Reimbursements and Disbursements of Expenses under the Bahrain VAT Law and we will also understand the terminologies that Reimbursements and Disbursements are and the tax implication of reimbursement and disbursement expenses under the Bahrain VAT law.

In everyday business, a person may incur expenses and subsequently recover such expenses from another party. The VAT treatment of the subsequent recovery of expenses depends on whether the recovered amount is in the nature of reimbursement” or “disbursement” under the Bahrain VAT Law 

What is Disbursement?

Disbursement refers to a transaction where a person makes payment on behalf of the other and later recovers such amount paid from others.

For Example:  When a person “X” makes a payment to a third party “Y” in the name and on behalf of another person “Z” and later recovers such amount from “Z”.

A payment recovery made by one person from the other generally not supplies and does not come under the scope of VAT in Bahrain. Therefore, a transaction in the nature of disbursement is out of the scope of Bahrain VAT Law.

When can we treat a payment as Disbursement?

An amount paid by a person “X” to a person “Y’ for the expenses incurred on behalf of “Z” which is later recovered from “Z” can be treated as disbursements only if all of the following conditions are met.

  1. “X” should have contacted with “Y” in the name of “Z”
  2. “Z” should be the “bill to” person on the invoice issued by the “Y”
  3. “Z” should be legally liable to make payment to “Y”
  4. “Z” should be the recipient of goods or service supplied by “Y”
  5. “X” should have recorded the transaction as a receivable from “Z” in his balance sheet which is credited when the refund is received instead of recording the payment to the supplier as an expense and the refund from the customer as income in his profit and loss account.

Let us understand the Reimbursement and Disbursements situation by illustrations:

Illustration 1:

ABC establishments W.L.L., DEF establishment W.L.L. and XYZ establishment W.L.L.  are companies under the group namely Alphabets group. The head office of the Alphabets group located in Manama, Bahrain applies for a group insurance policy for all the employees of the group and the premium is paid by ABC establishment W.L.L., while the insurance company issues invoices separately to each company in the group. ABC establishment W.L.L. recovers the amount paid to the insurance company from other companies in the group.

In this case, the expense recovered by ABC establishments W.L.L. will amount to disbursement, and will not subject to Bahrain VAT. Moreover, the transaction took place between each of the group companies and the insurance company and not between ABC establishment W.L.L. and other group companies and also the amount is invoiced to the companies in the group separately and therefore, the individual companies are legally obliged to make the payment to the insurance company. Therefore, all companies can recover the VAT amount paid through its Bahrain VAT return, subject to the normal input tax recovery rules.

Illustration 2:

123 trading co. W.L.L. a resident in Bahrain has approached Any Bee Cee clearing agents for clearing goods imported from China.  In the course of providing the service, the clearing agent paid the port fee, customs duty and VAT amount on behalf of the company 123 tradings W.L.L. Invoices for the said charges were received in the name of company 123 trading W.L.L. itself. The clearing agent issued a single invoice to company 123 trading W.L.L. for each charge paid by him on behalf of the company. In addition to that, the service charges for the clearing agent is also collected on the same invoice.

Here the expense recovered by the clearing agent from the company except its service charges is considered as disbursement because he has not made any supply attributable to that amount. The clearing agent has made the payment for the expenses as an agent to the company.  The transaction took place between the 123 Trading and the provider for the said service and not between the 123 Trading and the clearing agent. Since the amount recovered by the clearing agent is only a disbursement and not a consideration for any supply, it will not be taxable. However, the amount received by the clearing agent for his service charges from 123 tradings W.L.L. is subject to VAT.

What is reimbursement?

Reimbursement is a different concept compared to disbursement. Generally, the word reimbursement means, “to make repayment to for expenses or loss incurred”

As per the guideline issued by the National Bureau of Revenue (NBR) , in case of reimbursement, a taxable person procures a good or service for its customer and acts as a principal in the procurement chain. The taxable person will procure the goods or services from a third party, be invoiced by that third party in his name and will recharge the costs (with a mark-up or not) to its customer, invoicing separately to them.

Payment can be treated as reimbursement if;

  1. The taxable person “A” have received the goods or services from the supplier “B”
  2. The supplier “B” should have issued the invoice in the name of the taxable person “A” and he is under the legal obligation to make payment for it
  3. In the case of goods, the taxable person “A” should own the goods prior to making the supply to another person

Let us Understand reimbursement through an illustration:

ABC Supermarket displays the advertising flyer for a product of DEF Electronics inside the premises of its supermarket and reimburses the expenses incurred on such display from DEF Electronics. ABC Supermarket incurred the expenses for the flyer on its own name and later reimburses the expenses from DEF Electronics as per the contract.

The recovery of the expenses incurred by ABC Supermarket from DEF Electronics is reimbursement of expenses as the expenses are incurred on the name of ABC Supermarket and therefore taxable as per the provisions of Bahrain VAT law.

The examples stated above should be used as measures to examine whether recovery of expense amounts to disbursement or reimbursement. The company should, however, consider all the facts and circumstances of the transaction holistically to come at a decision.

Hope this article gave you an idea about Reimbursement and Disbursements of Expenses Taxable under the Bahrain VAT Law.

Our Tax Experts in Emirates Chartered Accountants Group  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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