VAT treatment on discounts in Bahrain

Often the supplier of goods and services provides discounts on the value of the supply to its customers for various reasons. Let us go through the VAT treatment on these transactions.

Before going to discounts let us first analyze what is the Value of a supply as per the Bahrain VAT Law on which the VAT amount is charged and discounts provided by the suppliers.

What is the Value of a supply?

As a general rule, the value of supply includes everything that a taxable supplier receives from his client or for the supply given to the client. Therefore, the value of supply includes everything received from the client whether in cash or in kind. The value of remuneration received in-kind would be taxable at its fair market value.

The supplier must include all the costs or expenses imposed on the client while calculating the value of supply. That is any transportation cost, insurance costs, administration charges, taxes or duties except VAT imposed on the client.

The value of supply together with VAT charged on the supply is called the consideration for the supply.

The Bahrain VAT law defines consideration as “All that is received or expected to be received by the taxable supplier from the customer or from a third party in exchange for from the Customer for the supply of Goods or Services, inclusive of Tax.”

What are to be deducted while calculating the Value of supply?

The VAT should be charged after deducting the following amounts from the value of supply as per the Bahrain VAT Law.

1. Any discount provided for the supply at the date of supply and such discounts should be shown as a reduction in the invoice.
2. The subsidies the supplier has received from government bodies.
3. Any payments made by the supplier on behalf and in the name of the customer and claimed back from the customer. That is Disbursement made by the supplier in the name and on behalf of the client.
4. Any penalty, compensation or fines paid by the supplier due to customers default which is later recovered from the customer.
5. Refundable deposits made by the customer which are not considered as an advance payment for the supply. 

However, there are many cases where the discounts are given to customers many days after the Tax invoice is issued. In such a case, the supplier is obliged to issue a Tax credit note in order to adjust the value of supply and the related VAT amount.

What is the VAT treatment on Staff discounts offered by the employer as per the Bahrain VAT Law?

The Bahrain VAT Law considers staff and his employer as related persons for the purpose of VAT. Therefore, the value of supplies made by the employer to his staff should be at the fair market value.

Therefore, whenever an employer gives goods to his staffs at a value less than the fair market value of the goods, the employer is supposed to charge VAT on the fair market value of the goods.

For example:

Mr. Alexander works at ZYX enterprise which is major supplier of sewing machines in Bahrain. It has a brand “AB” whose fair market value is BD 50. However, ZYX supplies this “AB” sewing machine at BD 35 to Mr. Alexander in a scheme of staff discount.

In the above case, ZYX is supposed to account for VAT at BD 50 × 5% = BD 2.5. And therefore, the total consideration that will be collected from Mr. Alexander would BD 35 + BD 2.5 = BD 37.5.

However, if in the above case, ZYX offers the same discount to its customers as well, then it is eligible to account for VAT on BD 35 instead of BD 50.

In case the employer provides free goods to its staffs, then this will be regarded as deemed supply as per the Bahrain VAT Law and hence the employer must account for VAT at the Fair Market value of the goods and pay it to the NBR.

What is the VAT treatment for trade-related discounts provided by the supplier as per the Bahrain VAT Law?

There are various cases wherein the supplier offers discounts to its customers when certain conditions are met. For example:

1. If the customer exceeds a certain value of purchases over a given period.
2. Price off discounts might be provided to the customer for the given number of certain products sold in the given period.

The suppliers often provide discounts to the customers when they meet certain conditions for the previous periods. In such a case, the supplier is obliged to issue a Tax credit note in order to adjust the value of supply and the related VAT amount.

What are the requirements of a Valid Tax credit note?

The following requirements are to be satisfied by a credit note issued by the supplier to adjust the value of original supply:

1. The words “Credit Note” clearly stated.
2. The name, address and tax Registration Number of the Supplier
3. The name and address of the Customer.
4. A sequential Credit Note number.
5. The date of issue of the Credit Note.
6. The reference number of the original Tax Invoice or original document subject to the adjustment.
7. The adjusted value of the Supply and the Tax amount to be adjusted in Bahraini Dinars.

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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