UNDERSTANDING THE VALUE OF SUPPLY IN THE RETAIL AND WHOLESALE SECTOR

Once we identify the place of supply and confirmed that the Bahrain VAT Law will be applicable. The next step for a supplier is to determine the value of the supply that is the amount on which VAT applies and the date on which this VAT becomes due i.e. the VAT due date. 

Now we can discuss on the Value of supply and how the value is determined as per the Bahrain VAT Law.

What is the Value of supply?

The VAT law says that the remuneration received in lieu of the supply of goods or services on which the VAT is applied, either at the standard 10% or zero rates is the value of a supply. That is the total consideration received for the sale of goods or services on which amount we will charge the VAT is called the value of supply. 

The determination of the value of supply may seem to be so simple because it’s just the amount received or invoiced for a particular transaction. But identifying the value of supply might not be that much easy in every situation. There are various situations like the supplier receives the consideration whether in cash, in kind or both from the customer for the supply, Discounts & reductions for the supplies, Staff discounts, Service charges, tips and gratuity payments, Deposits, Part exchange and trade-ins, etc. 

For identifying the value of a supply and the value of an import of goods for VAT purposes, the VAT Law and Executive Regulations provide some specific rules. Hence the value should be calculated accordingly and upon that value, the VAT should be charged.

What are the General valuation principles under the Bahrain VAT regime?

1. Determination of the value:
   The consideration for a supply means the value of the supply plus VAT charged; i.e. the total amount including VAT that the supplier receives from the customer for the supplies he made to the customer. The consideration might be either cash, in kind, or both. The consideration which is received in kind should be valued at its fair market value. Furthermore, all costs and expenses imposed on the customer including any relevant duties or taxes such as tourist levies and municipality fees are to be included in the overall value of a supply, with exceptions only applying to VAT itself.
2. Discounts and reduction in the value of a supply:
   The value of a supply can be reduced by discounts, subsidies, disbursements, and a refundable deposit. If the value is reduced at the time of supply, VAT should be calculated on the reduced value.
   If the discount is provided after the date of supply, the supplier should issue a Tax Credit note.
3. Remuneration in kind – fair market value:
   A non-cash component’s value is assessed in relation to its fair market value. This is the fair price that might be negotiated in the market between two independent parties on the same date of the supply and the conditions for free competition are as follows: Both the supplier and the client work independently to pursue what is in their best interests, neither is subject to any form of commercial pressure, and the transaction is completed within a fair amount of time.
   If the market value cannot be determined using the fair price tradeable as above, it should be established using the procedures outlined in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which were released in 2009. Even if the parties may both reside in Bahrain, the same procedures should be applied.
4. Staff discounts:
   Employers and employees are considered related parties for VAT purposes, and the value of a supply must be the fair market value (for VAT accounting and reporting purposes) if the value is less than its fair market value and the recipient is not entitled to recover in full the VAT charged on his expenses. Where the discount is only available to employees, the employer must determine the fair market value of the supply and account for VAT accordingly.

What are the Other Specific Rules apart from the general valuation rules under the Bahrain VAT regime?

Other Specific Rules apart from General Rules are regarding (a) Service charges, tips and gratuity payments; (b) Deposits; (c) Part exchange and trade-ins; (d) Adjustments to the value of a supply and related output VAT; (e) Trade-related discounts; and; (f) Relief for bad debts. 

• Service charges, tips and gratuity payments 

Many retailers, such as restaurants and caterers, etc. levy service charges which can either be compulsory or freely given. The levy of compulsory service charge will be treated as a part of the consideration for the supply of goods/services and will come under the purview of VAT. Optional service charges like tips to staff given by customers are not part of the consideration for the underlying supply and are outside the scope of VAT.

• Deposits

Non-refundable charges, deposits and fees collected from customers, either full or partial payments for the supply of goods or services are subject to VAT at the appropriate rate. 

Deposits which are refundable are not considered advance payments and are outside the scope of VAT.

• Part exchange and trade-ins

VAT applies to the full selling price of new goods when the customer exchanges old goods. As an example, if a person sells a new mobile phone and accepts the old phone of a customer in an exchange scheme, the new phone’s price will be reduced by the value of the old phone. As a result, the supplier actually receives a lower price. The value of supply in this case is the normal price rather than the reduced price and the mobile Supplier is required to charge VAT on the normal price.

• Adjustments to the value of a supply and related output VAT

The supplier must adjust the value of a supply and the related amount of output VAT when one of the following events occurs after the date of supply: 

• cancellation either in part or full as applicable, 
• reduction in price after the supply, 
• return by the customer when accepted by supplier; or 
• bad debt relief. 

A credit note or debit note must be issued evidencing this transaction.

• Trade-related discounts

Wholesalers and manufacturers often provide retailers with trade-related discounts, such as retrospective discounts on the price paid for goods. These discounts can be in the form of a rebate or price-off discount. 

Where the supplier is located outside Bahrain, any discount granted after the goods have been imported into Bahrain will have no VAT implications unless the customs value of the goods is adjusted thereof. Wholesalers and manufacturers may also provide retailers with goods equal to the value of the discount granted. In this scenario, the suppliers should issue credit notes for the discount and invoice for the goods given to ensure correct VAT accounting.

• Relief for bad debts

The VAT Law and Executive Regulations allows a supplier to adjust and recover output VAT already paid to the NBR where he was not able to collect it from his customers. The supplier must meet the following conditions: 

• the payment of the consideration due by the customer must be pending for at least 12 months, (Please note that this 12-month period does not apply where the customer has not paid due to bankruptcy)
• the supplier must take all necessary measures to collect the debt, and 
• the supplier must write off the debt in his books. 

If the consideration is received, the supplier should make another adjustment and pay the output VAT due on the amount received in the VAT return. A Tax Debit note must be issued by the supplier to this effect for ensuring proper VAT records.

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

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