Mubeen Khadir, Head of Tax, Keypoint Group details on what else should be done as Bahrain’s largest companies gear up for their first VAT return.
With Bahrain’s largest companies – and businesses that have registered voluntarily – gearing up for their first VAT return at the end of this month, key decision makers across the finance, accounting and IT functions know that the changes that have been made to their systems, technology and people are about to be tested for real. Apart from simply setting up enterprise resource planning (ERP) systems to record VAT amounts and to record the VAT treatment of transactions, what else should have been done?
VAT genuinely is – in that overused phrase – a paradigm shift for Bahraini businesses. However, it should not hinder business as usual – particularly if you have automated (as far as practical) the process. What does that mean for day-to-day operations?
Opening additional accounting general ledgers to capture payable and receivable VAT is critical. One question is we have been asked is “How far do we need to go with this process?”. At a minimum – and this has been backed up not just by our experience of over 300 implementations across the GCC but also a wide range of surveys and articles – we suggest general ledgers that record output VAT, input VAT, blocked VAT expenses and VAT clearing accounts. In addition – and according to particular circumstances – other accounts include VAT on reverse charge, deferred import VAT and VAT suspense accounts. There are, of course, many other options – but remember that increasing options can complicate automation and lengthen the time needed to be ready. Businesses should also keep in mind the VAT return reporting requirements when considering which VAT accounts to create.
A second area where careful planning can make a significant difference is with tax codes (or VAT treatments). An important part of any VAT implementation is the mapping of all of a business’ transactions – both sales and purchases. Once transactions have been mapped, VAT treatments can be assigned to each type of transaction. Our recommendation is to automate VAT treatments or tax codes, either at an item (inventory) level, a vendor (or customer) level, or a general ledger level. If we could take a step back, it may be useful to consider the number – and type – of tax codes a business needs. Businesses should all be aware of the fact that while most goods and services are standard-rated (VAT charged at five percent), there are certain supplies that are zero-rated (VAT charged at zero percent), certain supplies that are exempt from VAT and others that are out of scope. Having just three tax codes is a certain recipe for disaster – notwithstanding its deceptive simplicity. Even a very small business that only just meets the voluntary registration threshold (BD18,750 of taxable supplies annually) is likely to find that it needs more tax codes than that. For supplies, the most popular tax code is likely to be the one used to record the sale of standard-rated goods and services to VAT-registered customers in Bahrain. A second code – somewhat more esoteric but still useful – can record sales of standard-rated goods or services to VAT-registered customers who have approval to account for VAT using the reverse charge.
With zero-rated supplies, at least two codes are generally needed: one for zero-rated domestic sales and one for exports (zero-rated) to customers outside the GCC as these need to be reported separately. Consider at least two codes for exempt supplies – one for the supply of services to customers outside Bahrain and one for the local supply of services which are exempt from VAT (such as leases of residential property or certain marginbased financial services). Simpler businesses – such as, for example, local law firms with only local customers – may, on the other hand, only need one tax code for supplies! Further tax codes will need to be created once all six GCC countries implement VAT as businesses will need to deal with complex intra-GCC supply rules for goods and services. Purchases and expenses are even more complicated – we have seen businesses with well over 20 different tax codes. Businesses need to differentiate between recoverable, partially recoverable and irrecoverable VAT, as well as using tax codes as a mechanism to monitor input tax claim process.
To minimize the impact of VAT on cash flows, businesses may well want to recover incurred VAT – but they aren’t breaking the law if they don’t do so. Not paying the VAT that is due to the government on supplies is – or can be – viewed as tax evasion. This all may look like overkill. But with the severity of the penalties that Bahrain has introduced for administrative oversights as well as tax evasion, it is probably worth getting this right now – it is much more complicated to have to reverse-engineer a general ledger in retrospect if you find your system is not fit for purpose.
Do GCC companies that have registered for VAT in their own country have to register for VAT in Bahrain?
Until all the GCC countries implement VAT, GCC and non-GCC companies are treated equally for VAT purposes. Any foreign company that makes taxable supplies in Bahrain – and where no one else in Bahrain is liable to account for the VAT – must register with the National Bureau for Revenue (NBR). Once all six GCC countries implement, GCC-resident companies will only have to register with the NBR if their taxable supplies to non- VAT registered customers in Bahrain exceed BHD 37,500 over a 12-month period. There are also special place of supply rules for services that may trigger a registration requirement in Bahrain. Companies can appoint a tax agent to look after the VAT registration process.
How can businesses claim back their VAT if a client doesn’t pay for services provided?
Businesses must wait 12 months before claiming bad debt relief (unless a customer has not paid due to bankruptcy) and be able to show attempts to collect an outstanding debt, including emails, phone calls, letters and legal proceedings. A supplier must also have written the debt off, partially or fully. The supplier must send a VAT-compliant tax sales credit note to the customer, obliging the customer to repay the input tax recovered. If a supplier is paid after claiming bad debt relief, they must account for the VAT by issuing a VAT-compliant debit note to the customer.
If you have paid VAT on purchases in another GCC country, can you claim the VAT back in Bahrain?
No. Input tax paid in another GCC country can’t be recovered using the Bahrain VAT return. GCC countries will be setting up mechanisms allowing the recovery of certain types of input tax paid in another country, however, this may not occur until all six countries have implemented VAT. The UAE allows businesses to recover input tax paid on services related to exhibitions and conferences, subject to certain conditions. GCC businesses should retain purchase invoices and supporting evidence in the event they are able to recover input tax. The tourist refund scheme is different – you claim the VAT in the same country in which you purchased the goods.