VAT will also come into effect in the Kingdom of Bahrain with effect from 1 January 2019, with an obligation for some businesses to register in December 2018.
Small businesses whose obligation to register for VAT in the Kingdom of Saudi Arabia (KSA) was deferred under transitional provisions will have to submit an application for registration by 20 December 2018. In addition transitional arrangements which meant that VAT did not have to be paid in respect of existing contracts come to an end on 31 December, meaning that contract prices may need to be renegotiated.
VAT was introduced in the KSA with effect from 1 January 2018.
Appreciating the challenge facing businesses in the region, the minister of finance Mohammed Al-Jadaan, together with the board of the General Authority on Zakat & Tax (GAZT), approved the inclusion of transitional provisions in the VAT Implementing Regulations in September 2017. Two of these transitional provisions may now require action by businesses.
Under KSA VAT rules, any person whose annual value of taxable supplies exceeds or is expected to exceed the mandatory registration threshold of SAR375,000 ($100,000) is required to register for VAT with GAZT within 30 days.
However, if the annual value of their supplies does not exceed SAR1 million ($267,000) the transitional rules provided relief from registration in advance of 1 January 2018. The rules defer the effective date of registration for these businesses to 1 January 2019, but the application for registration has to be submitted by 20 December 2018.
"To allow sufficient time to gather the necessary information and documentation for the registration application, together with the time it may take for GAZT to process your application, it is important that businesses affected by this transitional provision, who have not already voluntarily registered, start the process as soon as possible," Joanne Clarke said.
All information relating to VAT Registration requirements and process can be found on the GAZT website.
Any taxable person obliged to charge VAT at 5% on a taxable supply of goods or services in the KSA must calculate VAT on the agreed consideration either as VAT-inclusive or VAT-exclusive, depending on the VAT clause within the contract or stated terms and conditions.
Prices displayed to the general public must always be stated VAT-inclusive.
In a business-to-business transaction, prices are generally agreed VAT-exclusive. However, in the absence of any tax wording within the contract, the price is presumed by GAZT to be VAT-inclusive unless renegotiated. Clearly, it is to the detriment of the supplier if a previously agreed price becomes inclusive of VAT at 5%.
In order to relieve this real cost for suppliers in the initial year of the VAT regime in the KSA, and to provide businesses with additional time to identify and amend such contracts, the KSA transitional provisions allow the application of a zero-rate of VAT to transactions under contracts entered in to before 30 May 2017. This only applies if the customer is entitled to full input VAT deduction or refund and the customer provides the supplier with a written certification confirming its deduction or refund entitlement.
These 'grandfathering' provisions expire on the earliest of expiry or renewal of the contract and 31 December 2018.
"Any business which has been applying the zero-rate of VAT to transactions under a contract entered in to before 30 May 2017 needs to work out what it needs to do before 31 December 2018 in respect of contracts which have not expired or been renewed," said Clarke. "If they do not renegotiate the price, businesses will see their profit margins fall as they will have to account for VAT out of the contract price."
The above transitional provisions have assisted with easing the burden on taxpayers who, at this stage, are now expected to be more familiar with the VAT regime in the region and therefore, be in a better position to be compliant with the normal provisions under the regime.
In terms of the introduction of VAT in Bahrain, only certain businesses will have to register for VAT purposes by 20 December 2018. Resident businesses with annual supplies exceeding or expected to exceed BHD 5,000,000 (approx. USD 13.25m) will have to register by 20 December. In addition non-resident businesses making any level of supplies may need to register. Bahrain VAT law allows for registration directly by the non-resident business or through the appointment of a tax representative.
All other businesses will have phased registration deadlines in 2019, depending on their expected level of annual supplies.
Clarke said: "For all business with trading activities in or into Bahrain, regardless of their residency status or level of supplies in Bahrain, they should complete their VAT implementation change management projects on a timely basis, to ensure compliance with local laws and to mitigate the risk of penalties for non-compliance."