Guidance on transitional rules on Value Added Tax rise 1 January 2022
The Bahraini National Bureau for Revenue has issued implementation guidance for the rise on VAT from 5% to 10% from 1 January 2022. This covers when to switch VAT rate, time of supply rules, invoicing and anti-abuse measures for:
- one-off supplies; or
- continuous supplies.
1. One-off supplies VAT rate
Any contract signed by 24 December 2021 for completion on or after 1 January 2022 will be subject to 5% VAT. This rule applies only if the supply is completed by 1 January 2023 and that there are no significant changes to the contracted supply (see below).
For one-off supplies contracted after 24 December and supplied on or after 1 January 2022, the VAT rate is 10%. This applies even if the consideration and or invoice are exchanged before 1 January 2022 – thus an anti abuse clause to prevent VAT evasion.
Where supplies should have been made before 1 January 2022 but were not, and had been invoiced at 5%, the a correction to 10% is required.
2. Continuous supplies VAT rate
Where continuous supplies entered into before 24 December 2021 stretch over 1 January 2022, then 5% will apply for supplies. If they continue after 1 January 2023, then 10% will apply. If such a contract is materially changed or renewed in 2022, then 10% should be applied going forward.
Contracts entered into on or after 24 December 2021 should be charged at 10%. Although any supply between 24 and 31 December 2021 may be charged at 5%.
Changes to contracts
For the above conditions, material changes to contracts to trigger switching to 10% cover:
- Extension of period of the contract
- Including additional supplies
- Price risess
VAT hike due to COVID-19 pandemic
The Arab Gulf Kingdom of Bahrain increased its standard Value Added Tax rate from 5% to 10% from 1 January 2022 following the formal approval by upper house of Parliament, the Shura Council. To counter any effects for the less well off, there are a range of targeted welfare payments of up to 10%.
Drop in oil prices and COVID-19 forced VAT hike
The hike was implemented as the state has struggled to contain its budget deficit following the 2014-15 drop in oil prices and COVID-19 crisis. The economy shrank by 5.4% in 2020. Bahrain is under fiscal strain despite a $10 billion bailout package pledged by its wealthier neighbours in 2018. That package came under the condition that Bahrain implement fiscal reforms to rein in its budget deficit. The aim was to balance the budget by the end of 2022. That timetable had to be put on hold in 2020 as the government focused on helping the economy weather the double shock of Covid-19 and low oil prices.
Saudi Arabia, another member of the GCC (see below) trebled its VAT rate from 5% to 15% in 2020 – although this may be decreased at some point in the next year or two. The tax rises are a sign of the difficulties that many Gulf governments face in trying to deal with large mismatches between spending and revenue while also trying to diversify their economies away from a heavy reliance on oil and gas revenues. Oman has committed to not raising its VAT rate from the current 5% in 2022.
Bahrain VAT as part of GCC agreement
A lack of regional cohesion, combined with the varying political and economic issues in each country, has meant the rollout of the tax has happened only in fits and starts. As time passes, more differences in approach are becoming evident. Bahrain introduced VAT in January 2019 at 5%. It was the third of the six Gulf Cooperation Council states to do so as part of a 2016 agreement to introduce a VAT and customs union. Saudi Arab and the UAE started the process in January 2019. Oman has since followed in April 2021. Kuwait and Qatar may rollout their VAT regimes in the next two years.
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Arab Gulf GCC VAT implementations
|Jan 2023||Kuwait decides between VAT or excise taxes|
|2022||Qatar provisional plans to implement VAT|
|Jan 2022||Bahrain doubles VAT to 10%|
|16 Apr 2021||Oman introduces 5% VAT|
|1 Jul 2020||Saudi Arabia trebles VAT to 15%|
|1 Jan 2019||Bahrain launches 5% VAT regime|
|1 Jan 2018||Saudi Arabia and UAE introduce 5% VAT regime|
|2016||VAT and Customs Union agreement: Bahrain; Kuwait; Oman; Qatar; Saudi Arabia; UAE United Arab Emirates|