Bahrain VAT: Fines and Other Penalties

Failure to comply with the Laws and Regulations of VAT can result in significant fines and penalties. Moreover, in cases where Tax Evasion can be proven, a Taxable Person can find himself facing imprisonment for up to five years.

This article aims to explain the fines and penalties that can be imposed on Taxable Persons in Bahrain and situations where Tax Evasion can be charged.

Penalties

The VAT Law and Regulations set out the overriding position of the National Bureau for Revenue (NBR) regarding penalties. The NBR is the authority that is authorized to impose administrative fines and file criminal proceedings for Tax Evasion according to Article 113 of the Regulations. The fines and penalties are spelled out in Article 60 of the VAT Law and are summarized in the table below.

Tax Evasion

A special category within the area of penalties, fines and other legal actions are the consequences in the Legislation for Tax Evasion. Tax Evasion can be defined as the “Unlawful attempt to minimize tax liability through fraudulent techniques to circumvent or frustrate tax laws, such as deliberate understatement of taxable revenue or willful non-payment of due taxes”. The consequences of committing such an action are severe as described below:

Penalties and Punishment for Legal Persons      

A legal person is subject to double the maximum fine applicable to a natural person if a tax evasion crime is committed in his name, on his behalf, or for his benefit.

Repetition of Offence

The penalty shall be doubled if the offence is repeated within three years from the date of final conviction of the first offence.

 

I hope this article helped explain the severity of the fines and penalties that can be faced as a result of inappropriate applications of the VAT Law and Regulations. In case you have any inquiries, please feel to contact us at Capital Profits Accounting Services on our landline (+973 17281717) or drop us an email on info@cpaccounts.com.

 

Bahrain VAT: Who Should Register?

It is common knowledge by now that the deadline for VAT registration is 20-Dec-2019 for Resident Taxable Persons who have Taxable Supplies of more than 37,500 BD. But what does that really mean? What are “Taxable Supplies”? And who are “Resident Taxable Persons”? What if your business does not generate revenue of more than 37,500 BD right now but is expected to do so in the future? What if you have multiple businesses under your name, do you have to register them all even if not all of them generate more than 37,500 BD in revenue? The list of questions can go on and on…

In this article, we will try to shed some light on the VAT registration criteria and hopefully answer some of these concerns.

First of all, we will need to explain what Taxable Supplies are since we will be using this term quite a lot in our discussion. As you might know, there are three categories of products/services under the VAT law, Standard Rate Products, Zero Rate Products, and Exempt Products. The table below explains the difference between the three.

Taxable Supplies is the sum of all Zero Rated and Standard Rated products/services sold by a Taxable Person. So, if you are a Taxable Person selling products/services that are Standard Rated and/or Zero Rated worth more than 37,500 BD, you will have to register.

Which brings us to our next question, who/what is a Taxable Person?

A Taxable Person is anyone performing an economic activity independently for the purpose of generating income and exceeding the mandatory VAT registration threshold. For this purpose, a taxable person may be

  • Individuals (Natural or Legal Persons)
  • Companies (Private & Public Limited)
  • Businesses (Small, Medium, and Large)
  • Partnerships & Associations
  • Government (Ministries & Departments)
  • NGOs & Clubs

Now that we got the basics out of the way, we can approach the real question, who should register for VAT?

The National Bureau of Revenue (NBR) has set forth extensive criteria according to which a Resident Taxable Person would be required to register for VAT and other criteria according to which VAT registration would be voluntary.

First of all, let us discuss when it would be mandatory for a Resident Taxable Person to register for VAT. In order to assess that, we will need to conduct two tests, the Historical Test, and the Future Test.

  • Compulsory Registration by Historical Test

If at the end of a month, the resident person’s taxable supplies (excluding supplies of capital assets) over the previous 12 months exceeded 37,500 BD, that person would be required to register for VAT within 30 days from the end of the month when the limit was exceeded. So, for example, if a person assessed his sales of taxable supplies over the past 12 months on 30-Mar-2020 and discovered that they have exceeded the 37,500 BD limit, he would be required to register for VAT by 30-Apr-2020 at the latest.

  • Compulsory Registration by Future Test

In case the taxable supplies were less than 37,500 BD over the past 12 months, the taxable person still needs to perform the Future Test. The Future Test looks at the total value of taxable supplies at the end of the month, plus the following 11 months to determine whether the level of taxable supplies exceeds the mandatory registration limit by the end of this future period. If the threshold (37,500 BD) will be exceeded, the person will have to apply for registration within 30 days prior to the month during which the value of his annual supplies in Bahrain is expected to exceed the mandatory threshold. For example, on 30-Mar-2020, a business owner forecasted his sales over the next 11 months and discovered that by November 2020, his sales, including sales made in March 2020, would probably exceed 37,500 BD. In this case, the business owner would be required to register his business by October 2020.

  • Voluntary VAT Registration

For voluntary registration, existing traders can register even if their taxable supplies fall below the mandatory registration limits but it is not less than 18,750 BD in any 12 month period. However, in this case, either taxable supplies or taxable expenses can be taken into account.

 

To summarize, there are two types of registration, Mandatory and Voluntary. In both cases, a taxable person would need to perform two tests, a Historical Test and a Future Test, to determine whether or not he needs to register.

In case a taxable person has multiple businesses, some passing the Mandatory Registration criteria and others not, it might be feasible to go for a Group Registration. In this case, the taxable person would need to assess the amount of inter-company transactions to determine whether this could be a viable option. This exercise can be a bit more demanding and would require support from experienced accountants.

I hope this article helped alleviate some of the concerns with regards to registration. In case you have any inquiries, please feel free to contact us at Capital Profits Accounting Services on our landline (+973 17281717) or drop us an email on info@cpaccounts.com.

 

Inventory Valuation Methods Impact on VAT

VAT

VAT

 

Would changing the inventory valuation method from First In First Out (FIFO) to Weighted Average (WA) or vice versa reduce my VAT payments?

VAT is computed on the amount paid to purchase or sell an item. So, in case a retailer purchases stock for 1,000 BD from a distributor, the VAT amount would be 50 BD on top of the 1,000 BD that is to be paid for the stock.

Subsequently, when the retailer sells the stock for 2,000 BD, he would have to collect 100 BD on top of the 2,000 BD as output tax. The retailer would then deduct the 50 BD paid to the distributor from the 100 BD collected from the customer and give the difference (50 BD) to the government.

Inventory valuation on the other hand has to do with calculating the value of stock that a company has on hand in order to identify the value of the assets in stock and accordingly the Cost of Goods Sold when a sale is done.

To clarify this, let’s take an example of an item that a reseller purchases at one time for 10 BD and another time for 9 BD and then sells the items for 20 BD.

 

Weighted Average Method

If the reseller buys 100 items for 1,000 BD at 10 BD a piece and then another 100 of the same item for a discounted price of 9 BD a piece for a total of 900 BD, the value of each stock item would be (1000 + 900)/200 = 9.5 BD if the reseller was following the Weighted Average inventory valuation method. Therefore, for each sale of this item, the reseller would have to record COGS of 9.5 BD.

The reseller would have paid 5% on each purchase, hence, he would have paid 50 BD on the first purchase and 45 BD on the second purchase totalling 95 BD.

The reseller would then sell each of the 200 items for 20 BD and collected 5% VAT on each sale totalling 200 BD for all the items (200 x 20 BD x 0.05 = 200 BD).

Finally, the reseller would deduct the 95 BD VAT that he paid to his distributor from the 200 BD VAT that he received from his customers and pay the difference (200 – 95 = 105 BD) to the government.

 

First In – First Out (FIFO) Method

If the same reseller is following the FIFO inventory valuation method, the reseller would have to track the sales of the items to make sure that for the first 100 items sold, a COGS of 10 BD is recorded, and then the next 100 items a COGS of 9 BD is recorded. However, the reseller would still have paid 50 BD VAT for his first purchase and 45 BD VAT for his second purchase. Moreover, the reseller would still have collected 5% VAT for each of the items sold. Assuming that the selling price was maintained at 20 BD per item, the total VAT that he would have collected for all 200 items would still be 200 BD.

Again, the reseller would have to deduct the 95 BD that he paid on his purchases from the 200 BD that he collected from his customers and pay the difference (105 BD) to the government.

As we can see from the preceding example, the inventory valuation method has nothing to do with the amount of VAT that is going to be paid. Inventory valuation methods are concerned with the value of stock and COGS while VAT impacts the selling/purchasing price of the goods.

 

How Outsourced Accounting Works

Accounting Services

Accounting Services

 

Companies have the option to prioritize their core business activities by outsourcing support functions such as accounting.

 

Accounting activities include bookkeeping, inventory costing and related internal controls, financial statements preparation, fixed asset controls, assessment of taxes and preparation of guides for payment of taxes, assistance in the processes of importing products, and bookkeeping of fiscal books.

The corporate area also works in parallel with accounting in a way that comprises of opening, altering, and shutting down the services of a branch or subsidiary which can all impact the financial position of the company.

Outsourced accounting firms also perform the classification of all the documents of the company, issue reports such as balance sheets, cash flow statements, and income statements. They can provide insight on Human Resources and Payroll, making monthly payroll calculations, give advice on admissions and layoffs, calculate charges, contributions, and taxes, and follow up on conventions and collective agreements of work and obligations that may arise.

Finally, we also offer outsourced accounting support in the fiscal and financial areas. We perform bookkeeping of incoming and outgoing invoices with tax calculation, manage cash flows, record payments and receipts, as well as reconciliation of financial statements.

There are many the benefits to outsourcing accounting activities. It has become somewhat of a standard practice to outsource non-core activities due to the numerous tangible and non-tangible benefits. Financial audits run smoother with an experienced accountant on your team since he understands what auditors are looking for. Synergies can be created thanks to advice that can be given on taxes, human resources, corporate finance and other areas of your business. All in all, approaching specialized professionals to take care of the accounting needs of your company will ensure management’s total dedication to growing the business and increasing profitability.

 

5 Reasons to Outsource Accounting Services for Your Company

When you start your own business, it may seem that you have everything under control, as being a new or small company, both the registration, as the management of finance and accounting are easy to carry out. However, as time goes by and our company becomes bigger, the burden of managing your accounts also grows and it is common that, before you know it, you find yourself buried under the weight of your own finances. It suddenly becomes more difficult to track banking transactions, handle receipts and make payments.

At this point, the question we need to ask ourselves is: “Is it time to leave my accounting to third parties?” Before we can answer, here are 5 good reasons why hiring third parties could be extremely beneficial.

Reason #1: Time is Money

When you are at the head of a business, time is money. Deciding to hire a third-party service to maintain your accounts can save hours of trying to do it by yourself without making any mistakes, from the management of credit cards, to talking with banks, to the collection of invoices.

 

 

Sometimes there is not even time to supervise an accountant within your company, so doing it on your own may seem impossible. Putting your accounts in the hands of an accounting firm will be profitable and will allow you to concentrate your energy on the development of your business.

One of the main functions of a business owner is to work to generate more income for the company. How can you do it if you’re stuck in the accounting department? By contracting outsourcing services, your time can be spent searching for new potential clients and improving the areas that will make your company a successful business.

An experienced professional is always better

 

Reason #2: Timely, Reliable Service

Unless you have first-hand experience with accounting, it is probably best to have a professional who is dedicated only to keep a good record of our finances and, most importantly, to do so with all the required experience.

Let’s stop wasting time trying to find out how the world of accounting works and better let us be guided by experienced professionals, which will be reflected in a better quality of work.

People who work in accounting firms know how to handle payroll, develop financial statements, and manage audits. Therefore, by hiring someone you trust, you will ensure that they provide you with a timely and reliable service that matches your needs and timelines.

Reason #3: Reduce Expenses

Especially for small and new companies, expenses can be a real problem. Leaving the management of accounting to a professional organization that is only dedicated to that will help you save money. At first glance it would seem cheaper to hire an accountant to keep track of finances, but when considering the total costs of training, benefits, visa, and social insurance, it becomes cheaper and less complicated to go to a third party.

One of the main benefits is the freedom to pay for the specific services you need, which translates into lower costs and more productivity, compared to a full-time employee.

Reason #4: Flexibility

A good accounting firm will provide efficient cost perspectives and lists full of options to choose from to help you increase profits. In addition, they can advise you professionally on how to expand your business or find aspects in which you can reduce costs. In other words, outsourcing gives you all the necessary flexibility to grow your business. Outsourcing will allow you to have the best services without the additional expense of constant training.

 

 

Reason #5: Minimize Fraud and Errors

Perhaps the biggest advantage is that by having a team of experts working on your accounts, the risk of fraud or errors is significantly reduced and, when this happens, the probability that the responsibility falls on your own company is almost null.

In the long term, having a person to manage your finances is not effective, because even the best accountant can be wrong, which translates into loss of time and money. But when outsourcing to accounting experts, you are ensuring that there is a team of competitive specialists with different tasks that will manage the accounts of your business in the best possible way.

Exempt vs. Zero Rated (VAT)

Bahrain’s VAT Law