COVID-19 has wrought havoc around the globe. In March 2020, the Central Bank of Bahrain (CBB) issued a number of directives to specific stakeholders as part of a broader stimulus package to try to soften the impact of the virus on Bahrain’s economy. The directives instructed all CBB licensees, including conventional and Islamic retail and wholesale banks, finance companies, microfinance companies and ancillary services providers registered in Bahrain to defer the collection of instalment payments on certain loans and credit cards from March 2020 to August 2020 (this quickly became known as the holiday period).
On 25 August 2020, Bahrain’s tax authority, the National Bureau for Revenue (NBR) issued a public clarification which stated that directives issued by the CBB served as a unilateral amendment of the payment due dates in the underlying terms and conditions of relevant loans and that the time of supply for VAT purposes should follow the new payment due dates unless a tax invoice was issued or payment received prior to these dates.
The head of tax at one of Bahrain’s leading conventional banks commented that the public clarification provides “vital guidance and financial relief to the banking industry during these turbulent times”. He added: “Although the views expressed [in the public clarification] are only legally binding on the NBR, taxpayers may rely and use these as guidance when applying the provisions of the VAT law and regulations”.
The public clarification also states that the time of supply for interest- (or profit-) bearing loans follows the rules for continuous supplies and arises at the earlier of the date on which:
1. Interest (or profit) is due and payable by the borrower
2. A tax invoice is issued in respect of the supply
3. The borrower pays the consideration (interest or profit)
According to the head of tax, the [unofficial English version of the] VAT law reads slightly differently with the time of supply for so-called continuous supplies arising at the earlier of:
1. The date on which a tax invoice is issued
2. The due date of payment of the amount specified in the tax invoice
3. The date on which payment is received.
While the head of tax agrees with the NBR’s interpretation that the time of supply should be triggered by the payment due date, he suggests that “the current wording of the law should be amended to eliminate this incongruity”.
Where none of the above time of supply events occur within 12 months of the date on which the supply began, a VAT due date is triggered automatically. If the 12-month period ends during a holiday, the public clarification states that the VAT due date falls on the day after the holiday period ends - 1 September 2020.
According to the public clarification, deferred interest or profit relating to these loans should be excluded when calculating the input tax apportionment ratio (except where the time of supply is triggered after the holiday and within the relevant tax period). This is a welcome clarification for retail banks as it increases input tax apportionment ratios, boosting their input tax recovery and reducing overall VAT costs.
However, since loans granted to non-residents are excluded, wholesale banks will not benefit unless their customers are based in Bahrain.
As most financial institutions have sophisticated information technology systems (also known as VAT engines) that automate the processing of transactions for VAT purposes, there may be a need to identify (perhaps manually) impacted general ledgers, customer accounts and amounts to make the necessary adjustments before banks file and submit their VAT returns.
Financial institutions may have overstated exempt supplies relating to relevant loans during the tax periods preceding the NBR’s public clarification, resulting in input tax being underclaimed. All financial institutions should therefore review the time of supply rules applied during the holiday period and, where required, amend previous VAT returns.
Additional input tax claims will lead to VAT refunds which are likely to be carried forward to the following tax period. If the tax consequence of an amendment to a previous tax period is less than BHD5,000 (the equivalent of approximately US$13,620), taxpayers are not required to amend their previous return as the current VAT return can be amended (that is, the July 2020 VAT return can be amended in the August 2020 return). However, if the amendment is more than BHD5,000 or does not relate to the immediately previous tax period, a voluntary disclosure is required. This can be done online through the NBR portal. Voluntary disclosures should include, among other things, a brief reason for amending VAT amounts. The NBR will automatically calculate a late filing penalty. VAT returns being audited by the NBR cannot be amended.
The head of tax points out that, in his experience, “the NBR has not been imposing penalties for amending VAT returns as a result of the public clarification, possibly because the amendments result in VAT refunds”.
One of the CBB directives extends the holiday period for loans to non-qualifying borrowers, mainly expatriates and borrowers who initially declined the deferral option in March, at financial institutions’ discretion. The time of supply for non-qualifying borrowers should, in theory, follow the guidelines set out in the public clarification. However, any fee components that would otherwise have been charged to borrowers in the case of a normal loan deferral arrangement may be viewed as a deemed supply.
On 14 September, the Cabinet in its weekly session directed the CBB to defer all bank loan repayments faced by Bahrainis affected by the COVID-19 crisis until end of the year without it affecting their liquidity or financial status.
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