Services that are directly related to money, financing, debts, and other financial securities as well as fund management are considered as ‘Financial Services.’
Bahrain’s National Bureau for Revenue published first of its guide on ‘Financial Services’ (Financial Services VAT guide) in March 2019
This guide is relevant for institutions in the financial services sector such as banking (retail, corporate, investment, etc), re-insurers, funds, and fund managers that receive various nature of incomes in the form interest, margins, gains etc. while making supply of various types.
Furthermore, this guide will be of interest to any other business providing inter-company loans and similar activities for which it is remunerated by way of interest or implicit margin.
The applicable rate of VAT on Financial Services can be categorized as follows:
• Standard rated (5%): The income earned by way of fees, commissions, or commercial discounts are subjected to VAT at standard rate.
• Exempt: The income earned by way of an implicit margin or spread, including interest are exempt
• Zero-rated: When income is earned by rendering services to residents outside Bahrain.
The NBR has laid out a detailed list of (categories) of fees and services, by giving practical examples on how suppliers and recipients should treat the respective service from a VAT perspective.
The FS VAT Guide also focuses on key issues and has provided clear instruction as on few matters such as :
• When a financial service provider makes remittance either by way charging a fee or recovering an implicit margin, the fee component should be standard rated whereas the margin recovered should be be exempt.
• Under regulatory perspective, Businesses regulated and licensed as such by the Central Bank of Bahrain mustprovide Financial Services. But in consideration for VAT purposes, any services that falls within the definition set out in Article 81(b) of the Executive Regulation shall be treated as financial services.
This entails that any taxable person may render financial services and could potentially be subject to VAT at applicable rates as laid out in the VAT Laws and Regulations.
• Precious metals like gold, silver, and platinum may be subjected to VAT @ Zero- Rate provided, after extraction, the first supply of precious metal is fortrading purposes, or if the purity of the supply of investment (Gold, Silver, and platinum) is greater than 99%
• Life insurance and reinsurance products are specifically defined in the FS VAT Guide as follows:
o The FS VAT Guide defines Life insurance and re-insurance products as “a conventional or Takaful insurance contract or another form of Islamic insurance which results in the payment of a sum contingent on death or another significant event of human life.”
o That being said, any life insurance products considered as such by the Central Bank of Bahrain will also be treated as life insurance for VAT purposes.
o These products are exempt unless they comply with the conditions for a zero-rated export of services.
• VAT treatment for Islamic Finance products is similar toits conventional financial product counterpart. As the vendor of the Islamic Finance product usually receives a profit margin, this profit margin will be given the same treatment as the interest earned in the conventional financial product.
In theory, the National Bureau for Revenue expects a taxable person to issue a valid tax invoice for any supplies of goods or services including deemed supplies made by him/her in the Kingdom of Bahrain.
An exception to the rule set out above, the NBR allows VAT exempt financial services reimburse by way of interest or a margin, taxable persons may choose not to issue tax invoices provided that they are able, only at the request of the NBR, to collect electronically and provide details of their VAT exempt financial services income.
But in the case of Life insurance products tax invoices should be provided in those instances.
• The FS VAT guide specifies the requirements and conditions for an often complex process. For instance, Input tax cannot be recovered on expenses incurred in making exempt supplies.
Businesses such as banks engaged in partly taxable and partly exempt activities must allocate their input tax in order to recover only the amount to which they are entitled.
It is important that the FS VAT guide be referred before taking any VAT position on various type of incomes and determining recoverability on various types of input expenditures
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