The value-added tax, being all-pervasive, impacts a country’s economy as well as the industries therein. Furthermore, VAT impact also spills over to the import and export of goods and services.
Typically, after the introduction of VAT in a country, businesses discover that their entire business ecosystem – i.e., their vendors, suppliers and customers located in and outside the country – are also part of their business. The underlying reason for this tectonic shift is the fact that in VAT, businesses cannot take unilateral decisions and have to take decisions bilaterally as a buyer can debate on the applicability of VAT (for example, whether the transaction qualifies as ‘export’ or not).
As mentioned above, the dependency between the supply chain intensifies, particularly, in cases of outbound supply of goods (like goods being supplied to Bahrain from the UAE).
Typically, in such transactions, there are two aspects to be vetted, one whether the supply qualifies as an export from UAE and whether the transaction qualifies as an import in Bahrain. Thus, it is advisable for UAE entities having business interests in Bahrain to initiate early dialogue on the likely impact to identify possible issues and documentation requirements to avoid VAT debates/disputes with customers.
Import of goods
Typically, VAT is payable at the time of import of goods (unless the facility of deferment is provided) along with customs duty.
Thus, after the introduction of VAT, imports in Bahrain may attract VAT and thus, at the time of import itself, it will be critical to determine the applicability of VAT on goods being imported in Bahrain (as certain goods such as specified medicines may not attract VAT). Also, procedural aspects like the declaration of the VAT registration number on import documents, linking of the VAT number with customs, etc, also become critical during the transition.
As discussed earlier, the VAT act casts the onus of determining, inter alia, whether a transaction is local supply or export/zero-rated supply. There could also be challenges in determining the location of a supplier of a service.
Change is constant for VAT, as in the time to come, there could be developments as the introduction of an electronic clearance system, recognition of implementing states, credits or refunds being available across GCC states, etc. Even there are discussions in the GCC on remittance tax, expat tax, corporate tax and transfer pricing. Further, the remaining three signatories of the GCC are expected to bring VAT.
Furthermore, though there is an umbrella GCC VAT agreement, it appears that each signatory, while bringing VAT law is customising the same as per the economy’s requirement. For example, pearls, gemstones and certain basic products are zero-rated in Bahrain.
These tweaks certainly bring an additional layer of challenge to meet for entities having a multi-state presence as ERP will need to factor in these aspects for each country. It will require ,anagement to understand the different VAT impact for the same transaction in different countries.