Out Of Scope Transactions Under Bahrain VAT Law
It is important for a VAT payer in Bahrain to determine whether the transaction made by him is within the scope of Bahrain VAT Law or is it outside the scope. The Bahrain VAT Law has defined transactions that doesn’t fall within the scope of Bahrain VAT Law. These transactions are termed as Out of scope transactions and they need not be disclosed while filing their VAT Return in Bahrain.
What are the transactions within the scope of Bahrain VAT Law?
The Bahrain VAT Law has defined the following transactions within the scope of VAT:
- Supplies of goods by a taxable person
- Supplies of services by a taxable person
- Imports of goods
- Deemed supplies by a taxable person
Only transactions that fall within these categories are considered to be within the scope of Bahrain VAT Law.
What are out of scope transactions under Bahrain VAT Law?
The out of scope transactions are those transactions that does not fall within the scope of the four categories mentioned above. That is, it does not fall within the scope of Bahrain VAT Law and the company does not have to account VAT on out of scope transactions neither disclose it in the VAT return.
The following are the specifically defined out of scope transactions under the Bahrain VAT Law:
- Transfer of a going concern:
A person may transfer a part of its business activity or entire business activity as a part of going concern with or without consideration. Under the Bahrain VAT Law, such a transfer is referred to as surrender of economic activity.
The surrender of economic activity does not fall within the scope of Bahrain VAT Law and the transferor may not charge VAT on such a transaction provided the following conditions are met.
- The transferor should be a taxable person registered for VAT in Bahrain
- The transferee or the person buying should be a taxable person registered for VAT in Bahrain else he becomes obliged to be registered for VAT as a result of the transfer being made.
- A business or a part of a business must be transferred that allows the transferee to carry out the economic activity subject to the transfer.
- The transferee must immediately use the business or part of the business transferred and he should carry out a similar activity that was conducted by the transferee.
- The business or part of the business transferred must be subject to actual exploitation and should generate revenue which may or may not be profitable
- The transferor and the transferee must separately notify the NBR of the transfer of the going concern within thirty days of the date of the transfer made.
It is important to note that if all of the above points are not met then the transfer will be considered as falling within the scope of Bahrain VAT Law and hence the taxable person is required to charge VAT on the transfer made.
Also, if the transferor and the transferee fail to formally notify the NBR regarding the transfer within 30 days, then again such a transfer will be considered within the scope of Bahrain VAT Law and will be subject to VAT.
- Disbursements:
Disbursement refers to a transaction where a person makes payment on behalf of the other and later recovers such amount paid from others.
A payment recovery made by one person from the other does generally not supply and does not come under the scope of Vat. Therefore, a transaction in the nature of disbursement is out of the scope of Bahrain VAT law.
An amount paid by a person “X” to a person “Y’ for the expenses incurred on behalf of “Z” which is later recovered from “Z” can be treated as disbursements only if all of the following conditions are met.
- “X” should have contacted with “Y” in the name of “Z”
- “Z” should be the “bill to” person on the invoice issued by the “Y”.
- “Z” should be legally liable to make payment to “Y”.
- “Z” should be the recipient of goods or service supplied by “Y”.
- “X” should have recorded the transaction as are receivable from “Z” in his balance sheet which is credited when the refund is received instead of recording the payment to the supplier as an expense and the refund from the customer as income in his profit and loss account.
- Intra tax group transactions
Two or more persons can together form a tax group provided the following conditions are met:
- Each of the applicants to form a tax group should be a legal person (i.e. an entity that can enter contracts in its own name).
- The place of residence of all the applicants should be in Bahrain.
- All the applicants should conduct an economic activity
- All the applicants should be registered for VAT purposes as at the date of applying for registration as a VAT Group.
- None of the applicants be a member of another VAT group in Bahrain
- All the applicants are related persons.
Transaction made between the so formed tax groups is considered to be outside the scope of the Bahrain VAT Law as they occur within the same taxable person from the point of view of VAT.
- Other transactions outside the scope of the Bahrain VAT Law:
Below are some transactions that will be outside the scope of the Bahrain VAT Law:
- Tips paid on top of a bill by the customer as it is paid due to the independent choice of the customer.
- Penalties paid for late payment or infringement of the law are not a consideration for a supply.
- Indemnity payment as part of an insurance contract or in the context of Litigation received by a person. Such payments are not a consideration for a supply of goods or services made by the insured person or by the party to the litigation as they are paid to compensate loss or damage that had happened to them.
- The dividends received by a shareholder. The exercise of shareholder rights is not considered as an economic activity for the purpose of VAT.
- Goods that are returned by the customer to the supplier. The customer is not supplying
the goods to its supplier. The return is actually the reversal of the initial supply.
- An inheritance received through a will.
- The replacement of goods that are sold under a warranty. The replacement goods are not seen as a separate supply made to the customer, provided the replacement is covered under the warranty.
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