VAT on Electronic Service

Electronic services are an integral part of our day-to-day life. We use many electronic services such as buying a zoom subscription to conduct online meetings, subscription to OTT platforms to watch films, services of website or web page, advertising through social media platforms, etc.

Now let us look at the taxability of such electronic services as per the provisions of the Bahrain VAT law.

Meaning of Electronic Service in Bahrain

Electronic services are those services provided over the internet or electronic platforms. It works in an automated manner by making use of Information technology and with very limited human intervention.

Some of the examples of electronic services that are regularly used by businesses are as follows:

1. 1. Advertising space on websites.
   2. Online communication services (e.g., zoom, google meet, etc)
   3. Services supporting websites or web pages on the internet.
   4. Electronic supply of music, films, television series, games, magazines, newspapers, etc.
   5. Online educational services.

VAT Applicability on Electronic Services in Bahrain 

The VAT applicable on electronic services should be assessed by analyzing the place of supply of the services. If the place of supply is in Bahrain, then the provisions of the Bahrain VAT law will apply and hence the service will be taxable in Bahrain. If the place of supply is outside Bahrain, then the electronic service will be outside the scope of Bahrain VAT law.

The place of supply for electronic services is the place where these services are used and enjoyed at the date they are supplied to the customer. Bahrain VAT Law, therefore, applies when the services are used and enjoyed in Bahrain to the extent of such use.

The Place of Enjoyment or Use of Service can be Identified by Applying the Following Rules:

1. Where the customer is registered for VAT in Bahrain:

The place of supply will be the place of residence of the customer which shall be identified using the following provision:

1. 1. 1. The customer’s address as stated on the tax invoice or any other billing document used.
      2. Details of the customer’s bank account.
      3. The Internet Protocol (IP) address is used to receive the services.
      4. The country code of the SIM card used to receive the services.
      5. Any other information of commercial nature (e.g., the country settings on an app used by the customer to avail the service).
      6. Where the customer is not a registered person in Bahrain:

The place of supply is determined to be the place where the customer actually uses and enjoys the service. In this case, the place where the contract with the customer is executed and the place where the customer pays for the service are not relevant to determine the place of supply.

For example, Ms. Lena subscribes to ABC meetings an online app to arrange and attend virtual meetings. This will be an electronic service availed and the place of supply will be the place where the service is used and enjoyed.

Since Lena uses the app in Bahrain, the place of supply will be Bahrain.

In case Lena attends a meeting when outside Bahrain, the service is deemed to be enjoyed outside Bahrain, and the place of supply will be the country where Lena has attended the meeting.

VAT Treatment on Electronic Services in Bahrain

You have now understood that if the place of supply of the electronic service is Bahrain then, the Bahrain VAT Law will apply.

Now let us look at the VAT rate to be applied on the electronic services where the place of supply is in Bahrain.

VAT Treatment on the Supply of Electronic Services Made by a Person Established in Bahrain:

When the Electronic services are supplied by a person established in Bahrain and are used and enjoyed in Bahrain then it will be subject to VAT at the standard rate, unless the services are specifically exempt from VAT or zero-rated or the supplier is not registered for VAT in Bahrain.

The supplier will have to consider the normal registration threshold to determine whether it should register for VAT in Bahrain. Please refer to a VAT registration in Bahrain for more information on the VAT registration threshold.

VAT Treatment on the Supply of Electronic Services Made by Non-Residents in Bahrain:

1. 1. Where the customer is registered for VAT in Bahrain:

When the Electronic services are supplied by non-residents in Bahrain to VAT-registered customers in Bahrain and are used and enjoyed in Bahrain, then they will be subject to VAT under the reverse charge mechanism, unless the services are specifically exempt from VAT or zero-rated.

Please refer to Reverse Charge Mechanism in Bahrain for more information on the applicability, accountability, and impact of the Reverse Charge Mechanism under Bahrain VAT Law.

The non-resident supplier need not register for VAT in Bahrain if he supplies services only to registered VAT payers in Bahrain.

Even if the non-registered supplier is registered for VAT in Bahrain, the supplies made to registered VAT payers in Bahrain will remain subject to reverse charge mechanism. However, the supplier should issue a tax invoice, with a clear description that the customer should self-account for VAT under the reverse charge mechanism.

1. 2. Where the customer is not registered for VAT in Bahrain:

When the Electronic services are supplied by non-residents in Bahrain to non-registered customers in Bahrain and are used and enjoyed in Bahrain then it will be subject to VAT at the standard rate, unless the services are specifically exempt from VAT or zero-rated.

A non-resident supplier is liable to get registered for VAT in Bahrain if he is making taxable supplies to businesses not registered for VAT in Bahrain or end-consumers. Since there is no threshold limit, making a supply worth BD 1 would make him obliged for VAT Registration in Bahrain.

Please refer to VAT registration and deregistration of non-residents in Bahrain for more information on the registration of non-residents for VAT in Bahrain.

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 in 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 
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• VAT Return Filing Service
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