How VAT in Bahrain impacts neighbours
Value-added tax, being all pervasive, impacts a country’s economy as well as the industries therein. Furthermore, VAT impact also spills over to the import and export of goods and services. The UAE, all along, has business ties with Bahrain through either a local presence in Bahrain (as branch or local entity) or through export/import of goods or services.
Typically, after the introduction of VAT in a country, businesses discover that their entire business ecosystem — i.e., their vendors, suppliers and customers located in and outside the country — are also part of their business. Underlying reason for this tectonic shift is the fact that in VAT, businesses cannot take unilateral decisions and have to take decisions bilaterally as a buyer can debate on the applicability of VAT (for example, whether the transaction qualifies as ‘export’ or not).
Outbound transactions
As mentioned above, dependency between the supply chain intensifies, particularly, in cases of outbound supply of goods (like goods being supplied to Bahrain from the UAE).
Typically, in such transactions there are two aspects to be vetted, one whether the supply qualifies as export from UAE and whether the transaction qualifies as import in Bahrain. Thus, it is advisable for UAE entities having business interests in Bahrain to initiate early dialogue on the likely impact to identify possible issues and documentation requirements to avoid VAT debates/disputes with customers.
Import of goods
Typically, VAT is payable at the time of import of goods (unless facility of deferment is provided) along with customs duty.
Thus, after introduction of VAT, imports in Bahrain may attract VAT and thus, at the time of import itself it will be critical to determine the applicability of VAT on goods being imported in Bahrain (as certain goods such as specified medicines may not attract VAT). Also, procedural aspects like declaration of the VAT registration number on import documents, linking of the VAT number with customs, etc, also become critical during transition.
Service transactions
As discussed earlier, the VAT act casts the onus of determining, inter alia, whether a transaction is local supply or export/zero rated supply. For example, if an entity located in Bahrain is charging a business entity in the UAE for providing advertisement in its cinema hall screens, the question that will arise is whether Bahrain VAT will apply in such cases (as the transaction is related to immovable property located in Bahrain) or it’s advertising services treated as ‘export’ of service as the recipient is located outside Bahrain.
Furthermore, there could be challenges in determining the location of a supplier of a service. For example, ABC, a consultancy firm has offices in the UAE and Bahrain. ABC’s UAE office enters into an agreement to provide services to its client, say PQR, in Bahrain. However, ABC’s Bahrain office provides support in execution of the assignment (either by way of coordination or executing partly or executing fully). Now, herein whether the supplier ABC is in the UAE or Bahrain. Based on the determination of this question the liability to pay VAT will crystallise.
Way forward
Change is constant for VAT, as in the time to come, there could be developments as the introduction of an electronic clearance system, recognition of implementing states, credits or refunds being available across GCC states, etc. Even there are discussions in the GCC on remittance tax, expat tax, corporate tax and transfer pricing. Further, the remaining three signatories of the GCC are expected to bring VAT.
Furthermore, though there is an umbrella GCC VAT agreement, it appears that each signatory, while bringing VAT law is customising the same as per the economy’s requirement. For example, pearls, gemstones and certain basic products are zero-rated in Bahrain. These tweaks certainly bring an additional layer of challenge to meet for entities having a multistate presence as ERP will need to factor in these aspects for each country. It will require ,anagement to understand the different VAT impact for the same transaction in different countries.
Given the aforesaid, businesses having presence across the GCC will have to deliberate how VAT introduction in these countries will impact their business dynamics. Thus, at least for the next few years, VAT and taxation appears to remain a key topic of debate and discussion in boardrooms.