On 1 January 2022, the standard rate of VAT in Bahrain was increased from five percent to ten percent, making Bahrain the second GCC country to lift the VAT rate from the initially agreed five percent rate as per the GCC VAT framework agreement. In line with common practice, pre-existing contractual arrangements will remain unaffected by the VAT rate increase for a one-year period, subject to certain conditions.
The VAT rate increase is estimated to result in an increase in government revenue amounting to 1.5% - 2% of GDP, a much-needed boost considering that the public debt to GDP currently sits at a rather high 125%, with a sharp recent increase following the substantial government expenditures in 2020 onwards that were aimed at mitigating the economically painful impact of the coronavirus-related restrictions.
Furthermore, the increased emphasis on tax revenues is part of a broader plan to diversify the government’s revenues away from the volatile oil sector, whose contribution to the government’s total revenue is around 70%. Due to this over-reliance on oil revenues, government indebtedness witnessed a sharp and continuous increase from 2015 onwards, which is when global oil prices endured a sustained slump. (Interesting side note: In one of the most bizarre events in the history of financial markets, on April 2020, the May 2020 WTI crude oil futures traded at a price of negative $37.63, effectively requiring sellers of the contract to pay to have oil taken off their hands, a result of short-term supply far outstripping demand and the exhaustion of storage capacity).
Being a consumption-based tax, VAT revenues are much more stable than oil revenues or other major taxes, such as the corporate income tax, which by its nature is likely to fluctuate with the business cycle. Nonetheless, the attractiveness of the corporate income tax stems from its considerably lesser administrative burden compared to VAT. Furthermore, it is seen as falling more heavily on business owners, at least at a superficial level, making it more agreeable for the general population.
In Q4 2021, the OECD’s announcement of the two-pillar solution to address tax challenges arising from digitalization and a global race to the bottom in corporate tax rates was seen as potentially anticipating the introduction of corporate income taxes in tax haven countries such as Bahrain and the UAE. In January 2022, the UAE government announced the introduction of a corporate tax regime for financial years starting on or after 1 June 2023. Although Bahrain has yet to make a similar announcement, the introduction of corporate income taxation as an additional measure towards long term sustainability of the public finances is more than a possibility.
By: Abdulrahman Bucheery, Head of Tax, CrediMax, Bahrain
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