- October 10, 2021
- Posted by: Emirates CA
- Category: Tax
Export of Service under Bahrain VAT
Many retailers in Bahrain provide various services to their suppliers outside Bahrain. Can all of these be treated as export of service? Are there any conditions to be met for services provided to foreign companies to be treated as Export of service?
Let us look at the answers to these questions.
What is the export of service as per the Bahrain VAT Law?
Services provided to a person or a company who is not a resident in Bahrain can be termed as export of service, provided certain conditions are met.
Such export of services is subject to VAT at zero rates. The zero rates allow the businesses to remain competitive as:
- The price of the services being provided is not impacted by the Bahrain VAT.
- The supplier of service can claim Input VAT on expenses and hence the cost of services provided is not impacted by Bahrain VAT.
What are the conditions to be met before applying zero rates to the export of service as per the Bahrain VAT Law?
All of the following conditions should be met for a service to be treated as export of service under the Bahrain VAT Law:
- The recipient of the service i.e., the customer should not be a resident in Bahrain.
The recipient of the service means the actual person who is receiving all the benefits of the service being provided. That is, even if the services are being provided to a contracting party, the residence of the ultimate beneficiary of the service should be outside Bahrain.
If the customer is having multiple places of residence, then that place of residence which is mostly connected to the service being provided is to be considered for the purpose of Bahrain VAT Law.
For example, XYZ W.L.L. provides project designing services to DEF L.L.C in Dubai. DEF L.L.C has various customers across the globe. DEF L.L.C outsources the design of a project in Bahrain and one project in Dubai to XYZ W.L.L.
In this case, the designing of the project in Bahrain cannot be treated as an export of service. Even though the contracting party (DEF L.L.C) is outside Bahrain the ultimate benefit of the service is received in Bahrain. It will not be able to treat these services as export of services.
However, in the case of designing the project in Dubai, the ultimate benefit of the service is being received in Dubai, and therefore, the place of residence of the customer will be treated as Dubai and zero rates can be applied.
The supplier should consider the actual nature and substance of the supply being provided while determining the actual recipient of the service and the place of residence of the recipient. The supplier of service should retain evidence of how the determination was made.
- The recipient of service should not be physically present in Bahrain when the services are being performed by the supplier. However, if such physical presence of the customer cannot be related to the provision of services at all, then he will be treated as not being present in Bahrain for the purpose of applying Bahrain VAT.
- The services being provided should not be related to any tangible goods or real estate which are located in Bahrain at the time the services are being performed.
This could mean where the services are related to tangible goods (repair, alteration or storage services, etc.) and services are connected to a real estate in Bahrain then these will be subject to the applicable VAT rate and will not be treated as export of services under the Bahrain VAT Law.
- The service must be received and consumed by the recipient of service outside Bahrain.
If all of the above conditions are met then the services will be treated as export of services and the taxable supplier can apply zero rates to the service and also, recover the eligible Input VAT being incurred for supplying the services.
The supplier should also, issue tax invoices to the customer which meet all the requirements of a tax invoice as per the Bahrain VAT Law. It is important to note that such a tax invoice should be issued by the 15th day of the month following the month in which the service was rendered to the customer.
Whether marketing activities provided by the retailers to suppliers outside Bahrain qualify as export of service under the Bahrain VAT Law?
In many instances, the local dealers acquire products from manufacturers outside Bahrain. These dealers also provide promotional activities for such products acquired.
Such promotional activities are primarily intended to attract prospective customers to enhance the sale of the product. These marketing activities create awareness and interest in the relevant products thereby increasing brand loyalty and sales.
The Bahraini dealer incurs all the expenses connected to conducting such marketing activities. And when the Bahraini dealer receives any kind of consideration from the manufacturers who are outside Bahrain then it will constitute a service being provided by the Bahraini dealer to the foreign manufacturer.
In this case, the manufacturer is not a resident in Bahrain, and neither he has a presence in Bahrain at the time the supply is being provided. However, the benefits of the promotional activities conducted are enjoyed in Bahrain (in the form of an increase in sales and an increase in brand loyalty among customers in Bahrain). Hence, the service will not qualify as export of service and hence zero rate cannot be applied on the same.
The dealer is obliged to issue a tax invoice to the manufacturer treating the services as standard rated supply and charge output VAT.
The tax invoice should be raised regardless of the mode of the consideration received (whether as cash or in the form of discount or as set off against payable amounts)
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