GCC VAT: recent developments in Bahrain

Recent publications include a very detailed new guide to VAT in the retail and wholesale sector, which contains additional commentary around a number of challenging sector-specific topics. The NBR has also published a new guide on economic activity, as well as a very timely new guide on transfer of going concern (TOGC) given the current climate of businesses reorganisations due to economic pressures.

The NBR has also released a brief clarification on how the temporary Loan Repayment Holiday should be dealt with from a VAT perspective.

New guidance for the retail and wholesale sectors

The NBR's new retail and wholesale VAT guide (74-page / 3.3MB PDF) is one of the most detailed it has released to date. The guide walks businesses in these sectors through all of the basic VAT concepts and principles and how they specifically apply to the types of activities often seen in this sector.

The guide also deals with some tricky areas of VAT applicable to businesses in this sector, who perhaps have required clarity on the application of the law to their specific circumstances. Topics covered include:

• valuation principles when dealing with bundled supplies, discounts, rebates and more, with a specific reference to the OECD transfer pricing guidelines for determining market value;
• agent and intermediary relationships, including host stores and concessions;
• asset financing and the profit margin scheme;
• vouchers, gift cards, coupons and loyalty schemes;
• damaged and obsolete stock;
• warranties;
• the tourist refund scheme.

This is a very valuable support document for businesses in these sectors trading in Bahrain, especially when dealing with some of these more complex VAT matters.

Economic activity guide

The NBR has released an economic activity guide (25-page / 865KB PDF) setting out what is and is not viewed as representing an 'economic activity' within Bahrain, and therefore within the scope of the VAT regime.

While the guide is somewhat as expected in terms of VAT treatments to be applied, some valuable sections of this guide include the NBR's comments on contracted staff, board members and directors; charities and not-for-profits; and active and passive holding companies.

Transfer of going concern guide

The NBR's new guide to transfer of going concern (TOGC) (27-page / 739KB PDF) is particularly timely, given the impact of Covid-19 and the price of oil on the Bahrain economy. Businesses and corporate groups may be considering selling off parts of their business in order to cut their losses, and international investors may be taking advantage of the current economic climate by investing in new industries and sectors.

The guide sets out the basic conditions required in order for the TOGC rules to apply to the transfer of a business, or part of a business, for VAT purposes in Bahrain. Importantly, the transferor must be registered at the time of the transfer and not simply have submitted a VAT registration application, which is acceptable in other Gulf countries.

The guide provides further explanation and helpful practical examples relating to some of the conditions for the TOGC rules to apply. These include the need for the business being transferred to be capable of being operated on an independent basis (the 'going concern' condition); and the need for the transferee to immediately use the business assets for the same or a similar trade activity.

Importantly, each party must independently notify the NBR of the transaction within 30 days of the sale or transfer, via the appropriate form. In the absence of this step, the TOGC rules will not apply and the transaction will fall back to the usual Bahrain VAT rules.

The guide also helpfully walks taxpayers through some of the more practically difficult aspects of a business transfer such as transactions with vendors or customers after the transfer; bad debts; warranties; and the interaction of the TOGC rules with VAT group provisions. The real estate and capital assets sectors of the guide are also warmly welcomed, as the transfer of property as part of a deal can have particularly complex VAT implications.

Loan repayment holiday

The NBR has released a two-page public clarification (188KB PDF) on the VAT consequences of the six-month loan repayment holiday introduced by financial institutions in Bahrain in response to the Covid-19 crisis.

Specially, the public clarification deals with the timing of accounting for VAT on these financial services as a result of the extended payment holiday period.

Businesses are prompted to use the standard due date rules in relation to the earlier of:

• when the consideration (e.g. interest or profit) becomes due and payable by the borrower;
• the date a VAT invoice is issued in respect of the supply; and
• the date of payment of the consideration by the borrower.

In the absence of any of the above occurring for any particular credit granted by a financial institution due to extended payment terms, VAT must at a minimum by accounted for at the end of a 12-month period.