Query:
A retail conventional bank in Bahrain is seeking ABC Consultants to review its VAT
compliance for the year 2024. Bank deals in conventional retail loan products- loans and
deposits and it also has international branch in Dubai. Advise in detail?
Answer:
Based on the query and the provided knowledge base, I will provide a detailed advisory on
VAT compliance for the retail conventional bank in Bahrain with an international branch in
Dubai. I’ll structure the response according to the guidelines, focusing on relevant Bahraini
VAT regulations and cross-border implications.
VAT Compliance Review for Retail Conventional Bank in Bahrain
1. Introduction
This advisory addresses the VAT compliance requirements for a retail conventional bank in
Bahrain with an international branch in Dubai for the year 2024. The analysis covers the
applicable VAT regulations in Bahrain, focusing on financial services and cross-border
transactions.
2. Relevant Standard/Law References
a. VAT Implementation in Bahrain Bahrain introduced VAT on January 1, 2019, with an
initial standard rate of 5%. This rate was revised to 10% effective from January 1, 2022.
The VAT system in Bahrain is governed by the VAT General Guide issued by the National
Bureau for Revenue (NBR) Bahrain VAT General Guide, page 12.
b. Scope of VAT VAT applies to consumer spending and is collected on supplies of goods
and services as well as imports into Bahrain. Generally, VAT applies at the standard 10%
rate if a supply of goods and services is made by a VATable person in Bahrain, unless
specifically exempted or zero-rated Bahrain VAT General Guide, page 12.
c. Financial Services and VAT The treatment of financial services under Bahrain’s VAT
system is outlined in specific guidelines. Some financial services may be exempt or subject
to special rules Bahrain VAT Guide Financial Services, page 2.
d. Cross-Border Transactions For the international branch in Dubai, it’s important to note
that Bahrain currently does not recognize any other GCC member states as Implementing
States for VAT purposes. Therefore, transactions with the Dubai branch are treated as
transactions involving a non-Implementing State Bahrain VAT General Guide, page 10.
3. Detailed Explanations
a. VAT Registration and Compliance The bank must ensure it is properly registered for VAT
if its annual supplies exceed the mandatory registration threshold. As of 2024, the
threshold is BHD 37,500 for mandatory registration Bahrain VAT Registration Guide, page
9.
b. VAT Treatment of Banking Services i. Retail Loan Products: The VAT treatment of loans
depends on whether they are provided with or without an explicit fee. Interest on loans is
generally exempt from VAT, but any explicit fees charged are likely subject to VAT at the
standard rate of 10% Bahrain VAT Guide Financial Services, page 2.
ii. Deposit Products: Interest paid on deposits is not subject to VAT. However, any fees
charged for account maintenance or specific services related to deposit accounts may be
subject to VAT at 10% Bahrain VAT Guide Financial Services, page 2.
c. Cross-Border Transactions with Dubai Branch Transactions between the Bahrain
headquarters and the Dubai branch are treated as cross-border transactions with a
non-Implementing State. This means:
º Services provided by the Bahrain headquarters to the Dubai branch may be
considered as exports and potentially zero-rated for VAT purposes.
º Services received from the Dubai branch may be subject to the reverse charge
mechanism in Bahrain Bahrain VAT Guide Import and Export, page 2.
d. Input VAT Recovery The bank should carefully track its input VAT on expenses. VAT
incurred on expenses used for making taxable supplies (including zero-rated supplies) can
be reclaimed, while VAT on expenses related to exempt supplies cannot be reclaimed
Bahrain VAT General Guide, page 12.
e. VAT Reporting and Filing The bank must file regular VAT returns with the NBR. The
frequency of filing depends on the annual value of supplies. For large businesses, this is
typically monthly Bahrain VAT General Guide, page 132.
f. Documentation and Record Keeping Proper documentation is crucial for VAT compliance.
The bank must maintain detailed records of all transactions, including those with the Dubai
branch, to support VAT treatments applied Bahrain VAT General Guide, page 127.
Alternative strategy
1. VAT Planning for Financial Products
º Bundling exempt and taxable services may help in reducing overall VAT liability.
º Reviewing fee structures on loan and deposit products to clearly distinguish
between interest (exempt) and fee-based (taxable) income.
Pros:
º Potential reduction in overall VAT liability
º Clearer VAT treatment for different revenue streams
Cons:
º May require significant changes to product offerings and systems
º Could impact customer-facing pricing and competitiveness
2. Cross-Border VAT Optimization
º Consider establishing a VAT group if other group entities exist in Bahrain to simplify
intra-group transactions.
º Review transfer pricing arrangements to ensure they align with VAT requirements.
Pros:
º Potential VAT savings on cross-border transactions
º Simplified compliance for intra-group transactions
Cons:
º May require restructuring of inter-branch operations
º Could have implications for corporate tax in UAE (if applicable)
3. Enhanced Technology for VAT Compliance
º Automate VAT calculations and reporting
º Improve accuracy in distinguishing between exempt, zero-rated, and standard-rated
transactions
Pros:
º Reduced risk of compliance errors
º Improved efficiency in VAT management and reporting
Cons:
º Initial investment in technology and training required
º May necessitate changes to existing processes and systems
Implementation Framework:
1. Conduct a detailed VAT impact assessment on all products and services.
2. Develop a VAT optimization strategy based on the assessment.
3. Implement necessary changes to systems, processes, and documentation.
4. Provide comprehensive training to staff on new VAT procedures.
5. Establish a regular VAT review process to ensure ongoing compliance and
optimization.
4. Used Cases/Interpretations & Disclosures by the listed entities
National Bank of Bahrain B.S.C. – 2024: The bank’s financial statements for 2024 indicate
compliance with VAT regulations. They note: “The consolidated financial statements have
been prepared in accordance with the International Financial Reporting Standards (IFRS),
the requirements of the Commercial Companies Law and the Central Bank of Bahrain and
Financial Institutions Law 2006.” This suggests adherence to local tax laws, including VAT
NBB-Financial-Statements-2024-English, page 13.
Bank ABC – 2024: Bank ABC’s financial statements provide insights into their approach to
taxation, including VAT. They state: “There is no tax on corporate income of the Bank in the
Kingdom of Bahrain up to year 2024.” However, they also mention: “Taxation on foreign
operations is provided for in accordance with the fiscal regulations applicable in each
location.” This approach would be relevant for the bank’s Dubai branch operations Bank
ABC FinancilStatement-2024-Eng, page 34.
5. Summary
To ensure VAT compliance for 2024, the retail conventional bank in Bahrain should:
1. Confirm its VAT registration status and ensure timely filing of returns.
2. Apply the correct VAT treatment to its financial products:
º Exempt treatment for interest on loans and deposits
º Standard rate (10%) VAT on explicit fees and charges
3. Carefully manage cross-border transactions with the Dubai branch, treating them as
transactions with a non-Implementing State.
4. Implement robust systems for tracking input VAT and ensuring proper recovery.
5. Maintain comprehensive documentation for all transactions and VAT treatments
applied.
6. Consider the suggested alternative strategies for VAT optimization, particularly in
product structuring and cross-border transactions.
7. Stay informed about any changes in VAT regulations, particularly regarding GCC-wide
implementation.
By following these guidelines and maintaining diligent compliance practices, the bank can
effectively manage its VAT obligations while optimizing its tax position within the legal
framework.
6. Attribution
The information provided in this response is based on the VAT Law and associated
regulations as issued by the National Bureau for Revenue (NBR) in Bahrain. The specific
rules referenced are from the Bahrain VAT General Guide, VAT Guide Financial Services,
and VAT Guide Import and Export. For complete and authoritative guidance, please refer to
the full VAT legislation and guides available through the NBR’s official website
(www.nbr.gov.bh).
Bank VAT Review engagement
