Bahrain’s government is assessing proposals to double its VAT rate from 5% to 10% in another example of tax jurisdictions reacting to the impact of the COVID-19 pandemic.
Reports from the Gulf state that the pandemic and a contracting economy, due to lower oil prices, have combined to place an unwelcome strain on government revenue streams.
If the proposals are accepted then Bahrain would be following in the path of its Gulf neighbour Saudi Arabia in amending its VAT rate. Saudi Arabia did so back in July 2020, again primarily as a reaction to the pandemic and volatile oil prices, a source of revenue the Gulf states are still heavily reliant on.
Bahrain VAT system
Bahrain VAT rules mean non-resident digital service businesses must register for Value-Added Tax (VAT) within 30 days of their first sale to domestic customers.
Bahrain’s 5% VAT system came into force on January 1, 2019. In December 2018, just weeks before the go-live date, the Gulf Cooperation Council (GCC) state was busy releasing information about the impact of the new VAT system on domestic and non-resident businesses.
One of the most interesting points, from the perspective of non-resident businesses selling digital services in Bahrain (B2C), is that there is no sales threshold to registration for Bahrain VAT. There are, however, thresholds for domestic businesses.
Bahrain’s National Bureau of Taxation (NBT) released their VAT Executive Regulations in mid-December 2018 via its very helpful website.
Here, there is a specific section dedicated to the ‘Registration of Non-Residents in Bahrain’. This section states:
“Non-Residents (with no fixed place of business or fixed establishment) are required to register for VAT within 30 days from the first taxable supply to non-taxable persons in Bahrain, regardless of the thresholds mentioned above.”
For B2B sales, the Bahrain website states: “Non-Residents supplying goods and services to taxable persons in Bahrain are not required to register. In turn, the taxable persons in Bahrain receiving those goods and services have to report the VAT due under the reverse charge mechanism in their VAT return. Non-Resident taxable persons can apply for registration with the NBT either directly or by appointing a Tax Representative to act on their behalf. The NBT reserves the right to request and obtain necessary documentation from the taxable entity to prove that the above requirements are met.”
Background to Bahrain VAT introduction
Bahrain was the third GCC Member State to introduce a VAT system. In doing so they followed the path of Saudi Arabia and the UAE that did likewise in January 2018. Back in June 2016, all six Gulf Cooperation Council (GCC) member states signed the Common VAT Agreement. It was agreed that each GCC Member State would introduce a VAT system at a rate of 5%.
As VAT has been introduced from scratch every supply of a good or a service provided in the course of business are in scope. This is not a specific law targeting foreign suppliers of digital services. However, the result is the same, non-resident digital service suppliers, with sales in the GCC Territory that introduce a VAT system, must register, collect VAT, and remit it to the relevant tax authority.
So, what has happened with VAT elsewhere in the GCC?
In February 2017, Saudi Arabia ratified the GCC VAT framework and committed to introducing VAT on January 1, 2018. In July 2020, Saudi Arabia increased its VAT rate to 15%.
The General Authority of Zakat and Tax (GAZT) is responsible for managing the implementation, administration and enforcement of VAT in Saudi Arabia. It does so in close coordination with other relevant entities. More here.
United Arab Emirates (UAE)
On July 31, 2017, President of the UAE His Highness Sheikh Khalifa bin Zayed Al Nahyan issued the landmark Federal Law No. 7 of 2017 for Tax Procedures. This law established the foundations for the planned new UAE VAT system. The Federal Tax Authority (FTA) is the responsible authority in relation to the administration and collection of the VAT.
Online registration for VAT in the UAE opened in mid-September 2017. On November 27, 2017, the VAT Executive Regulations were signed into law. The VAT Executive Regulations were issued after His Highness Sheikh Khalifa bin Zayed Al Nahyan issued the Federal Decree-Law No. 8 of 2017 for Value-Added Tax (VAT) on August 27, 2017. More here.
Oman implemented its new VAT system on April 16, 2021. The introduction was the result of years of planning since the June 2016 agreement among Gulf Cooperation Council (GCC) member states and the signing of the Common VAT Agreement.
Back in mid-October 2020, the Gulf State issued its VAT law that came into effect 180 days after its publication in the Official Gazette. Registrations opened on February 1 this year and the executive regulations were then published on March 14. More here.
Acknowledgement: Information compiled with thanks to Abdelhamid Atalla from Cragus.
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