Bahrain clarifies VAT on education and simplifies returns

Out-Law Analysis | 23 Jan 2020 | 5:06 pm | 3 min. read

The National Bureau for Revenue (NBR) of Bahrain has made several recent announcements in relation to value added tax (VAT) treatment in the region.

Simplified annual value added tax (VAT) for smaller businesses, updated guidance on the VAT treatment of educational supplies and clarification over input VAT apportionment for financial institutions are among the most significant announcements.

New technical guidance on value of related party transactions

The NBR has updated its VAT 'technical FAQs' page to provide additional information about how to calculate the market value on a related party transaction. The information provided goes further than what is included in article 27 of the Bahrain VAT Regulations, and therefore offers additional guidance to taxpayers.

Interestingly, the NBR has confirmed that it will not pre-approve any calculation method chosen by the taxpayer. This suggests that many taxpayers have been requesting pre-approval and that the NBR does not want this to become a standard practice, bearing in mind the 'self-assessment' nature of VAT obligations.

New guidance on VAT classification of business activities

The NBR now requires taxpayers registering for VAT purposes to indicate the nature of their business based on the United Nations Economic and Social Council's standard classification codes for business activities (ISIC).

A new 'Business Activity Details' information section on the NBR website takes taxpayers through the new process step-by-step. The NBR has also produced a new guide (33-page / 691KB PDF) setting out all of the different codes and descriptions that may be used by businesses undertaking an ISIC coding exercise, with a brief description at the start of the guide of how the coding works.

Public clarification on input VAT apportionment for financial institutions

NBR has published a public clarification (1-page / 160KB PDF) in relation to input VAT deduction and using apportionment for financial institutions.

Article 59 of the Bahrain VAT Regulations sets the 'turnover' or 'value of supplies' method as the standard apportionment method in Bahrain. A business using this method calculates the total value of all its supplies, those which are taxable and those which are exempt; and then identifies an apportionment rate of deductibility for 'dual-use' or 'residual' VAT on general overheads - costs not directly attributable to any one supply - on this basis. This means that a business must first be able to identify the "value" of its supplies before carrying out an apportionment exercise.

The recent public clarification deals with transactions undertaken by financial institutions which are conducted on a margin basis. For these types of transactions, the financial institution may have a profit or a loss from the transaction depending on the commercial outcome of the transaction. The clarification sets out the NBR's view that the outcome of a margin transaction should be treated as an 'absolute value', which is a positive amount, whether it is a profit or loss. It should then be included within the 'value of supplies' calculation for the purpose of the financial institution's apportionment calculation.

Many VAT regimes around the world have a blanket exemption for all transactions within the banking and financial services industries, and so an issue of this type would not usually arise. However, in Bahrain, most financial services transactions are subject to VAT at 5% where they are undertaken for a fee, commission or commercial discount. This results in many more taxable transactions happening within the Bahrain financial services sector, and more complexity in assessing input VAT deduction rights and accurate apportionment calculations.

While the NBR's clarification may be welcomed by the industry, it may not be aligned with the approach taken by financial institutions to date. For this reason, the NBR confirmed in the public clarification that it will not require previous VAT returns to be amended. However, this treatment of margin transactions should be considered when undertaking the obligatory year end 'look back' exercise under article 59(G) of the Bahrain VAT Regulations.

The NBR has published detailed guidance on VAT in the financial services sector (119-page / 2.1MB PDF).

Updated VAT on educational services guide

Updated guidance on the VAT treatment of educational supplies and related goods and services (5-page / 637KB PDF) in Bahrain was issued in December 2019.

All references to the "Ministry of Education" in the original April 2019 version of the guide have been replaced with "the competent authority in Bahrain". This suggests that NBR may have been requested to clarify whether the zero rate of VAT applicable to "educational services and related goods and services" under article 53(12) of the Bahrain VAT Law could be applied to other goods and services related to educational activities, even where they have not been licenced by the Ministry of Education or under its supervision.

The amendment, which is the only change to the guidance, suggests that there are other competent authorities in Bahrain which may licence or have oversight of educational activities in Bahrain and that this would suffice for the purpose of the VAT zero-rating. However, it may be prudent for businesses undertaking educational activities or supplying goods and services to support an educational activity which is not licenced by the Ministry of Education to obtain prior approval of the application of zero rating from the NBR in order to mitigate any risk of error or application of penalty for misapplication of the tax rate.

Simplified annual VAT returns for smaller businesses

The NBR has announced that VAT payers with annual supplies of less than BD 100,000 (US$265,000) will soon be able to submit a simplified one-time annual VAT filing document. The change is designed to make VAT filing procedures easier for smaller businesses.

Information on the procedures needed to submit the new annual filing document will be published soon.