Vat Tax: Uae Sales To Bahrain Explained

The United Arab Emirates (UAE) and Bahrain are two of the six Gulf Cooperation Council (GCC) states that entered into a Value Added Tax (VAT) Treaty in 2016. The UAE introduced a 5% VAT rate on 1 January 2018, with some goods and services subject to a 0% rate or an exemption from VAT. The Kingdom of Bahrain followed suit on 1 January 2019, implementing a 5% VAT rate with similar exemptions.

When it comes to sales between the two countries, the UAE does not charge VAT on exports outside of VAT-implementing GCC member states. Imports into the UAE from Bahrain are subject to VAT, which is payable by the importer. However, there are special cases where VAT may not be payable, such as imports by a VAT-registered person using their TRN code.

Therefore, while the UAE generally does not charge VAT on sales to Bahrain, there may be specific scenarios where VAT is applicable, depending on the nature of the goods or services being exchanged and the registration status of the entities involved.

Imports and exports between the UAE and Bahrain

The United Arab Emirates (UAE) and Bahrain have a close relationship when it comes to imports and exports. The UAE is the largest exporting state among all the Gulf Cooperation Council (GCC) states, and Bahrain is the third-largest exporter within the GCC. Both countries have implemented Value Added Tax (VAT), which impacts their trade relationship.

UAE's Imports and Exports

The UAE is the 20th largest importer and the 29th largest export economy in the world. The country's top imports include gold, diamonds, jewellery, and cars. The UAE's major exports are electronics, precious metals and stones, crude petroleum, gold, refined petroleum, broadcasting equipment, and diamonds. The UAE's exports primarily go to India, China, Saudi Arabia, Japan, and Iraq.

Bahrain's Imports and Exports

Bahrain's economy is the 77th largest in the world in terms of total exports and the 98th largest in terms of total imports. The country's top imports include iron ore, aluminium oxide, cars, gold, and gas turbines, with China, the UAE, Brazil, Australia, and India being the main import partners. Bahrain's main exports are raw aluminium, refined petroleum, iron ore, aluminium wire, and aluminium plating, exported mostly to Saudi Arabia, the UAE, the United States, Japan, and India.

VAT Impact on Trade

The UAE and Bahrain have enacted VAT laws, which impact their trade relationship. Exports from the UAE to Bahrain may be subject to VAT, depending on the specific circumstances. While exports from the UAE are generally zero-rated (0% VAT), there are scenarios where VAT may apply, such as exports to another GCC VAT implementing state or exports to registered recipients in a GCC VAT implementing state. On the other hand, imports into the UAE are taxable under VAT at a rate of 5%, with certain exceptions like precious metals.

Trade Relationship

The UAE and Bahrain have significant economic relations as part of the GCC, enjoying free trade access through the Greater Arab Free Trade Area Agreement (GAFTA). Bahrain is one of the top destinations for UAE exports, and the UAE is one of the main sources of imports for Bahrain. The two countries have strong trade ties, with their shared membership in the GCC facilitating trade and contributing to the economic growth of both nations.

Reverse charge mechanism

The reverse charge mechanism is a concept in Value Added Tax (VAT) law where the liability to pay VAT shifts from the supplier to the recipient of the goods or services. This is also known as the forward charge mechanism. In the United Arab Emirates (UAE), the reverse charge mechanism is applied to imports of goods and services from outside the Gulf Cooperation Council (GCC) countries.

Under the reverse charge mechanism, the recipient of the goods or services is responsible for reporting and disclosing the VAT transaction in their VAT return for the same quarter. This eliminates the obligation for the overseas seller to register for VAT in the UAE. The recipient must report the Input VAT (VAT on purchases) and the Output VAT (VAT on sales). The recipient is also responsible for paying the VAT to the Federal Tax Authority (FTA).

The reverse charge mechanism is applicable to most services received from a foreign supplier. However, there is no requirement for payment of VAT for services subject to the reverse charge mechanism. The tax-registered customer is responsible for reporting and disclosing in their VAT return, and this liability is nullified by the VAT input recovery, resulting in a net payable of zero.

In the case of imports, the treatment differs depending on the country. There are generally two types of procedures: imports without VAT payment and imports with VAT payment. In the UAE, VAT-registered persons using their TRN code are not required to pay VAT at customs for clearing goods. Instead, the imported value and VAT liability will be pre-populated in their VAT return during the filing process, and they can claim this amount back (if the import is for business and not personal use).

In Bahrain, a third GCC country to implement VAT, the reverse charge mechanism is also applicable to taxable customers who buy goods or services in Bahrain from a non-resident supplier.

VAT registration

The UAE introduced a Value Added Tax (VAT) of 5% on 1 January 2018. This tax is levied on the consumption or use of goods and services and is payable by the purchaser. It is applied at each step of the supply chain.

Businesses must register for VAT in the following two cases:

• If the taxable supplies and imports of a UAE-based business exceed AED 375,000 per annum.
• If a non-UAE-based business makes taxable supplies in the UAE, regardless of its value, and there is no other person obligated to pay the due tax on these supplies in the UAE.

Businesses whose supplies and imports exceed AED 187,500 per annum may choose to register for VAT voluntarily.

The Federal Tax Authority (FTA) of the UAE administers the law. Businesses can register for VAT through the eServices section on the FTA website.

Mandatory Registration

A business must register if:

• The total value of its taxable supplies and imports exceeds the mandatory registration threshold over the previous 12 months.
• The business anticipates that the total value of its taxable supplies and imports will exceed the mandatory registration threshold in the next 30 days.

The mandatory registration threshold is AED 375,000.

Voluntary Registration

A business may apply to register if it does not meet the mandatory registration criteria and:

• The total value of its taxable supplies, imports, or taxable expenses in the previous 12 months exceeds the voluntary registration threshold.
• The business anticipates that the total value of its taxable supplies, imports, or taxable expenses will exceed the voluntary registration threshold in the next 30 days.

The voluntary registration threshold is AED 187,500.

Benefits of Registration

Only VAT-registered businesses will be allowed to:

• Charge VAT on the taxable supply of goods and services.
• Claim Input Tax Credit on VAT paid on their purchases, which will be deducted from VAT liability on sales.
• Make periodic filings of VAT returns.

The Kingdom of Bahrain implemented VAT on 1 January 2019. The standard rate is 5% tax levied on the total value of all taxable goods and services, unless they belong to a zero-rated or tax-exempt category.

A resident taxable person must register for VAT if they fulfil any of the following conditions:

• If the total value of the supplies they made in the Kingdom of Bahrain exceeds the mandatory threshold of BHD 37,500 in the twelve months before the end of any month in 2018.
• If the value of the supplies they made in the Kingdom of Bahrain is expected to exceed the mandatory threshold in the next 12 months.

A resident taxable person can register for VAT from 1 January 2019 if they fulfil either of the following conditions:

• If the value of supplies they made in the previous 12 months exceeds the voluntary threshold of BHD 18,750.
• If the value of the supply is expected to exceed the voluntary threshold in the next 12 months.

Exemptions and zero-rated supplies

In the United Arab Emirates (UAE), there are three categories of supplies that are not subject to Value-Added Tax (VAT): zero-rated, exempt, and standard-rated. Zero-rated and exempt supplies are the ones that are not subject to VAT.

Zero-Rated Supplies

Zero-rated supplies are taxable supplies charged at a 0% VAT rate, meaning no VAT is charged on these supplies. Suppliers of zero-rated supplies can still claim input tax deductions on the VAT paid for their business purchases related to the zero-rated supplies. This means that suppliers can recover the VAT they incur on their costs, reducing their tax burden.

The following are considered zero-rated supplies in the UAE:

• Exports of products and services to countries outside the Gulf Cooperation Council (GCC) countries.
• Healthcare services, including primary and preventive healthcare services and related supplies.
• Educational services, including goods and services provided for pre-schools, nurseries, primary schools, and higher education owned or funded by the federal or local government.
• Supply of natural gas.
• Precious metal investments, such as gold, silver, and platinum, that are 99% pure and in tradeable form.
• Residential buildings constructed within three years, whether through leasing or sale, in part or incomplete.
• Buildings constructed for charitable purposes, whether through rental or sale.
• Commercial buildings converted into residential properties, either through rental or sale.
• Transportation services for goods or people by land, air, or sea.
• Vessels and aircraft used for rescue operations by land or sea.

Exempt Supplies

Exempt supplies are non-taxable supplies with no VAT rate, meaning VAT is not charged. Unlike zero-rated supplies, suppliers of exempt supplies cannot claim input tax deductions on their business purchases related to the exempt supplies. This means that suppliers of exempt supplies cannot recover the VAT they incur on their costs.

The following are considered exempt supplies in the UAE:

• Local transportation within the UAE.
• Supply of bare lands.
• Residential buildings, except for the first supply of new residential properties, which is zero-rated.
• Financial services like insurance plans, life insurance reinsurance, and services not provided for an explicit fee, commission, rebate, or compensation.
• Tourists visiting the UAE or those with a tourist visa are exempt from paying VAT on their purchases. They are eligible to receive a VAT refund of up to 85% of the total VAT amount paid.

Differences Between Zero-Rated and Exempt Supplies

The main difference between zero-rated and exempt supplies lies in the impact on input tax recovery. Suppliers of zero-rated supplies can claim input tax deductions, whereas suppliers of exempt supplies cannot. This difference has implications for pricing, profitability, and tax revenue for the government.

Compliance and penalties

Compliance with VAT regulations in the UAE is crucial for businesses operating in the country. Non-compliance can result in substantial fines, penalties, and legal consequences. The Federal Tax Authority (FTA) is responsible for monitoring VAT compliance and imposing penalties in case of non-compliance.

Businesses must register for VAT within 30 days of crossing the mandatory registration limit, which is an annual taxable turnover of more than AED 375,000. Voluntary registration is allowed if the taxable supplies exceed AED 185,000 to AED 187,500. Late VAT registration can result in a penalty of AED 10,000, and disrupted operations, impacting the ability to conduct business smoothly with other VAT-registered entities.

VAT-registered businesses in the UAE must maintain proper books of accounts, including invoices, receipts, bank statements, and other documents supporting VAT calculations. Failure to keep the required records specified by tax procedures and tax laws can result in a penalty of AED 10,000 for the first offence and AED 50,000 for each repeat violation.

The FTA requires businesses to submit VAT returns and make VAT payments within a specified timeframe, usually within 28 days of the end of the tax period or tax quarter. Late VAT return filing can result in a penalty of AED 1,000 for the first offence and AED 2,000 for repeated non-compliance within 24 months.

Businesses must also pay the VAT amount mentioned in the tax return within the specified timeframe to avoid late payment penalties. The instant fine for late VAT payment is 2% of the unpaid tax, with an additional 4% due on the seventh day following the deadline. A 1% daily penalty is applicable from one month after the deadline, up to a maximum of 300% of the original tax amount.

Submitting incorrect tax returns is a serious violation, with a penalty of AED 3,000 for the first offence and AED 5,000 for repeated non-compliance within 24 months. This can also lead to a tax shortfall, where the business owes the difference, and potential interest charges.

To ensure compliance, businesses should maintain accurate records, follow bookkeeping practices, and utilise reliable expense management platforms. Complying with VAT regulations is essential for the financial health and smooth operation of businesses in the UAE.

Frequently asked questions