The Kingdom of Bahrain will be the third GCC member state to implement VAT after all members had agreed to adopt VAT when they signed the GCC VAT Framework Agreement in 2016. The UAE and KSA have been the first States to introduce VAT on 1 January 2018. The other States will follow most likely in the following order: Oman, Qatar and Kuwait.
On 10 October 2018, Bahrain published its VAT Decree law (No. 48) in its Official Gazette. The Bahraini VAT law was written mainly by the Ministry of Finance and borrows largely from the GCC VAT Framework and the KSA VAT legislation. In addition to the VAT Decree law, Decree No. 47 approves the GCC VAT Treaty and Decree No. 45 establishes the Bahraini Tax Authorities. As a next step, Executive Regulations will be adopted in Bahrain to provide further detail on all provisions.
As is expected the VAT rate is 5% and businesses making taxable supplies in excess of BD 37,500 are required to register for VAT purposes. Bahrain has adopted a similar stance to financial services as the UAE and KSA. With respect to Real Estate, Education, Health Care and Local transport it has borrowed more from the UAE. Contrary to both the UAE and KSA, it has zero rated a number of foodstuffs. Regretfully it has taken over the too strict conditions to apply the zero rate on “exports of services” (in fact services’ which place of supply takes place abroad) like the UAE and KSA have. These conditions are not in line with modern international EU VAT practice or the guidelines of the OECD in this matter.
Unfortunately it has also implemented the obligation to appoint a fiscal representative in some cases, whereas experience has taught that in KSA this structure is practically difficult to implement and leads to less compliance. No automatic reverse charge on imports of goods has been foreseen, contrary to the UAE. Remarkably, the sale of pearls in Bahrain has been zero rated, relatively similar to the wholesale of diamonds in the UAE where a reverse charge applied.
In line with KSA and UAE, steep penalties have been adopted to deter any non-compliance. A specific prison sentence has been determined as well for tax evasion. Extremely long transitional provisions have been foreseen for supplies to governments.
Businesses in Bahrain have to prepare for the introduction of VAT now and UAE and KSA businesses with subsidiaries in Bahrain have to compare their current implementation with the Bahraini framework. In addition, businesses in the other GCC States will have to analyse the impact of the implementation on their dealings with Bahrain, such as the exchange of VAT numbers but also the different Customs framework which will apply.