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Voluntary registration for VAT – issues SMEs need to consider

Bahrain’s Ministry of Finance (MoF) has confirmed mandatory registration deadlines:

  • Turnover above BD5m – registration deadline of 20 December 2018 with an effective date of 1 January 2019
  • Turnover above BD500K and less than or equal to BD5m – registration deadline of 20 June 2019 with an effective date of 1 July 2019
  • Turnover above BD37.5k and less than or equal to BD500K – registration deadline of 20 December 2019 with an effective date of 1 January 2020
  • No turnover threshold for non-residents who meet the requirement to register – registration deadline of 20 December with an effective date of 1 January 2019

Has MoF changed the mandatory registration threshold (MRT)?

No, Bahrain’s VAT law clearly refers to the MRT as BD37,500 (approximately US$100,000) as set out in the GCC VAT treaty.  The voluntary registration threshold (VRT) also remains at BD18,750 (approximately US$50,000). The announcement from MoF does not change the MRT or the VRT. The mandatory registration deadlines the MoF is using are purely interim measures to ease the pressure on businesses given the short time frame to 1 January 2019.

What should be considered when assessing whether a business meets the mandatory registration threshold or the Bahrain MoF mandated registration threshold:

  • Total value of all taxable local supplies (excluding the sale of capital assets) in the Kingdom (whilst the Bahrain VAT law does not use the word “taxable” before the word “supplies”, both Saudi Arabia and the UAE consider taxable supplies – ie a business that only makes exempt supplies should not be required to register unless the below result in the threshold being met); plus
  • Total value of all exports (goods and services) from the Kingdom; plus
  • Total value of all imports that are subject to the reverse charge mechanism (RCM).  For example, a business that only makes exempt supplies locally but exceeds the threshold in relation to purchases from abroad subject to the RCM will still be required to register.

Once all six countries have implemented VAT, supplies that are ‘out of scope’ will not be considered exports and these will be excluded from the registration test.

What does MoF’s decision to stagger registration mean for SMEs?

In simple terms, SMEs have more time to prepare for the introduction of VAT and meet their registration and reporting obligations. These SMEs cannot charge VAT on any of the supplies they make until they are registered.  However, some SMEs that are ready to implement the tax earlier than the MoF mandated registration date may wish to register voluntarily, for the reasons outlined below.

Will SMEs still have to pay VAT?

All businesses importing goods into Bahrain or purchasing any services or goods from a VAT registered larger business (that is, with turnover over BD5m) in Bahrain will still pay VAT.

If a business is not registered, can it recover VAT?

In short, no. Until businesses below the BD5m threshold register for VAT, the VAT they incur on their expenses or purchases will likely be a cost to these businesses as they won’t be able to immediately recover the input VAT they pay on their expenses or purchases.

Should SMEs register voluntarily earlier than the MoF mandated date?

The advantages depend on the industry you operate in, the size of businesses in your supply chain, the goods and services you purchase and supply, and the makeup of your other expenses. A manufacturer or reseller will, assuming the business is importing goods or buying from a VAT registered local business, pay VAT which can’t be recovered – increasing its cost of doing business. These businesses may have to increase their prices to pass this locked cost on. VAT registered business may seek purchase from other VAT registered businesses to enable them to claim the input VAT rather than pay higher prices to an unregistered SME without the ability to claim input VAT.

Any business incurring significant amounts of VAT on purchases will have a greater incentive to register for VAT voluntarily, with a view to recovering the VAT suffered on inputs – this is likely to include importers, manufacturers, and other businesses buying from VAT registered local businesses.

On the other hand, a business supplying services and whose costs are mainly salaries is unlikely to suffer a large VAT cost on its expenses and purchases, and may therefore have a lesser incentive to register for VAT before the MoF mandated registration date. In other words, a distributor of imported goods or manufacturer will be much more impacted by VAT than a company providing professional consulting services.

If SMEs defer registration, can they recover VAT paid prior to registration?

Bahrain’s VAT law does allow for the recovery of input VAT paid prior to registration – subject to meeting the conditions specified in article 44 of the law:

“A Taxable Person is entitled to deduct Input Tax in respect of Goods and Services supplied to him or that have been imported prior to the registration date in the Tax Return of the first Tax Period provided the following conditions are met:

  1. The Goods and Services are received in the course of making Taxable Supplies.
  2. The goods are not supplied before the date of registration
  3. Capital Assets are not fully depreciated before the date of registration.
  4. Receipt of Services within the period of 6 months prior to the date of registration.
  5. The Goods and Services are not subject to any restriction listed in the Agreement and in this law.”

What should SMEs be doing now?

  • Examine their business activities and their position in the supply chain
  • Estimate how much irrecoverable VAT on their expenses and purchases they are likely to incur
  • Consider the impact of VAT on pricing and customers
  • Seek advice on whether they can benefit from article 44 of the Bahrain VAT law – to ensure that only recoverable VAT is claimed, particularly given Bahrain’s tough penalty regime
  • Retain copies of tax invoices received and ensure that these are valid (as prescribed by the Bahrain VAT regulations) to protect their position on pre-registration input VAT claims
  • Consider compliance costs – businesses with turnovers of less than BD5m will be required to lodge half-yearly returns in 2019. From 2020, businesses with turnovers more than BD3m will lodge monthly returns. Businesses with turnovers under BD3m will lodge quarterly returns.

For more details on this or other VAT issues, contact Mubeen Khadir (mubeen.khadir@keypoint.com), George Campbell (george.campbell@keypoint.com) or another member of Bahrain’s leading VAT specialist team.

Bahrain’s Ministry of Finance briefs advisors

Following the announcement on 29 November 2018 by the Ministry of Finance (MoF) that they will host meetings for companies and traders about VAT, the first briefing session for advisors and other stakeholders was held on Monday 3 December 2018. During the meeting, the MoF confirmed VAT registration will be done in phases:

  • Revenue threshold greater than BD5m – registration deadline of 20 December 2018 with an effective date of 1 January 2019
  • Revenue threshold above BD500K  and BD5m or less – registration deadline of 20 June 2019 with an effective date of 1 July 2019
  • Revenue threshold above BD37.5k and BD500K or less  – registration deadline of 20 December 2019 with an effective date of 1 January 2020
  • No threshold for non residents who meet the requirement to register – registration deadline of 20 December with an effective date of 1 January 2019

The MoF will open a portal for voluntary registration (for all businesses with turnover of BD18,750 or more) within the next week. The implementing regulations will be issued soon – although no precise date was provided. We will be issuing a VAT alert shortly on other matters covered including VAT on imports, zero rated and exempt supplies, deadline for filing of returns, tax agents, VAT grouping and a diagnostic VAT readiness survey.

With less than 20 working days left until VAT is implemented in Bahrain, there is limited time  for businesses with turnover of BD5m or more to ensure people, systems and the organisation itself are prepared for one of the most significant economic changes in Bahrain in living memory.

For more details on this or other VAT issues, contact Mubeen Khadir (mubeen.khadir@keypoint.com), George Campbell (george.campbell@keypoint.com) or another member of Bahrain’s leading VAT specialist team.

What does the Bahrain MoF announcement on staggered registration mean for businesses?

On 28 November 2018, the Ministry of Finance announced that it is staggering the registration of VAT for businesses in Bahrain. We understand this announcement means that only businesses with turnover of over BD5m will need to register for VAT by 1 January 2019. These businesses must submit their registration before 20 December 2018.

What should these ‘larger’ businesses be doing now?

Businesses with turnover above BD5m should be continuing (on a fast track basis) with their preparations to be ready for the implementation of VAT by 1 January 2019.  If you haven’t received the form from the MoF you should urgently contact the MoF or speak to your advisor.

Has the Bahrain government changed the mandatory registration threshold (MRT)?

No, the Bahrain VAT law clearly refers to the MRT as BD37,500 (approx. USD100,000) as per the GCC VAT treaty.  The voluntary registration threshold (VRT) also remains at BD18,750 (approx. USD50,000).  This announcement does not change the MRT or the VRT.

Does the announcement mean the Bahrain government is going to apply the VAT law differently to smaller businesses?

No, the announcement is only a staggering of the registration which appears to effectively be a staggering of the introduction of VAT in Bahrain.  Saudi Arabia did something similar but used a much lower threshold of SAR1m.  The MoF has not announced any changes to the application of the VAT law.

What should businesses with turnover above the MRT but BD5m or less do?

It appears these ‘smaller’ businesses have some extra time to get ready for VAT.  Based on the announcement to stagger it would appear that these businesses will likely not be implementing VAT on 1 January 2019.  However, there has been no announcement on how much extra time they have – these businesses will need to wait for clarity from the MoF on when they need register for VAT or whether these businesses will be able to voluntarily register.

What does this actually mean?

In simple terms, these ‘smaller’ businesses will not charge VAT on any of the supplies they make until they are registered – hopefully the MoF will announce an effective date of VAT for these businesses soon.

Will these ‘smaller’ businesses still have to pay VAT?

All businesses importing goods into Bahrain, purchasing any services or goods from a larger business (ie with turnover over BD5m) that is registered for VAT in Bahrain will still pay VAT.

If a business is not registered can it recover VAT?

In short, no.  Until businesses below the BD5m threshold are allowed to register, VAT will likely be a cost to these businesses as they won’t be able to recover any input VAT they pay on their expenses.  However, the Bahrain VAT law does allow for the recovery of input VAT paid prior to registration subject to meeting the conditions specified in section 44 of the Bahrain VAT law – hopefully, the regulations will provide more clarity on this. We recommend businesses retain copies of tax invoices received and make sure that these are valid (as prescribed by the Bahrain VAT regulations) to protect their position on pre-registration input VAT claims.

Should ‘smaller’ businesses stop preparing for VAT?

Assuming the go live date for these businesses is being delayed these businesses will have more time to prepare – will this be one month, six months or longer we currently do not know.  Whilst, smaller businesses may be able to slow down their preparations for implementation of VAT we do not know how much “breathing space” the MoF has decided to provide so our strong recommendation to these businesses is that they do not stop preparing.  All the MoF has announced is a staggered registration (which in effect appears to be a staggered introduction).  See also the answer to the question above – businesses will still need to know what to do to protect their position on input VAT incurred prior to registration – they will not be able to do this unless they have an understanding of how the VAT law applies.

To discuss this development – or any VAT issue – with one of our VAT specialists, contact Mubeen Khadir (mubeen.khadir@keypoint.com), George Campbell (george.campbell@keypoint.com) or another member of the Keypoint VAT team.

Bahrain to stagger VAT registration

Bahrain’s Ministry of Finance has announced – through its Instagram page – that it is staggering the registration of Bahrain’s businesses for VAT. While the National Bureau of Gulf Taxation (NBGT) continues to circulate a series of questionnaires to help determine which businesses need to be prioritised before VAT is implemented on 1 January 2019, we understand that – in the initial stage – only businesses with revenues over BD5m will need to register for VAT. These businesses must submit their registration before 20 December 2018.

There  has  been no  announcement  on when businesses  below  the  BD5m  threshold  will need  to  register  for  VAT or whether businesses will be able to voluntarily register. Until businesses below the BD5m threshold are allowed to register, VAT will likely be a cost to these businesses as they won’t be able to recover any input VAT they pay on their expenses (unless they meet the conditions in section 44 of the Bahrain VAT law – hopefully, the regulations will provide more clarity especially in relation to s 44(2) and 44(4)). We recommend businesses retain copies of tax invoices received, and to make sure that these are valid (as prescribed by the Bahrain VAT regulations) to protect their position on pre-registration input VAT claims.

The Instagram account also said that MoF will host meetings for companies and traders about VAT and the readiness of companies and that 94 basic food items – as well as other basic services such as education and health – have been zero-rated. The post also indicates that implementing regulations – once released – will set out procedures for calculating, paying and collecting VAT. The NBGT will be responsible for managing and collecting all types of taxes and related fines.

To discuss this development – or any VAT issue – with one of our VAT specialists, contact the VAT team at vat@keypoint.com or +973 1720 6809.

‘Grandfathering’ in Saudi Arabia

The zero-rating transitional provision in Article 79(3) of Saudi Arabia’s implementing regulations – the ‘grandfathering provision’ – permits zero-rating of supplies made under some legacy contracts, subject to strict conditions:

  •  The contract was entered into before 30 May 2017
  •  The customer is entitled to deduct input tax in respect of the supply in full or is an eligible person entitled to a VAT refund
  •  The customer certifies in writing to the supplier that input tax can be deducted or refunded in full

All of these conditions must be met. If grandfathering has been applied where it should not have been, GAZT is entitled to pursue suppliers for due VAT – often for large sums – even before the application of penalties.

 

Unfortunately, a number of companies in Saudi Arabia have applied the grandfathering provision incorrectly. For more information on common misapplications and the possible ramifications, please read our VAT alert.