Value-Added Tax (VAT) Queries

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With VAT a fact of life now for almost all Bahrain-based businesses, Gulf Insider has been swamped by VAT-related questions from readers. In an occasional column, Mubeen Khadir from Keypoint answers some of your questions.

How likely am I to be audited by Bahrain’s tax authority – the National Bureau for Revenue (NBR)?

Your likelihood of an audit is determined based on a combination of factors (and sometimes it’s just random). Tax authorities generally target taxpayers in industries where it is likely that VAT is reported incorrectly or where VAT rules are highly complex. Industries that involve lower tax payable to the authority – for example, industries with high zero-rated supplies – may also be subject to higher scrutiny. The NBR will use data analytics to direct audits. For example, the NBR will compare data reported in your VAT registration form against your VAT returns. The NBR will also use your VAT return data to develop a taxpayer profile, which it can then use to conduct targeted reviews when your sales or purchases conflict with your ‘normal’ profile. The NBR will also compare your data against similar taxpayers for reasonableness.

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What is the reverse charge mechanism and how does it work?

The reverse charge mechanism (RCM) applies when a Bahrain VAT-registered business buys taxable supplies from overseas – it moves the responsibility for the accounting of a VAT transaction from the seller to the buyer. If the purchaser is a fully taxable business, they should be able to recover the input VAT paid on purchases when paying output VAT, so there should be no financial impact. The RCM applies to most services acquired from overseas, including legal services and IT software subscriptions.

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What is the difference between VAT-exempt and VAT at 0%?

The main difference between VAT-exempt and zero-rated supplies is to do with input VAT recovery – the VAT incurred on purchases. If you make exempt supplies, you cannot recover input VAT on your purchases whereas you can if you make zero-rated supplies. While there is no VAT charged on an exempt supply, VAT is charged on a zero-rated supply – the rate is just 0%. If you make an exempt supply, you are required to specifically note this on your tax invoice.

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