Reverse Charge Mechanism in Bahrain 

Reverse Charge Mechanism Under Bahrain VAT Law: Can a VAT payer opt for Reverse Charge Mechanism in Bahrain on Local supplies? The output VAT liability is triggered as soon as a transaction within the scope of the Bahrain VAT Law takes place. But who is liable to pay the Output VAT due on such a transaction to the National Bureau for Revenue (NBR) is to be analyzed in detail and concluded. Normally, it is the supplier who is liable to pay Output VAT to the NBR, but for certain transactions, reverse charge mechanism in Bahrain would be applicable and the person liable to pay would be the customer.

The underlying principle here is that the Output VAT due on a transaction is to be paid by the person liable to account for the VAT due on a transaction. He should be accounting such VAT as Output VAT and disclosing in his VAT return.

Let us understand this principle of Reverse Charge Mechanism in Bahrain on local supplies in detail:

What is the general rule determining the person liable to pay the Output VAT?

As per the Bahrain VAT Law, the general rule is that the person liable to pay the Output VAT on a supply (including deemed supply) is the Supplier. This rule is applicable unless a special rule applies.

Also, it has to be specially noted that any person who charges a VAT amount in the invoice is liable to pay such VAT to the NBR, irrespective of whether VAT is applicable on the transaction or not.

Who is liable to pay the VAT when the “special rule” is applied?

The Bahrain VAT Law has listed out certain transaction under the “special rule” wherein the VAT liability is shifted from the supplier to the customer. That means the customer would be liable to account for VAT and to disclose it in his VAT return. This is known as “reverse charge mechanism”.

As per the Bahrain VAT Law, there are cases where the application of reverse charge mechanism is by default and cases where it is an option prior to approval from the National Bureau for Revenue (NBR).

When is the Reverse Charge Mechanism applicable by default?

Under the Bahrain VAT Law, the Reverse Charge Mechanism is applicable by default in the following situations:

1. 1. In case of purchase of Standard rated services by a taxable person in Bahrain wherein the supplier of the service is a non-resident.
   2. In case of purchase of Standard rated goods by a taxable person in Bahrain wherein the supplier of the goods is a non-resident.

Please note that when a non-resident supplier sells their product or service to a resident who is not registered in Bahrain, the reverse charge mechanism will not apply. In this case, their product or service is taxable in Bahrain then the non-resident supplier is supposed to register for VAT in Bahrain and charge VAT on supplies made by him.

Therefore, the Reverse Charge Mechanism helps a non-resident supplier to sell their goods or service to a registered VAT payer in Bahrain without having a VAT registration in Bahrain.

When can we opt for DOMESTIC REVERSE CHARGE MECHANISM or Reverse-charge mechanism for local supplies?

The Bahrain VAT Law allows the Reverse Charge Mechanism to be applied for certain domestic supplies in Bahrain. But in this case, for the application of DOMESTIC REVERSE CHARGE MECHANISM, the VAT payer should meet certain conditions specified and also, should apply to the NBR and get approval from them.

The following are the conditions to be met for the application of DOMESTIC REVERSE CHARGE MECHANISM in local supplies:

1. 1. 1. The applicant should be a taxable person in Bahrain
      2. Such taxable person should be having exports whose total amount exceeds 50% of the total value of supplies made by him.
      3. The taxable person should provide a reasonable explanation to the NBR that he will be having Tax refund position in the VAT return and this will have a material impact on his financial position.

If the above conditions are met, then such person can apply to the NBR for applying DOMESTIC REVERSE CHARGE MECHANISM on his local supplies. Once the NBR accepts the application then such VAT payer can apply DOMESTIC REVERSE CHARGE MECHANISM on all the purchases made from the local supplier.

Once the NBR approves the application they will send a certificate to the VAT payer allowing them to apply for DOMESTIC REVERSE CHARGE MECHANISM. The VAT payer can give a copy of the certificate obtained to his suppliers so that they will not charge VAT on the supplies made to him.

In case the taxable person ceases to meet the conditions specified above which allows him to benefit from DOMESTIC REVERSE CHARGE MECHANISM, he should notify the NBR within 30 days. The NBR would then revoke its approval.

The underlying principle in DOMESTIC REVERSE CHARGE MECHANISM is to allow the VAT payer (whose significant supply is either taxable at zero rate or outside the scope of Bahrain VAT Law) to mitigate negative cash flow impact of the VAT on their business expenses.

Can we recover the VAT under Reverse Charge Mechanism in Bahrain?

Under the Reverse Charge Mechanism, the customer would self-account for the Output VAT. This output VAT recorded is also Input VAT for the customer. This input VAT can be recovered in his VAT return provided he meets the normal Input Tax recovery rules.

This can be better explained with the below example:

XYZ W.L.L. is a VAT payer in Bahrain. Their website designing is done by MNC (USA), Inc. who is a non-resident in Bahrain and charge BD 500 monthly.

Since website designing is subject to VAT at 5%, XYZ W.L.L. will have to account for Output VAT under REVERSE CHARGE MECHANISM. Therefore XYZ W.L.L. will self-account for VAT (5% of BD 500 which is BD 25) and treat this as his Output VAT due. He can also treat this as Input VAT incurred on business expense and recover the full amount (i.e., BD 25) (if all the input tax recovery rules are met).

Suppose XYZ W.L.L. is entitled to recover only 75% of the Input tax on the web designing expense as 25% of the website is used for owner’s personal blogging. In this case, XYZ W.L.L. will only be able to recover BD 18.750 (i.e., 75% of BD 25) as the Input VAT but must account for BD 25 as the Output VAT. Therefore, the net VAT payable to the NBR would be BD 6.250.

Our Tax Experts in Emirates Chartered Accountants Group Bahrain believe in a proactive approach to tax advisory services with a cost-effective and tailor-made option that is preferred by businesses all over. Our team of professionals is well versed with the Bahrain VAT Law as well as the UAE VAT Law  They are also equipped with practical experience of implementing VAT in UAE and VAT in Bahrain.

Our wide range of services includes:

• VAT Registration
• VAT Training 
• VAT Implementation 
• VAT Return Filing Service
• VAT Consultancy 
• Accounting for VAT Compliance

We’d be happy to support you – Call us!