VAT deadline looms for Bahrain’s large businesses

Bahrain has been hit hard by a drop in oil prices in recent years, with its dinar sliding to its lowest level in more than a decade
Wednesday 19/12/2018
A Bahraini man shops at a local supermarket in Isa Town south of Manama, Bahrain, November 28, 2018. (Reuters)
A Bahraini man shops at a local supermarket in Isa Town south of Manama, Bahrain, November 28, 2018. (Reuters)

ABU DHABI – A value added tax (VAT) is to go into effect in Bahrain January 1, with an obligation for businesses supplying taxable goods or services to register in December.

Bahrain would be the third Gulf Cooperation Council (GCC) member to introduce a VAT after Saudi Arabia and the United Arab Emirates. Reports suggest Oman and Qatar could introduce VATs in 2019. The other GCC member — Kuwait — is expected to do so within 18 months.

Bahrain’s legislation for a VAT has been in circulation for a few months but details of regulations are unavailable to the public, which makes it difficult for businesses to prepare for the tax implementation.

Though all businesses are supposedly required to register and comply with the VAT legislation as of January 1, Assistant Under Secretary for Development and Revenue in the Finance Ministry Rana Faqihi said in November that only businesses with sales exceeding 5 million dinars ($13 million) would have to register with tax authorities before the new year.

Faqihi said a VAT of 5% would be rolled out in a phased manner and that large businesses should register with the National Bureau for Taxation (NBT).

The decision to temporarily exempt small businesses was confirmed by the NBT. The bureau also said the registration threshold would drop to 500,000 dinars ($1.3 million) in June 2019, and 37,500 dinars ($100,000) in December 2019.

Bringing only large businesses within the VAT fold means that those which have the resources to implement it will be required to do so, which should enable the NBT to fine-tune the operation.

However, the high registration threshold technically puts Bahrain in breach of the Unified VAT Agreement, the GCC treaty setting out the framework for establishing a VAT system in each country.

Article 50 of the treaty states that the mandatory registration threshold is 375,000 Saudi riyals (about $100,000) or its local equivalent, which gives a registration threshold in Bahrain of approximately 37,500 dinars, a figure the threshold will drop to in a year.

The United Arab Emirates and Saudi Arabia may not be particularly pleased with the breach of the Unified VAT Agreement and they may not treat it as an implementing state for domestic purposes until December but at least Bahrain, unlike half the countries in the GCC, will have introduced a VAT.

All six GCC members signed the Common VAT Agreement in June 2016. It was agreed that each country would introduce a VAT system at a rate of 5%. A total of 94 basic foodstuffs and other basic goods and services, including education and health services, are exempt from VAT.

Bahrain has been hit hard by a drop in oil prices in recent years, with its dinar sliding to its lowest level in more than a decade. As a result, the country had been trying to put its finances on a more solid foundation.

In early October, Manama signed an agreement with Kuwait, Saudi Arabia and the United Arab Emirates to fund a $10 billion package as part of a fiscal balance programme.

The government says it has reduced spending by $2.2 billion a year since 2015. However, the reduction of spending failed to cut large deficit (estimated at 14% of GDP last year) and government debt has reached 89% of GDP.