Import and Export of Services under VAT in Bahrain

What Is an Import of Services?

Services are considered imported if they meet the following criteria:

• They are provided by a non-resident supplier to a taxable recipient in Bahrain.
• The place of supply is the location of the taxable recipient, which is Bahrain.
• The recipient is a taxable person in Bahrain and is liable to pay VAT on these supplies based on the reverse-charge mechanism.

Place of Supply for Imported Services

In cases where the customer is a taxable resident of Bahrain who avails services from a non-resident supplier, then the place of supply will be Bahrain. If the services supplied are subject to VAT, then the customer is liable to pay tax.

Here’s an example to understand the place of supply rule better. Let’s assume that a Bahraini business owner who is registered for VAT receives services from an American company. Here, the place of supply will be Bahrain because the services are provided by a non-resident supplier to a resident who is a taxable person. Since the place of supply is Bahrain, the consulting services are liable to VAT at the standard rate of 5%. So the Bahraini business owner is liable to pay VAT.

If the same consulting services were provided to a non-taxable resident, then the place of supply would be the country where the supplier resides (in this case, the USA) and VAT would not be applicable.

VAT Liability under Reverse-Charge Mechanism

The reverse-charge mechanism applies when taxable goods and services are provided by a non-resident supplier to a taxable person in Bahrain. This mechanism allows non-resident suppliers to sell goods and services that are subject to VAT in Bahrain, without having to register for VAT.

When taxable supplies are made under the reverse-charge mechanism, the customer is liable to pay VAT. The customer can account for the VAT paid as output tax in his tax returns. In order to do this, the customer must record the VAT amount due in Bahraini Dinars on the invoice given by the supplier. This amount can be handwritten in pen.

The reverse-charge mechanism does not apply when a non-resident supplier provides taxable goods or services in Bahrain to non-taxable customers. In this case, the supplier must register for VAT in Bahrain and charge VAT on these supplies.

When a VAT-registered, non-resident supplier supplies goods and services that are subject to VAT in Bahrain, then the following rules apply:

• The non-resident supplier must charge VAT in Bahrain on supplies of goods and services to customers who are not taxable. This is because the customers cannot file returns and make the VAT payment directly to the government.

• The non-resident supplier must not charge VAT in Bahrain on supplies of goods or services to customers who are taxable. In this case, the customers are required to pay VAT directly to the government under the reverse-charge mechanism while filing their tax returns.

In both these cases, the non-resident supplier must issue a valid tax invoice for his supplies. Where the reverse-charge mechanism is applicable, the supplier must mention “supply subject to reverse-charge mechanism” on the tax invoice.

Recovery of Input Tax under Reverse-Charge Mechanism

Since the person paying the VAT due under the reverse-charge mechanism is a taxable person, they can claim input tax for VAT incurred on business expenses in their tax return.

If the taxable person is eligible to recover input tax fully, then the output tax due can be offset fully by the recoverable input tax amount reported on the return.

For example, suppose that a non-resident supplier provides legal services to a taxable resident of Bahrain for BHD 20,000. Since the services are provided to a taxable person in Bahrain by a non-resident supplier, the tax calculation will look like this:

• The place of supply will be Bahrain and the legal services will be subject to the VAT rate of 5%.

• The customer will be liable to pay BHD 1,000 (5% VAT on BHD 20,000) on this service under the reverse-charge mechanism.

• The customer will record this amount on the invoice sent by the supplier and report it as output tax due in his tax return.

• Since the customer is using this service to make taxable supplies, he can recover the VAT paid fully, so he will report BHD 1,000 as recoverable input tax in his tax return.

• The net VAT amount due from the customer will be zero, since the output tax is fully netted against the recoverable input tax.

If the customer was eligible to recover only 50% of the VAT paid, he would be able to recover only BHD 500 and pay the NBR the remaining BHD 500 as the net tax due.

What is an export of services?

A service is considered to be exported from Bahrain when a supply is made by a resident supplier to a non-resident customer. The place of supply for such transactions must be Bahrain.

Exports of services in Bahrain are subject to 0% VAT. This allows businesses to remain competitive since the price of the services when exported is not affected by VAT. It also means that the businesses will be able to recover the VAT paid on expenses related to making the export.

To understand this better, let’s suppose that a VAT-registered law firm in Bahrain provides legal advice to a company based in the USA. The place of supply for this service is Bahrain, because the services are provided by a resident supplier to a non-resident customer who is not taxable in an Implementing State.

Services not considered as exports

A supply of service will not qualify as an export for those transactions where the place of supply is Bahrain based on the special place of supply rule as explained in Articles 17 and 18 of the VAT Law. A few examples of such services include: services related to real estate, restaurant and hotel services, transportation of goods and passengers, telecommunications and electronic services.

When these services are supplied in Bahrain, they are subject to 5% VAT, unless they are specifically exempt from tax or part of a specific zero-rate regime other than the export of services regime.

If the place of supply is a place outside of Bahrain, then the VAT law does not apply. For example, the VAT law does not apply to a Bahraini catering service provided to an event in Saudi Arabia.

Conditions for the zero rate to apply

A resident, taxable supplier must meet all of the following conditions laid down by the VAT Law and Executive Regulations to apply zero-rated VAT on the export of services.

• The customer must not be a resident of Bahrain or any other Implementing State.

• On the date of services performed, the customer must not be present in Bahrain.

• The services must not be related to tangible goods or real estate located in the territory of the Implementing States at the time the services are performed.

• The services must be enjoyed or used outside the territory of the Implementing States.

Understanding the term ‘customer’

A person who receives services is considered to be a customer. Therefore, the person who signs the contract or pays for the services is not necessarily the customer, unless there is sufficient evidence to prove that they are receiving the services.

The person signing the contract will be considered as the person receiving the services, if they order, receive, review, and accept the service delivery. The nature of the supply, including whether it is received by the contracting party and whether they benefit from it, should be taken into account. For this purpose, you need to differentiate between the person who signed the contract and the actual recipient of the services. If they are not the same person, then the actual recipient of the service must be considered as the customer.

Let’s look at an example to understand how the VAT law is applied in this scenario. Let’s suppose that a VAT-registered, Bahrain-based consulting company enters into a contract for advisory services with a Spanish company on behalf of its subsidiary based in Bahrain. Even though the contract is signed by the Spanish entity, and this Spanish entity will pay for the services, the subsidiary will be the actual recipient or customer of the services. Since the services are provided to a customer whose place of residence is Bahrain, the contracting company cannot consider this transaction as an export of services or apply zero-rate VAT.

Understanding ‘place of residence’

When a customer has more than one place of residence, the place of residence that is most closely connected to the supply will be used to determine VAT applicability. The supplier must assess the customer, and the place of residence that is most closely connected to the supply, based on the nature of the supply. The supplier must retain the evidence of the assessment.

When a customer has a place of residence outside Bahrain or the Implementing States, and that place of residence is the one most closely connected to a supply of services, then the customer will be considered as a non-resident for that supply.

In cases where you cannot determine the place of residence that is most closely connected to the supply, then the customer will be considered as a resident of Bahrain or the Implementing States for that supply.

Let’s take an example where a VAT-registered accounting company based in Bahrain enters into a contract with a South African company. The South African company wants due diligence services to help them acquire equity stake in a Bahrain-based trading company. The South African company’s branch office in Bahrain acts as its representative office. The accounting company will deliver its reports to the employees in the South African office.

In this scenario, the customer or recipient of the service has multiple places of residence, in South Africa and Bahrain. Here, the due diligence services supplied are most closely connected to South Africa, since the South African office wants to acquire equity stake, and the results are delivered to them. As a result, the customer is considered to have no place of residence in Bahrain, or in an Implementing State. The accounting company will be able to charge VAT at 0%, provided the other conditions to qualify this transaction as an export of services are met.

Evidence of assessment of the customer, as well as the place of residence that is most closely connected to the supply must be retained by the supplier.

Understanding ‘presence’

A customer would be considered to have a presence in Bahrain if the customer is physically present in Bahrain during the supply of service, even if it is just a visit. In cases where the customer is present in Bahrain for purposes other than the supply of services, then the customer will be considered as not present in Bahrain.

For example, let’s suppose that a South Korean company requires translation services from a Bahraini agency. They require a project proposal to be translated from English to Arabic. The South Korean company is also working on a different project in Bahrain at the same time.

The company has sent a team to Bahrain to follow up on this other ongoing project. Even though the representatives of the company are present in Bahrain when the translation service is provided, the translation agency will consider that the customer’s place of residence is outside of Bahrain and Implementing States, and the customer is not present in Bahrain during the delivery of service. This is because the main purpose of the company’s visit is related to another project and not the translation service. In this case, the translation agency can apply 0% VAT on the supply, provided all other conditions of an export of services are met.

If the team from South Korea had visited Bahrain to review the translation, then the agency would not be able to consider this transaction as an export of service, since the customer was present in Bahrain while the service was provided to them.

Services related to tangible goods

Services such as repair, maintenance, storage, alteration and insurance are considered to be services related to tangible goods.

Services related to real estate

Services that have real estate as the central part but are not directly connected to the real estate are considered to be services related to real estate. For example, an insurance service of a real estate is considered to be services related to real estate. Maintenance services provided to a real estate is considered a part of the real estate.

Services related to tangible goods and real estate do not qualify for zero-rated export if the tangible good or real estate is located in Bahrain or an Implementing State when the service is being performed, unless the services are subject to VAT in the Implementing State.

Let’s suppose that a resident of the UK owns a real estate property in Bahrain for investment purposes. This person signs a housing insurance contract with a VAT-registered insurance company based in Bahrain. The customer has no presence or place of residence in Bahrain, or in an Implementing State.

However, since the real estate property that is insured is located in Bahrain, the insurance service does not qualify as an export of services.

The UK resident also owns a car in Bahrain that he uses during his visits. The car is also insured with the same Bahraini insurance company and it needs an annual maintenance service. As both the insurance services and the annual maintenance services are performed for a tangible good (car) that is located in Bahrain, neither service qualifies as an export of services.

Documents required

The supplier must be able to prove that all the conditions required for a supply to be treated as a zero-rated export service have been met. They are expected to maintain all supporting evidence.

The supplier must issue tax invoices for these services since VAT is applied. This tax invoice must be issued on or before the 15th day of the month following the supply.