Financial service institutions in Bahrain must evaluate the implications of Value-Added Tax (VAT)

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Attendees during KPMG VAT event for FS sector
Attendees during KPMG VAT event for FS sector

Banks and other financial service providers in Bahrain will need to think carefully about their procurement processes, operating models and systems to prepare for the upcoming introduction of Value-Added Tax (VAT) according to KPMG’s global head of indirect tax for the financial services sector, Gert-Jan van Norden. Van Norden was in the country to address senior professional at a seminar organized by KPMG in Bahrain to provide insight into how the introduction of VAT will affect the financial services sector. The seminar was held at the Crown Plaza hotel, and it brought together banking CFOs to discuss industry trends and topics.  

In late October 2016, most GCC countries signed a framework agreement to introduce VAT at a rate of 5%. Individual member states will now draft domestic legislation in the coming months, with implementation scheduled to start on 1 January 2018. Countries, which may not be ready by the scheduled launch date, may be granted an extension to 1 January 2019 at the latest.

Whilst the draft framework and legislation has not yet been published, Bahrain’s legislation is likely to mirror global best practice. With this in mind, it is probable that the country’s financial services providers will feel the impact of VAT more than other sectors – as elsewhere in the world, financial services providers are exempt from charging customers VAT on margin related activities (such as interest on loans), but are liable to pay VAT on goods and services procured. This differs from most other sectors, which are able to charge customers VAT and offset VAT that they pay when procuring goods and services. On this, Norden continued: “Banks will have to think carefully about how to manage the potential increase in costs as a result of unclaimed VAT. Passing costs on to customers is an obvious way to mitigate the impact of VAT, however with margins already being low, this may prove difficult. Consideration will also have to be given to the legal implications of potentially altering existing contracts, and the effect that raising prices on new contracts will have on competitiveness.”

Whilst nothing is certain until the draft legislation is finalized, there are a number of things that financial institutions can do to prepare for the impact of VAT implementation. Craig Richardson, KPMG in Bahrain head of Tax and Corporate Services explained that: “the first step that banks must make is to plan and analyze. VAT is happening and if banks are to maintain profitability, they must invest in understanding the impact of VAT on their business from a financial and operational point of view. Before implementation, financial institutions can build and test systems and mechanisms to help them comply with legislation and embed these within existing processes. There are also immediate measures which banks can take to avoid VAT for example making any planned significant investments in business infrastructure and assets before implementation begins.”

Although the implementation of VAT may increase the cost of doing business for banks, revenues gained from VAT will be ploughed back into the economy. Bahrain has long been considered an attractive low-tax environment, especially for businesses looking to invest in the Gulf region. Generally, the introduction of a broad based consumption tax at a low rate is unlikely to deter investment into Bahrain, or the GCC Region.

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