Bahrain VAT Update – NBR Releases a Guide on Transitional Provisions for the Change of VAT Rate
The Kingdom of Bahrain (Bahrain) implemented Value Added Tax (VAT) on 1 January 2019, with the standard rate of VAT set at 5%. Bahrain amended VAT Law on 24 December 2021 to increase the VAT rate from 5% to 10% effective 1 January 2022.
Supporting the transitional phase, the National Bureau of Revenue (NBR) released a VAT Rate Change Transitional Provisions Guide (Guide) and Frequently Asked Questions (FAQs) to guide the taxpayers in determining the VAT rate to be applied on one-off and continuous supplies effective from 1 January 2022.
The Amended VAT Law does not affect the zero-rated, exempt, and out-of-scope supplies, and the VAT treatment of such supplies remains the same.
VAT at 10% will generally apply to all standard-rated supplies and imports made after 1 January 2022.
Under the Transitional Provisions, the VAT treatment for one-off or continuous supply would depend upon whether the contract for the underlying supply was entered before the enforcement date of Amended VAT Law, i.e., 24 December 2021 or after. The transitional rules for such contracts shall be effective until the said contract expires, is changed, or 31 December 2022, whichever is earlier.
I. Transitional Rules
A. Rule 1: Contracts for one-off supplies entered before 24 December 2021
*If the contract is changed before the supply is made, then the VAT rate will be 10%
B. Rule 2: Contracts for one-off supplies entered on or after 24 December 2021
** Even if the invoice is issued or consideration is received by supplier before 1 January 2022.
C. Rule 3: Contracts for continuous supplies entered before 24 December 2021
*** If the contract is changed or renewed, then 10% VAT will apply for the portion supplied on or after the contract is changed
D. Rule 4 – Contracts for continuous supplies where Transitional Rule 3 does not apply
This rule is applicable for contracts entered into:
- On or after 24 December 2021; or
- Before 24 December 2021 but which have been changed or amended on or after that date, but before 1 January 2023
II. Definition of a “Contract” for transitional provisions
The FAQs states a “Contract” as a binding written agreement where a proposal is made and subsequently accepted, creating a legal effect to supply goods or services for an agreed price.
The following documents will also be considered as a contract for the transitional rules:
- VAT invoice where full or part payment has been made. The date of the contract for transitional rules is the later of invoice or receipt of payment.
- Purchase order (written or electronic) that has been accepted by the supplier. The purchase order must be dated, specify the goods or services to be supplied, and the consideration payable. The date of the contract for transitional rules is later of the date of the purchase order or receipt of payment.
- Other documentation that clearly displays an offer and acceptance, where the supplier is obligated to supply goods or services to the customer for a specified consideration.
The framework or master agreements that do not reflect that the parties have reached a final agreement will not be considered a contract for transitional provisions.
III. Changes to Contracts
The Guide and FAQs state that a change in the contract includes the following but is not limited to:
- Extending the duration of the contract
- Changing the type of supplies
- Including additional supplies in the existing contract
- Increasing the consideration payable for supplies which would otherwise the subject to VAT at the 5% rate
Other changes (e.g., the method of delivery or payment method), which do not impact the original timing, consideration, or the number of supplies to be made, will not be considered as a change or amendment to the contract for transitional purposes.
We recommend all Bahrain VAT-registered entities to revisit and evaluate if the executed contracts are affected by transitional rules and take necessary actions to comply with the transitional requirements.
HOW CAN WE HELP?
Rethink as an entity provides VAT advisory, optimization, registration, implementation, compliance, and training services in UAE, Bahrain, KSA, and the GCC.
Our team of senior qualified tax advisors, finance experts, and tax accountants are happy to provide practical help and advice, to ensure timely and cost-effective VAT services.
Based on our local and international experience, we understand that VAT is a complex tax and would certainly suffer numerous changes in the upcoming years. Rethink’s VAT services are aimed to suit both basic and complex returns for SMEs and larger enterprises.
WHO ARE WE?
Re/think is a boutique accounting, audit, advisory, regulatory compliance, and tax advisory firm with offices in Dubai and Abu Dhabi (ADGM) focused on providing businesses of varying sizes with timely, proactive, and customized business solutions from start-up and early development to the latest stages of a business lifecycle.
Associate Director (Indirect Tax)
Luwie Anonuevo Senior Tax Executive