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VAT Law was introduced on 1st January, 2019 in the Kingdom of Bahrain. There is a standard rate of 5% applicable on supply of taxable goods and services, under VAT in Bahrain. In order to charge 5% of VAT, one wants to evaluate the amount of the supply on which this rate has to be calculated. Also, the due date of the payment of such also needs to be determined, because this shall help in calculation of interest and late fees.
The value of supply is the amount on which VAT is calculated. This value of supply is hence exclusive of the VAT amount. The value of supply in the Kingdom of Bahrain is the value determined by the Unified Customs Law. However, prices of the products displayed in the market are inclusive of VAT.
When computing the value of a supply, the supplier must include all the costs and expenses incurred due to supply, including any duties and/or taxes, but not VAT. This includes transportation and insurance costs, packaging, delivery charges, administrative fee(s) and other out of pocket expenses.
However, the value of supply must be reduced by any discounts by the supplier, subsidies granted by government, disbursements paid by supplier, amount of any refundable deposits, or any compensation paid due to default of the customer.
Different situations to determine the value of supply
- When the amount is received in Kind
If a supply is paid (in part or in full) in kind, the value of the non-cash component is determined by its fair market value (FMV). Here, FMV is the fair price tradable in the market between two independent parties under similar circumstances at the same date as the date of the supply and in accordance with the following free competition conditions:
- Neither the supplier nor the customer is subject to any kind of commercial pressure.
- Both the supplier and customer independently work to achieve what is in their best interest.
- The transaction is made within a reasonable period of time (i.e., no time pressure).
If FMV of a product cannot be determined, then the FMV of a similar product can be referred to.
- When the amount is received in Foreign Currency
When the value of a supply is received or expressed in a foreign currency, it must be converted into Bahrain Dinars using the relevant exchange rate at the tax due date as approved by the Central Bank of Bahrain.
- Supplies under Reverse Charge Mechanism
The purchase price paid by the recipient to the supplier is considered as the value of supply here. Where the purchase price cannot be determined, the value of the supply will be its FMV on the date it is received.
- Supplies made in form of Vouchers
The value for the supply of a voucher is the difference between the considerations received by the issuer of the voucher and the face value of the voucher. This difference (i.e., the mark-up) is considered to be inclusive of VAT. Hence the calculation of VAT charged needs to be done in the following manner:
Value of supply: Displayed price ÷ 1.05
Then multiply 5% on value of supply
VAT amount (at 5%): Displayed price ÷ 21
- Supply is made between related parties
The value of a supply of goods or services between related persons must be the FMV where the following conditions are met:
- The value of the supply is less than its fair market value; and
- The recipient of the supply is not entitled to recover in full the VAT charged on his expenses.
The VAT Law defines related persons as: “Two or more persons where one has the authority to direct and supervise the other Person(s), where he holds an administrative authority enabling him to influence the work of the other Person(s) from a financial, economical or organizational point of view”.
- Supplies made under profit margin
For supplies of goods made under the profit margin scheme, VAT is calculated on the margin realized by the supplier. The margin is the difference between the selling and their acquisition price. This margin is considered inclusive of VAT.
- For composite and multiple supplies
For composite supply, the value of supply is the value of main supply along with value of other ancillary supplies. And, in multiple supplies, the value of supply is determined on the total value of supply. It is done, when it’s not possible to allocate price to each product.
- Value of supply for deemed supplies
The value of a deemed supply of goods or services is determined as follows:
- Purchase price or, total actual cost incurred for the goods or services.
If not then, the fair market value of the goods or the services.
Adjustments to the value of supply
A taxable person may adjust the value of a supply, and the amount of output VAT, when one of the following events occurs after the date of supply:
- The supply is cancelled or refused (in full or in part).
- The value of the supply is reduced (e.g., discount granted after the sale occurs).
- The goods are returned and the supplier accepts the return.
- The payment of the consideration is not received (in full or in part) within 12 months of the date of the supply and the procedure for a bad debt relief has been followed.