Bahrain VAT – All about the Domestic Reverse Charge Mechanism

by Zaara 26, Oct 2022

Bahrain VAT

The establishment of businesses in the Kingdom of Bahrain is rising continuously. Investors are keen to invest because of the multiple benefits of the location when it comes to business incorporation.

The Bahraini government has launched lucrative initiatives for the betterment of businesspersons. One of them is the beneficial regime of tax in Bahrain. 

The Value Added Tax introduced in Bahrain was a welcome change, and its initial standard rate was 5%. Now, the rate is 10%, effective from January 2022.

There are also various benefits of the Bahrain VAT system. One of them is the domestic reverse charge.

What is the Domestic Reverse Charge under the Bahrain VAT Law?

According to this concept, the VAT must be paid on the domestic supplies by the recipient in reverse charge. 

Under this concept, the supplier will not charge VAT despite being registered. Instead, the recipient would pay the VAT on a reverse charge basis and be liable to the account.

The exporters who meet certain conditions on certain reserves may apply for domestic reverse demand.

Why Was It Introduced?

The domestic reverse charge was introduced in Bahrain VAT to diminish the exporters’ risk regarding the potential cash flow impact. 

If you are into exporting goods and services, you can opt for this concept. This will blow you out from the cash flow blockage.

Who Can Apply for the Mechanism under the NBR VAT Bahrain?

The registered businesses engaged in ‘Intra-GCC Supplies, or Exports of Goods’ can apply for the mechanism. However, according to their format, they must apply to the National Bureau of Revenue (NBR).

After all the conditions are met, the NBR will approve the application, and a certificate will be issued mentioning the right to apply for the domestic reverse charge mechanism.

So, the exporter can issue a copy of the certificate to the supplier for purchasing goods and services under the domestic reverse charge concept.

Import of Services

The reverse-charge technique, which requires an output VAT requirement and a corresponding input VAT recovery, must be used to account for service imports (subject to input tax recovery rules).

On services imported during the 2022 calendar year under contracts signed on or before December 23, 2021, and up until the contract's expiration, renewal, or amendment, whichever occurs first, the transitional rate of 5% will apply (excluding the zero-rated or exempted categories). 

10% VAT will be charged on services imported during the 2022 calendar year under agreements made on or after December 24, 2021.

Company formation in Bahrain that uses non-resident suppliers' services must separate their invoices to demonstrate that the proper VAT rate was applied to these transactions.

Conditions Required to Apply for the Mechanism under the VAT Rules in Bahrain

There are certain conditions that an exporter must fulfill to apply for the domestic reverse charge mechanism. 

The following criteria must be satisfied:

  • The total amount of Intra-GCC supplies and exports exceeding 50% of their actual value of supplies should be demonstrated by the taxable person
  • The taxable person should recover the VAT due as input tax on the goods and services supplied
  • Reasonable grounds should be provided to the bureau by the taxable person, evidencing that the net tax will regularly be negative. Thus, having a material impact on the business regarding his financial position.

Cancellation of the Approval for the Mechanism under VAT Implementation in Bahrain

Whether you have an established company in the mainland or in a Bahrain free trade zone, if the conditions mentioned above are no longer valid, the taxable person should notify the NBR within thirty days of not meeting the requirements.

Then the bureau will cancel the approval to use the domestic reverse charge mechanism. Besides this, the NBR may revoke its approval to apply the mechanism in all cases. Furthermore, it will issue a notification to the taxable person mentioning the effective date of cancellation.

Commitbiz has a team of expert business advisors well-versed in company incorporation and secretarial services. Our experience will guide you at every step throughout the procedure.

All the legal proceedings will be completely hassle-free, which would otherwise be challenging single-handedly. The entire process would be time-saving and cost-effective. 

So, for further information, contact us today and fulfill your business dreams.

FAQs

Which article comprises the domestic reverse charge mechanism in Bahrain?

Article 66. 

When will the VAT incurred will not be recovered?

VAT incurred on non-business expenditures should not be recoverable, such as entertainment and personal expenses.

Would the increase in the VAT rate affect the zero-rated and exempted categories in Bahrain?

No.

Who can apply for the reverse charge mechanism under the NBR VAT Bahrain?

The registered businesses engaged in ‘Intra-GCC Supplies, or Exports of Goods’ can apply for the mechanism.

Why was the domestic reverse charge introduced in the Kingdom of Bahrain?

The domestic reverse charge was introduced in Bahrain VAT to diminish the exporters’ risk regarding the potential cash flow impact.

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