 1, 2022 will be taxed at 5%, while supplies made on or after January 1, 2022 will be taxed at 10%.
In rules 3 and 4, the handbook explains how to value products and services supplied under contracts. In addition, the book clarifies when a contract is considered altered or amended. These include, but are not limited to, extending the contract’s duration, incorporating more items and/or services inside the contract’s terms, and inflating the consideration payable, among other things. This occurs when a contract amendment results in the supplies or consideration being liable to VAT at 5% instead of 10%.
Contracts for continuous deliveries signed into before January 1, 2022 that do not fall under Transitional Rule 3:
Standard rated deliveries made under these contracts, which cover a term that extends beyond January 1, 2022, and were entered into:
The following is the appropriate VAT rate for these supplies:
Suppliers will be required to value the quantity of products and services provided before and after January 1, 2022, and give documentation of that valuation if the NBR requests it. When the kind or amount of goods or services supplied does not change over time (for example, insurance contracts or gym memberships), they will be viewed as emerging equally across that period, and their worth before and after 1 January 2022 can be estimated, for example, on a time basis (e.g. using days or months). When the nature or quantity of goods or services given changes over time (e.g., building or renovation, consulting services), the value of the goods or services must be determined based on the actual amount of goods or services provided.
The apportionment of the value of supplies under this regulation does not result in a tax due date on January 1, 2022; instead, the tax due date will be determined by the date of the next invoice, receipt of consideration, or completion of the services (Unless a year has passed since the previous VAT due date, in which case the VAT due date will be the one-year anniversary of the prior VAT due date).
The person who is responsible for issuing a VAT invoice:
A VATable person must issue VAT invoices for supplies of goods and services supplied in Bahrain, regardless of whether the supplies are made to residents or non-residents. Furthermore, when making a presumed supply of goods and services, a VAT invoice must be issued by a VATable person. To the customer, a VAT invoice must be given.
Either an electronic or physical VAT invoice can be issued (subject to specific conditions and approval from the NBR).When a VAT invoice is damaged or lost, the supplier may issue a replacement invoice that is similar to the original VAT invoice. The replacement invoice must clearly state that it is a replacement for the original VAT invoice. “Duplicate of original” must be clearly written on any duplicate of an original VAT invoice.
It may be impractical for a VATable supplier to send a VAT invoice in some circumstances. In certain situations, the VATable client may send a VAT invoice on behalf of his VATable provider if all of the following requirements are met:
When a VATable provider uses self-invoicing, he or she is nonetheless liable for the VAT invoice issued by the VATable client.
When a VAT invoice is issued in a foreign currency, the VATable person must convert the values mentioned on the VAT invoice to Bahraini Dinars. The Central Bank of Bahrain’s official exchange rate for the VAT due date must be applied. If an exchange rate approved by the Central Bank of Bahrain is not available, a trustworthy source of foreign currency rates should be utilized as part of the transitional procedures. VATable people should continue to utilize the same source until currency rates authorized by Bahrain’s Central Bank are available.
Rules regarding recovery of VAT in Bahrain:
In general, VAT paid on costs is reclaimable if the expenses are used for the following purposes:
Input VAT recovery is subject to several requirements that must be satisfied before the VAT may be reclaimed in a VAT return.
All of the following conditions must be met in order to recover VAT charged on expenses:
Failure to pay the agreed-upon price for the service obtained.
The right to recover input VAT is based on the assumption that the recipient of the supply intends to pay the consideration. When the consideration is not paid (in part or in full) within twelve months of the date of the supply and the supplier follows the procedures for obtaining bad debts relief, the recipient of the supply is required to adjust the input VAT initially recovered by an amount equal to the amount of VAT not paid. The VAT return for the VAT period during which the supplier receives bad debt relief should show the adjustment of the input VAT initially obtained. A VAT credit note will most likely be issued by the provider.
If the recipient VATable person pays the consideration due to the supplier (in full or in part) at a later time, he will be entitled to re-adjust and seek recovery of the input VAT paid in the VAT return for the VAT period during which the payment was finally made, in accordance with the input VAT recovery rules.