Following in the footsteps of Saudi Arabia and the United Arab Emirates (UAE), Bahrain will become, as of January 1, 2019, the third Gulf Cooperation Council (GCC) country to introduce value added tax. Businesses in Bahrain are now required to integrate VAT considerations into their business models and launch their implementation process as soon as possible to ensure a smooth transition. This represents a challenge for regional players considering they usually have little experience with taxation. Based on our experience in the UAE, we are of the opinion that particular attention must be paid to preparation requirements, differences between VAT legislations and the existence of legal uncertainties.
We have noticed that many businesses underestimate the impact of VAT implementation. In the UAE, many did not start the preparation works until the publication of the laws and regulations or even, in some cases, a few weeks before the introduction. Furthermore, many of them refrained from performing an in-depth VAT assessment of their activities and usually limited the VAT analysis to the understanding of registration and reporting obligations. Even if such an approach in the short term allows for completion of VAT-related obligations, the lack of understanding of VAT impacts might lead to unprecedented difficulties in terms of cash and service flows as well as potential disputes with tax authorities.
In a nutshell, we have identified the following major steps which need to be followed by each business:
• Carrying out a general assessment of activities in order to determine at least the VAT treatment of sales and purchase transactions, the potential application of a VAT exemption or zero rate provision and the input VAT deduction right;
• Evaluating the financial impact of VAT on activities as well as identifying potential VAT risk exposures;
• Undertaking specific measures such as amending contractual documentation, reviewing supply chains, rationalising supply and invoicing flows, adjusting engagement letters and the wording of invoices, etc;
• Enhancing accounting and IT systems to facilitate the capture of VAT information and to improve the compliance process.
Secondly, although the common GCC VAT agreement derived to a large extent from foreign legislation such as the European VAT directive, domestic implementation by member states sometimes differs significantly from the framework agreement.
Differences also exist among GCC states. Since there is no supranational court in the GCC, governments, tax administrations and courts might take divergent views when interpreting the VAT-related legislation. As a result, businesses involved in intra-GCC transactions should monitor their activities closely by taking into account such discrepancies.
Legal uncertainties are mainly related to the lack of guidance provided for the interpretation of existing legislation. Although tax administrations are doing their best to provide explanations, there are still many grey areas in the current VAT legislation.
Bruno Gasparotto, Sophie Weyten and Yijun Liu are, respectively, a principal, a counsel and an associate in tax law at Arendt
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