Tax Advisory (VAT) Insight

VAT on Intra-GCC supply of goods

In the year 2016 Kingdom of Bahrain (hereinafter referred to as ‘Bahrain’) made total imports of USD 14.751 million from different countries across the globe. In the same year Bahrain made total exports valued at USD 12.891 million.  Bahrain mainly imports fuel, electrical equipment, chemical products, transport equipment, metals and plastics. Bahrain’s main trading partners are Australia, Japan, Saudi Arabia, China, the United States, the United Arab Emirates, Germany and the United Kingdom.  These statistics brings out an important fact that Bahrain is a country which heavily imports.

Currently, Customs Duty is levied on imports in Bahrain. The general rate of duty is 5% of the CIF value (Cost Freight Insurance), except for alcoholic beverages which is 125% and Cigarettes which are 100%. Certain categories of goods such as paper and aluminium products are subject to 20% duty rate.  With the Common VAT Agreement of the States of the Gulf Cooperation Council (GCC) (hereinafter referred to as the ‘VAT Agreement’) signed amongst the GCC Member States, VAT would soon be launched in each of the six member states of GCC.  The question under consideration, now, is where, how and who will discharge VAT on Intra-GCC supply of goods. Whether the exporter would charge VAT of the exporting country or the importer would discharge VAT in the importing country?

 

The elucidation to this dichotomy is to charge VAT of that country where the ‘place of supply’ of such goods fall.  The important test now, is to determine, where the place of supply of intra-GCC supply of goods fall.  Article (12) of the VAT Agreement explicates that the place of supply for intra-GCC supply of goods shall be the Member State where the movement of goods terminate for delivery. 

 

However, this principle works as long as the recipient is a “Taxable person”. A taxable person is defined in the VAT Agreement as “a Person conducting an Economic Activity independently for the purpose of generating income, who is registered or obligated to register for VAT in accordance with the provisions of this Agreement.” Consequently, all the businessmen in Bahrain having a turnover of more than USD 100,000 in the preceding twelve months, would be construed as a ‘Taxable Person’

 

Thus, a taxable person importing goods in Bahrain from any other Member State should not discover any VAT on their imports, since, the place of supply of such imports is Bahrain and the exporting country cannot levy VAT. Further, the VAT Agreement vide Article (9) imposes the responsibility to discharge VAT on the taxable person who imports such goods and acronyms this concept as the reverse charge mechanism.

 

Currently, Customs Duty is levied on imports in Bahrain. The general rate of duty is 5% of the CIF value (Cost Freight Insurance), except for alcoholic beverages which is 125% and Cigarettes which are 100%. Certain categories of goods such as paper and aluminium products are subject to 20% duty rate.  With the Common VAT Agreement of the States of the Gulf Cooperation Council (GCC) (hereinafter referred to as the ‘VAT Agreement’) signed amongst the GCC Member States, VAT would soon be launched in each of the six member states of GCC.  The question under consideration, now, is where, how and who will discharge VAT on Intra-GCC supply of goods. Whether the exporter would charge VAT of the exporting country or the importer would discharge VAT in the importing country?

 

The elucidation to this dichotomy is to charge VAT of that country where the ‘place of supply’ of such goods fall.  The important test now, is to determine, where the place of supply of intra-GCC supply of goods fall.  Article (12) of the VAT Agreement explicates that the place of supply for intra-GCC supply of goods shall be the Member State where the movement of goods terminate for delivery. 

 

However, this principle works as long as the recipient is a “Taxable person”. A taxable person is defined in the VAT Agreement as “a Person conducting an Economic Activity independently for the purpose of generating income, who is registered or obligated to register for VAT in accordance with the provisions of this Agreement.” Consequently, all the businessmen in Bahrain having a turnover of more than USD 100,000 in the preceding twelve months, would be construed as a ‘Taxable Person’

 

Thus, a taxable person importing goods in Bahrain from any other Member State should not discover any VAT on their imports, since, the place of supply of such imports is Bahrain and the exporting country cannot levy VAT. Further, the VAT Agreement vide Article (9) imposes the responsibility to discharge VAT on the taxable person who imports such goods and acronyms this concept as the reverse charge mechanism.

 

Hence, to complete the equation, let us take an example, a supplier registered in UAE exports goods to a taxable person in Bahrain. In this case, the taxable person in Bahrain would have to discharge VAT on such imports under reverse charge mechanism. As on this day, Bahrain is yet to launch VAT in their Kingdom, hence, the taxable person in Bahrain is relieved from discharging any VAT on their imports.

 

The above equation is true only if the importer in Bahrain is a taxable person. What happens when the importer is not a taxable person? Article (12) goes a step further to explain that where the recipient is not a taxable person and the value of supply is less than USD 100,000 the place of supply shall be the exporting Member State and the exporter will charge VAT on such supplies. It also states that where the recipient is not a taxable person and the value of supply is more than USD 100,000 the place of supply shall be the recipient country. In the latter case, the supplier shall be obligated to obtain VAT registration in the recipient country and discharge their VAT.  

 

To conclude the possible scenarios, refer the chart below –

In line with the provisions drafted in the VAT Agreement, UAE and Kingdom of Saudi Arabia have also assimilated similar provisions in their Country’s VAT Laws and Regulations to ensure exports to taxable person within GCC countries are zero-rated or outside the scope of work and imports from other member states are taxable under reverse charge mechanism. 

 

Until Bahrain launches VAT, the taxable persons in Bahrain are relieved from discharging VAT under reverse charge mechanism.

 

About the Author

 

Nirav Rajput

Manager

Tax Advisory (VAT)

Grant Thornton Abdulaal

M +973 38967876

E nirav.rajput@bh.gt.com

 

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