Following the decision of the UAE and Saudi Arabia to introduce VAT, Bahrain will bring the tax in on January 1 next year, leaving Oman, Kuwait and Qatar still to do so.
At the time of writing, Bahrain's primary legislation has been in circulation for a few months (in Arabic). However, the more detailed regulations remain unseen, making it difficult for businesses that need to prepare to do so.
It was only in the Emirati and Saudi VAT regulations that provisions were included regarding, for example, whether the price in existing contracts that made no reference to VAT should be treated as inclusive or exclusive.
Most businesses will not need to register for VAT in Bahrain from January 1, next year. In November, Rana Faqihi, the finance ministry's assistant under secretary for development and revenue, announced that only businesses with sales exceeding 5 million dinars (Dh48.8m) would have to register for VAT by December 20 2019. This was later confirmed by the National Bureau for Taxation. It also confirmed the registration threshold would drop to 500,000 dinars in June 2019, and 37,500 dinars in December 2019.
It will not surprise you that 5m dinars is the highest VAT registration threshold in the world. Singapore’s VAT threshold, one of the highest by comparison, is a mere Dh2.5m.
On the one hand, it’s a pragmatic – and temporary – response to the introduction of a complex transactional tax in a jurisdiction that does not generally have taxes.
A challenge in the UAE was that small and medium-sized businesses had fewer resources to understand both the basics of VAT operations, or the complexities of the legislation.
It was not just SMEs. The Federal Tax Authority was inevitably spread too thinly to be able to administer VAT, provide swift assistance to taxpayers and issue clarifications on subtle but important points of law.
Bringing only large businesses within the VAT fold means that those who have the resources to implement it will be required to do so, which should in turn enable the National Bureau for Taxation to fine-tune the operation.
On the other hand, the high registration threshold – even if only temporary – technically puts Bahrain in breach of the Unified VAT Agreement, the GCC treaty setting out the common framework for establishing a VAT system in each country. Article 50 of that treaty states that the mandatory registration threshold is 375,000 Saudi Arabian riyals (Dh367,173) or its local equivalent, which gives a registration threshold in Bahrain of approximately 37,500 dinars, the figure it will drop to in a year.
Such a high threshold creates economic effects. The purpose of a VAT threshold is, broadly speaking, to avoid micro businesses from having to register for and charge VAT so as not to swamp them with bureaucracy. The UK, which has a relatively high registration threshold and a relatively high rate of VAT, has seen some evidence of sole traders, particularly consumer-facing entities, deliberately restricting their supplies to keep below the threshold. The intention of a threshold is not to impose VAT on supplies made by big businesses only.
The practical effects are obvious. A small, independent gym may not need to register for and charge VAT until the end of 2019; a chain of 20 gyms will be more likely to do so. As a consumer, unable to recover VAT that is charged to me, I may be more inclined to go to the independent gym rather than the chain gym, to avoid the 5 per cent price increase.
I have already been asked by UAE businesses that trade with Bahrain what they need to do. The answer is not 100 per cent clear in all circumstances. So far, we don’t know exactly how Bahrain will legislate for the threshold. Will it also apply to non-resident suppliers, to whom a threshold does not generally apply? Will the threshold for voluntary registration be equally high? There will almost certainly be other knock-on effects, including opportunities for avoidance, and I hope the National Bureau for Taxation has explored them in full. It did the right thing by setting out the dates on which the threshold would reduce.
The UAE and Saudi Arabia may not be particularly happy about the breach of the Unified VAT Agreement, and they may not treat it as an implementing state for domestic purposes until December, but at least Bahrain, unlike half the countries in the GCC, will have introduced VAT within a year.
Over to you now, Oman, Kuwait and Qatar.
Jeremy Cape is a tax lawyer at Squire Patton Boggs, which has offices in London, Dubai and Abu Dhabi. Follow him on Twitter @jeremydcape