VAT: IMPACT ON BUSINESSES IN BAHRAIN

One of our resident VAT experts, Adnan speaks about how VAT can have an impact on businesses in Bahrain by highlighting the following key points:-

  • Impact on Revenue
  • Procurement and Input Tax
  • Contracts & Policies
  • Record Keeping, IT & ERP Systems
  • Compliances

He also emphasized that Affiniax can help in the following ways :-

  • VAT impact assessments
  • Advise on tax-efficient structuring/
  • Drafting of Sample Tax Invoices & Tax Credit Notes
  • Registering and filing VAT returns

VAT IN UNITED ARAB EMIRATES: PROFIT MARGIN SCHEME

The Federal Tax Authority (‘’FTA’’) issued a public clarification on Article 29 (VATP002) of the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on Value Added Tax, few months ago. This has been further clarified by the FTA at an awareness session recently organised at the Abu Dhabi Chamber of Commerce and Industry in order to raise awareness among the taxable persons.

Profit Margin Scheme is a scheme that may allow the Registrant, in any Tax Period, to calculate and charge tax based on the profit margin earned on the taxable supplies and not based on the value of these supplies.

The profit margin is the difference between the purchase price of the Goods and the selling price of the Goods, and the profit margin shall be deemed to be inclusive of Tax.

What kind of goods are eligible to be supplied under Profit Margin Scheme?

  • Second hand goods, meaning tangible moveable property that is suitable for further use as it is after repair;
  • Antiques i.e. goods that are over 50 years old;
  • Collectors’ items i.e. stamp, coins, currency and other pieces of scientific, historical or archaeological interest.

What are the key conditions to apply the Profit Margin Scheme?

  • Only those goods which have previously been subject to VAT before the supply in question may be subject to the profit margin scheme. As a result, used goods acquired prior to the implementation of VAT or goods which have not previously been subject to VAT for other reasons are not eligible to be sold under the Profit Margin Scheme. There needs to be sufficient evidence or information to justify that the good was subject to previously.
  • The goods must have been purchased from either:
    • A person who is not registered for VAT.
    • A registered business which has already applied Profit Margin Scheme on the same goods.
  • The taxable person made a supply of the goods where input tax was not recovered in accordance with Article 53 of Cabinet Decision No. 52 of 2017.

Under what cases the Profit Margin Scheme will not apply?

  • Used goods acquired prior to the implementation of VAT or goods which have not previously been subject to VAT for other reasons are not eligible to be sold under the Profit Margin Scheme.
  • Where a tax invoice or any other document mentioning an amount of VAT chargeable in respect of the supply has been issued.
  • Sufficient evidence or information is not available to justify that the goods have been subject to VAT previously.

How can we help?

Further, we can help you assess the eligibility of Profit Margin Scheme on the goods under question and advise on the implications and provide guidance in relation to the documentary requirements which need to be maintained to ensure compliance.

VAT IN UNITED ARAB EMIRATES: WHAT IS IT AND WHAT ARE THE IMPACTS?

Why is VAT being introduced?

The Ministry of Finance and the wider GCC have agreed to implement Value added tax (VAT) at a rate of 5% from 1 January 2018. This landmark Agreement marks the start of a fiscal reform across the region.

The increased need to diversify the economy, changing operating models and promoting smart initiatives led by technology and employment continue to be key trends. In order to promote such change and create an economy which is safeguarded for the future, governments across the region have introduced various initiatives to reduce the dependency on oil-generated incomes and further stabilize the economy, one of which being the introduction of VAT in Dubai, Abu Dhabi and all of the Emirates.

How will VAT impact your business?

VAT in the UAE is likely to impact various segments of your business, therefore it is advisable to conduct a VAT mapping programme of your current procedures and processes in order to identify the VAT transformation required.

Depending on the size and complexity of your business and operations, VAT readiness can take from three months to a year, with an impact being felt across multiple touch points of your business, which include some, if not all, of the functions such as:

  • Finance, Purchasing and Sourcing and Imports
  • Sales and Marketing; Logistics and Customs
  • Legal and Human Resources; IT Department for Systems and ERP

 

Standard Rate:       5% to be applied to most goods/services supplied by ‘Chargeable Persons’

Zero Rate:               Zero VAT (0%) applied to limited goods and services.

Exempt Supplies:   Supplies outside the scope of VAT. Input VAT will not be recoverable.

Who needs to register?

Mandatory registration will be required for ‘Chargeable Persons’ (individuals, companies, groups, etc) making ‘Taxable Supplies’ of AED 375,000 (generally calculated over a 12-month period). The voluntary registration threshold will be AED 187,500.

 

POINTS TO CONSIDER

VAT Returns: Most Chargeable Persons will need to file quarterly returns. The deadlines for VAT returns will be a month from the end of the quarter. Some entities may need to file monthly returns.

Transitional Rules: Transitional rules will apply on stock / WIP as at 31 December 2017. Contracts that cross over the date of implementation of VAT will be affected.

Tax Audits: FTA has been given rights to undertake a Tax Audit on any person to ascertain the extent of compliance with the provisions of the LAW.

What if you decide not to change anything?

If nothing is done, there is a serious risk that your current business methodology will not be compliant with the new legislation. Furthermore, you might not be able to submit a complete and accurate VAT return in a timely manner. Non-compliance could lead to penalties or prosecution, whichever applies.

BAHRAIN VAT: IN COMPARISON

The government of Bahrain has announced the implementation of VAT from 1st January 2019. An Arabic version of the VAT law has been published. Implementing regulations will be released at a later date which will explain the VAT matters in further detail.

Some of the important points and differences to UAE and KSA VAT legislation are as follows:

1. Mandatory Registration – Threshold

The Bahraini legislation refers to the GCC agreement for the mandatory registration threshold which stipulates Saudi Riyal 375,000 as the basis of calculation. The Bahraini legislation has not clarified which rate of exchange rate will be used to determine the final value of threshold. Threshold value is likely to be 37,500 if we look at the example of UAE threshold which is not exactly equivalent to the exchange rate pertaining to, for example, 01 January, 2018. UAE used a rounded off exchange rate of 1AED/SAR to calculate its threshold. Bahrain is likely to use a round off figure of 10 BHD/SAR, hence, BHD 37,500 as the threshold.

2. Mandatory Registration – Period

Another important distinction when compared to KSA and UAE legislation would be the period of revenue considered for mandatory registration. KSA and UAE consider last 12 months and next 30 days of revenue for the purpose mandatory registration. In contract Bahrain considers last 12 months OR “anticipated revenue” in the next 12 months. Companies may have to provide signed contracts to establish future revenue.

3. Voluntary Registration – Threshold and Period

Similar to UAE and KSA the voluntary threshold will be half of the mandatory threshold and both revenues and expenses can be considered for this purpose. But similar to the distinction in the period, previous OR next 12 months of revenue and expenses can be considered for the registration.

4. Tax Return Submission Date

It will be the last day of the month subsequent to the tax period. For example, for Quarter Ended 31st March, 2019 the last date of submission would be 30th April, 2019. This is similar to KSA.

5. Tax Debit Notes

The document titled “Tax Debit Note” is officially recognized when compared to KSA and UAE where only additional invoices can be issued for any increase in the value of a Tax Sales Invoice. For instance, in UAE and KSA, if by error or omission a Tax Invoice was undervalued, you need to issue an additional Tax Invoice describing the change. Bahraini Legislation recognizes a Tax Debit Note which can be officially issued to rectify such an error, instead of an additional tax Invoice.

6. Pre-registration Expenses

In Bahrain, with regards to sale of taxable goods, only those Input VAT credits can be claimed where the respective taxable goods would be sold after the registration date. In terms of taxable services, no Input credits can be claimed prior to 6 months of registration date. This is similar to KSA.

The distinction in UAE is with respect to the input credits on services only. Input Credits can be claimed as long back as 5 years prior to registration, provided that these services were used to make taxable services.

7. Education Services and related goods/services

In Bahrain these are Zero rated supplies. The legislation has not restricted this provision to government institutes only, whether higher education or not. The implementing regulation is likely to further elaborate on this topic specially “related goods/services”, and whether transportation, uniform, educational aids etc. would come under the zero rate or not.

In UAE, Higher education is chargeable at 5% VAT where it is a private institute. Otherwise public and private education and related goods and services are zero rated with the exception of uniforms, school trips, food items, electronic devices etc.

In contrast in KSA, all education services and related goods/services are subject to VAT at 5%. Though, the VAT payable by KSA citizens on educations services and related goods/services will be borne by the KSA government.

8. Enforcement

In Bahrain, the enforcement of VAT legislation will be done through an existing pool of judicial officers and public enforcement officials. So we may expect more inspections and enquiries when compared to KSA and UAE, where new departments are formed for enforcement which would need sufficient time to hire, train and start their inspections.

9. Failure to submit VAT return in time

The time stipulated in Bahrain before a penalty is levied is 60 days, when a minimum of 5% to a maximum of 25% penalty, on the amount of tax, can be levied. In contrast UAE, and KSA apply penalty immediately after the due date is over which is 28 days and last day, of the subsequent month, respectively.

10. Prosecution

In Bahraini legislation there is much more emphasis on criminal charges to be levied upon the violations of the law, when compared to UAE and KSA where financial fines are largely emphasized and higher in value.

THE VALUE OF BUSINESS CONSULTING IN THE UAE?

Determining the value you can derive from business consulting is one of those things that often comes with hindsight and, on occasion is overlooked or missed entirely. Having expert specialist advise or guidance often leads to the right decisions being made on a day to day basis and that can be mistaken for ‘business as usual’ rather than seeing it’s true benefit.

One way to highlight the real value of business consulting is to think of it terms of dentistry (let’s think way outside the box here).

Some people are methodical and make regular appointments to visit their dentist for a checkup. During that checkup, they will look at the health and vitality of the teeth and gums and look for any hidden problems or potential future issues that can be resolved and removed before they happen. When bigger problems are present, remedial action can be taken and they leave in the knowledge and comfort that they are likely to be incident free in the period until their next visit (and even if that is not the case, they know exactly where to go if something does happen)

At the other end of the scale are those who will only visit the dentist once the pain of a problem has reached the point that they can’t continue to operate without remedial action right now. This is often painful, disruptive and, more often than not, extremely costly as the actions required to get back on track are far more extensive and potentially difficult to administer.

This principle fits well with business consultancy. Having highly skilled business professionals giving your business a check up on a regular basis helps anticipate and tackle problems of all shapes and sizes on the go. If you consider the cost of remedial action at the dentist being high, compare that to having to perform a root canal to your corporate finances or poor due diligence and you start to appreciate the real value of consultancy as a regular input rather than an emergency procedure.

Business consultancy from Affinax covers a broad spectrum of key aspects that absolutely must be delivered with the utmost accuracy and professionalism. Whether you are valuing your business or a potential investment through to drafting commercial agreements or even winding up an organisation, make sure you are best placed to make effective and correct decisions. Few of us are lucky enough to have experience in every aspect of business and commerce and even larger corporations don’t always have the core competencies on their staff full time.

Why not speak to the professionals at Affinax and explore their scope of services and what benefits they can deliver to help you maintain a vibrant healthy smile in your business.