Readers based in the Gulf Cooperation Council (“GCC”) will be aware that the GCC member states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have committed in principle to the introduction of a common system of value added tax (“VAT”) from 2018.
Recent developments shed light on both how and when the system will be implemented in Bahrain and the other GCC countries.
On 1st February 2017 Bahrain’s Information Affairs Minister, Ali bin Mohammed Al-Romaihi, announced that the standard VAT rate for Bahrain was to be set at 5%, and that the VAT regime was expected to be in force by the middle of 2018.
Also on 1st February 2017, Bahrain’s Minister of Finance, Sheikh Ahmed bin Mohamed Al Khalifa, signed the Unified GCC VAT Framework Agreement (the “Framework Agreement”), formally indicating Bahrain’s intention to proceed with the implementation of a GCC-wide VAT regime.
The full text of the Framework Agreement was published (in Arabic) in the Saudi Arabian Official Gazette in April 2017, and a number of unofficial translations are available online.
The Framework Agreement sets out the legal foundations for the introduction of VAT in the GCC states to be charged on the import and supply of goods, and the supply of services, at each stage of production and distribution across the GCC Countries unless an exception applies.
A detailed analysis of the Framework Agreement is beyond the scope of this article, but there are several points of interest that are worth highlighting.
Firstly, the Framework Agreement is broadly permissive in certain key areas. By way of example, GCC member states have the right, but are not obliged, to exempt (or 0% rate) certain sectors, such as health and education, from VAT, and may also 0% rate the state’s oil and gas sector.
Furthermore, whilst the default position is that financial services offered by licensed banks and financial institutions are to be exempted from VAT, GCC member states may choose to apply any other tax treatment rate to such financial services.
Wide discretion is therefore afforded to GCC member states in the implementation of VAT, and it remains to be seen whether they will adopt a unified approach in these areas or whether we will instead see several different systems.
It is also of note that the threshold for compulsory registration for taxation will be SAR 375,000 (or its equivalent in the GCC member states’ currencies), equating to approximately USD 100,000.
It is clear that the majority of businesses will need to adapt to the coming VAT regime, and that many small and medium enterprises will shortly be obliged to register and account for tax, and maintain detailed books and records to evidence their compliance.
Awareness programmes are expected to be introduced by the government of Bahrain in due course, and independent legal and tax advisers are available to assist with the mechanisms and effects of the new tax.