Bahrain to Roll Out VAT System in Stages Before Official Launch

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  • Businesses with turnover exceeding $13 million must register by Jan. 1
  • Companies await implementation regulations and timetable for smaller firms

Bahrain wants large companies to register for the 5 percent value added tax ahead of its official rollout in January.

Companies with an annual turnover exceeding 5 million dinars, ($13.26 million) are being asked to register for the VAT on all goods and services before the system is officially launched at the beginning of the year, according to Bahrain’s finance ministry. Bahrain will be the third Gulf Cooperation Council country after the United Arab Emirates and Saudi Arabia to introduce the tax. Oman, Kuwait and Qatar are expected to follow shortly.

Under a 2017 agreement, all GCC states will collect VAT from businesses with revenues of 375,000 Saudi riyals ($100,000) or more by Jan. 1, 2019. Registration thresholds for smaller companies haven’t yet been announced.

“Taxpayers who have commenced their preparations should see them through,” Michael Camburn, head of VAT for Deloitte in Bahrain, said in an emailed comment Nov. 29. “The interim threshold for VAT registration could be altered at any time which would leave little time for the necessary changes to be made to accounting, financial, and other systems.”

VAT implementation details and the treatment of different sectors is left to the individual jurisdictions. In launching the tax system, the Gulf states are seeking to stabilize their budgets and replace lost revenues from oil, the price of which has fluctuated dramatically since 2014.

To charge, collect and remit VAT on time in compliance with the tax law, companies in GCC countries must update their information technology, accounting and billing systems, train employees and, in many cases, engage external tax advisers, according to practitioners. They must also maintain new tax records, together with original documentation in case of queries, for inspection on demand by the authorities.

Early indications are that VAT revenues are set to exceed an earlier EY estimate that 5 percent VAT will produce more than $25 billion per year for the six GCC countries. In the first three quarters of 2018 alone, Saudi Arabia collected more than 80 billion riyals ($21.3 billion) in taxes on goods and services, according to Jadwa Investment Research.

Staggered Implementation

Bahrain’s decision to require large companies to register early suggests that the introduction of VAT in the country will be staggered, Deloitte said in a note to clients Nov. 29.

The country has yet to announce when other companies above the minimum 37,500 dinars-threshold must register or whether they can do so voluntarily.

Bahrain’s National Bureau for Taxation will hold a series of briengs to help companies prepare to implement the executive regulations, which haven’t yet been published but “include a detailed explanation of the operational and procedural aspects of the law,” approved Oct. 9, Rana Faqihi, the bureau’s assistant undersecretary for development and revenue policies said in a statement Nov. 28.

“It does take pressure off SMEs and allows the National Bureau of Taxation to manage a smaller group of businesses in the first instance,” said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai. “In adopting this policy, Bahrain’s finance ministry is copying the Saudi tax authority, which had the exact same smart policy.”

Businesses Want Details

“With one month to go, the executive regulations are still not published,” whereas Saudi Arabia published its regulations nearly five months before its tax began on Jan. 1, Vanhee said by email Nov. 29. Bahrain’s finance ministry “will need to communicate extensively between now and Jan. 1, 2019, in order to inform businesses as much as possible.”

For multinationals, Bahrain’s VAT should pose few problems because they operate in other tax jurisdictions, including the Gulf for the past year, but the lack of information is causing some concern.

“The situation is very blurry,” said Katrijn De Naeyer, indirect tax manager EMEA for projects and planning at Johnson Controls, a multinational conglomerate that produces and ships batteries and electronics. “We don’t have the 5 million dinars revenue that they’re asking for so we’re more at ease but at the same time there’s so much uncertainty for a company, which is making it difficult to plan ahead.”

The firm is using its experience in the UAE last year, along with external advisers, to prepare. VAT won’t have much impact on revenue, so the main issue is compliance, De Naeyer said by phone from Brussels.

“In the UAE it was also very last-minute. In the end we were fine,” she said. “But here in Bahrain they are even later issuing the implementation guidelines. It’s a bit more stressful now because we know nothing. At least in the UAE we knew half a year before it actually went live. We are getting our VAT systems ready to go ahead. From the moment we know something more we’ll be able to press a button and go live.”

Under the GCC’s VAT treaty, other member states were due to start implementing the tax within 12 months from its start in the UAE and Saudi Arabia. That timetable has slipped.

“Although Bahrain will technically have introduced VAT just within the requisite time period, the registration threshold is by far the highest in the world, is in breach of the GCC Unied VAT Agreement, which provided for a threshold of the equivalent of 375,000 Saudi riyals,” said Jeremy Cape, tax and public policy partner at Squire Patton Boggs law rm in London.

“There is some sense in trying to avoid the issues that arose with the ‘Big Bang’ approach in the UAE, and the struggles that the tax authorities and smaller taxpayers faced,” but the high threshold provides “straightforward avoidance opportunities for large businesses, distorts the market and is unsustainable in all but the very short term. It will be interesting to see the reaction of the UAE and Saudi Arabia,” Cape said by email Nov. 29.