Value-Added Tax (VAT) has become an inventible reality! The Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) have started charging tax on the consumption of a majority of goods and services, starting from January this year. Although Bahrain has yet to formally announce a VAT roll out date, it is expected by the second half of 2018.
In my current role in the tax and corporate consulting business, I often get asked about how the new tax system will impact businesses and the overall economy in Bahrain. It goes without saying that VAT will provide additional revenues to ensure sustainable economic growth and fund the government’s development projects.
On an organizational/operational level, the potential impact is still not completely clear, as the details of the local VAT law are not published yet. However, based on the VAT laws and regulations in KSA and the UAE, we can predict the likely impact of VAT on various economic sectors.
To gain a better understanding of the potential impact, we should start by looking at one of the main economic sectors in Bahrain - real estate. This is because it provides the infrastructure, commercial and residential spaces required for vital economic activities.
Starting with residential real estate, any long-term lease is likely to be classed as an exempt supply. An exempt supply does not permit the supplier to charge VAT when making it, and also prohibits the supplier from recovering any input tax which he incurs in supplying the goods or services, thus turning input tax into a business cost which makes exempt supplies. This includes houses, flats and apartments used as a permanent home by a person. However, this does not include hotels or serviced accommodation.
Non-residential real estate leases or licenses – including offices, warehouses, shops, hotels, serviced apartments – and the supply through sale of any piece of real estate, are all expected to be subjected to VAT at a standard 5% rate. A standard-rated supply is when the supplier charges VAT at 5% upon making it, and the supplier will be able to recover input tax incurred in making this supply. Real estate related services are also likely to be standard-rated.
The purchaser will normally be able to recover VAT paid purchases if he is VAT-registered. If the purchaser is not a VAT-registered entity or is a private individual, VAT paid during purchases will be an additional cost to them. However, it is expected that the local tax authority, when established, might be willing to refund input tax paid by a Bahraini citizen in the construction of his house; an approach adopted by the Federal Tax Authority in the UAE.
Private individuals whose business involves buying and selling real estate will likely be obliged to register for VAT purposes and charge VAT on real estate sales. The good news is that these private individuals will be able to recover input tax paid for the purpose of making taxable (non-exempt) supplies. They will however be required to put in place proper accounting processes to manage VAT compliance.
A final important consideration for VAT-registered businesses and individuals in the real estate sector is the VAT treatment of rental agreements, which span the pre- and post-VAT implementation period. The correct VAT treatment for such rental agreements, assuming they are standard-rated, is to only charge VAT on the rent due for the period relating to post VAT implementation.
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