VAT Treatment in Bahrain on Oil and Gas Industry 

Oil and Gas is one of the major economic sectors in the Kingdom of Bahrain and its contribution to the real GDP is quite considerable. When the Value Added Tax (VAT) was implemented in the Kingdom of Bahrain, the lawmakers reserved specific tax treatment for the supplies in the oil, oil derivatives and the gas sector.

VAT Treatment in Bahrain As per Article 53(14) of the Bahrain VAT Law, supply in oil, oil derivatives and the gas sector are subject to zero rates of tax. Article 79 of the Executive Regulation further provides an elaborated list of supplies in oil, oil derivatives and the gas sector which are subject to a zero rate of VAT.

Oil and Gas sector comprises of numerous and diversified range of the activities. Further, a lot of other industries are also connected to the activities oil and gas either directly or indirectly. Therefore, it was pertinent to a have a detailed guideline from the National Bureau for Revenue (NBR)   on the scope of activities that are covered in the oil and gas sector and the tax treatment to be adopted. Hence, after giving due consideration to the requirement of Oil and gas sector the NBR has recently issued the VAT Oil and Gas Guide- Version 1.0. This article briefly discusses the VAT treatment in the oil and gas industry with respect to downstream activities and applicability of zero rates of tax in the light of recently issued VAT Oil and Gas Guide.

Taxability of downstream activities under Bahrain VAT Law

The subsectors of the oil and gas industry include upstream, midstream, and downstream. Downstream operations include:

1. Refining/processing of crude oil, natural gas and other hydrocarbons
2. Sale of products derived from refining/processing.

What is the VAT treatment of supply of oil refining and gas processing services?

VAT Treatment in Bahrain Article 79A (6) of the Value-Added Regulation provides that zero rating shall apply to the supply of oil refining or gas processing services, including regasification of liquefied natural gas.

It is further clarified in the VAT Oil and Gas Guide that refining and processing includes all processes of converting raw crude oil, natural gas, and other hydrocarbons to various products and by-products including regasification of liquefied natural gas.

Whether the sale of processed oil, natural gas, and other hydrocarbons taxed at zero rates or five percent?

Article 79A (1) of the Value-Added Regulation provides that the supply of oil, gas, and other hydrocarbons, whether processed or unprocessed shall be subject to tax at zero percent.

The VAT Oil and Gas Guide made it clear that when such goods are imported into Bahrain from a place outside Bahrain, it is exempted from import VAT. That means no VAT shall be levied on such goods while imported from outside the territory of Bahrain

It is further clarified in the said Guide that for sale of processed oil, natural gas, and other hydrocarbons, the rate of tax shall be determined based on the nature of products sold/imported. The status of the supplier, customer or the importer of records does not have any impact on the selection of tax rate.

For better clarity of the concept, few examples are also listed out in the guide. Accordingly, the following supplies shall be subject to the zero rates of tax.

• Sale petroleum oils and oils derived from bituminous minerals like naphtha, diesel fuel, fuel oil, fuels, lubricants.
• Sale of waste oil. (waste oil means oil that has not been used and is unsuitable for its originally intended purpose)
• Supply of petroleum gases and other hydrocarbons, in the gaseous or liquefied form such as LNG, LPG.
• Supply of other products such as petroleum bitumen, and specified products of petroleum oil.

It is to be noted that the zero rates will be applied when the above goods are supplied in Bahrain. Such goods when imported into Bahrain are exempt from VAT.

Following are the products which are subject to tax at the standard rate of 5% when imported or sold at Bahrain.

• Supply of used oil. Used oil means oil that has been used and became contaminated by physical or chemical impurities, such as oil drained from a vehicle engine.
• Products such as ammonia, methanol, urea, asphalt concrete

Import, supply and lease of equipment and consumables for the refining, processing and supply of oil, natural gas and other hydrocarbons

Now let us discuss the taxability of import, supply and lease of equipment and consumables that are used directly and exclusively for the refining, processing and supply of oil, natural gas, and other hydrocarbons.

Article 79A (9) & (10) of the Value-Added Regulation provide that purchase or lease of equipment and consumables that is used directly and exclusively for the refining, processing and supply of oil, natural gas, and other hydrocarbons shall subject to VAT at zero rate.

It is elaborated in the VAT Oil and Gas Guide that the zero-rating applies to the

• Equipment used in oil refineries, natural gas, and other hydrocarbon processing equipment,
• Fuel dispensers used to pump petrol, diesel, gasoline, LPG etc.
• Consumables related to the above such as hoses, hoses nozzles, top drive bushing, valves, bolts, wash pipes, pump gaskets, fittings, hydraulic seat pullers, pipe wipers, meter sticks, shaker decks, wedges, and flanges.

Where a company in Bahrain import, supply or leases of equipment and consumables that will be used for both Oil and Gas activities and Non-Oil and Gas activities, such items will be subject to tax at a standard rate 5%.

Reading of the above article will definitely provide a basic understanding of the transaction scenarios that are happening in the downstream sector in the oil and gas industry.

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.

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• VAT Registration
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