Introduction:As per Bahrain VAT law, under the reverse-charge mechanism the customer becomes the one liable to account for the VAT due on the supply as output tax and to report it in his tax return.
What is domestic reverse charge mechanism?The VAT legislation provides for a reverse charge mechanism to apply on certain domestic supplies. In order for it to apply, certain conditions must be met, an application must be made to the NBR and the NBR must approve this application.
There are cases where the reverse-charge mechanism is by default and cases where it is an option subject to the NBR’s approval.
Once the NBR approves the application, the supplier can apply the reverse-charge mechanism on the services and goods purchased from local suppliers which are specified in the approval, provided he can recover the related input tax in full.
What are the conditions to be met to apply domestic reverse charge?The conditions to be met in order to be eligible to apply for the domestic reverse charge mechanism to apply on the receipt of certain goods and services are as follows:
• The applicant must be a taxable person
• The applicant must evidence that the total amount of his intra-GCC supplies and exports exceeds 50% of the total value of his supplies
• The applicant must provide reasonable grounds that he will be in a recurring net tax recoverable position and that this will have a material impact on his financial position
Where the application is approved, the NBR issues a certificate allowing the taxable person to apply the domestic reverse charge mechanism. The taxable person will need to give a copy of this certificate to his suppliers so that they do not charge VAT on supplies made to him.
The taxable person must notify the NBR within 30 days when he ceases to meet the conditions to benefit from the domestic reverse charge mechanism. The NBR will then revoke its approval.
This domestic reverse-charge mechanism allows taxable persons with significant supplies either subject to VAT at the rate of 0% or occurring outside the territorial scope of Bahrain VAT to mitigate the negative cash flow impact of the VAT incurred on their business expenses.
Can you please share an example to understand domestic reverse charge mechanism?Here is an example provided in the VAT general guide document shared by NBR, to understand this concept in a better way.
A taxable person in Bahrain receives interior design services in relation to his offices in Bahrain from a non-resident supplier. As the services relate to a real estate located in Bahrain, their place of supply is in Bahrain (i.e. where the real estate is located). Under the VAT Law, such services are subject to VAT at the standard rate of 5%.
As the supplier is non-resident and the customer is a taxable person in Bahrain, the person liable for the VAT due on these services is the customer, under the reverse-charge mechanism.
The fee for the services is BHD 20,000. The customer will self-account for VAT at 5% (i.e. BHD 1,000), will record this amount on the invoice received from the supplier and will treat this VAT as output tax due.
If the customer can recover input tax in full:
The customer is using this expense for the making of taxable supplies and can therefore recover the VAT charged on it in full. The customer will therefore be able to treat BHD 1,000 as recoverable input tax.
The net amount of VAT due by the customer to the NBR for this specific supply is nil since the output VAT due is fully netted against the same amount as recoverable input tax.
If the customer can only partially recover input tax:
If the customer is only entitled to recover 50% of the VAT incurred on this business expenses (i.e. it uses the expense for performing both taxable and exempt supplies), he will only be able to recover BHD 500 as recoverable input tax (i.e. 50% of BHD 1,000).
The net amount of VAT due by the customer to the NBR on this supply will therefore amount to BHD 500 (i.e. BHD 1,000 output tax less BHD 500 recoverable input tax).