Key points on VAT for financial services

Manama, 13 February 2018

With VAT now live in KSA and the UAE, business leaders in the remaining GCC countries should understand VAT is an inevitability. In Bahrain, VAT could become reality as early as October. With a low registration annual turnover threshold of $100,000, an overwhelming majority of Bahraini businesses would have just over eight months to prepare systems, train staff and understand the financial impact of VAT.

Businesses in the financial services sector will find VAT a particular challenge. Generally, registered businesses should (where the supplies they make are either standard- or zero-rated or out of scope) be able to recover the VAT they have incurred in making those supplies. However, businesses making exempt supplies, including a number of financial services, will be legally precluded from recovering VAT on purchases related to those supplies, including overheads.

The GCC VAT treaty generally requires that member states exempt the supply of financial services, although it also allows the standard rate of 5% to be applied at their discretion. In Saudi Arabia and the UAE, supplies of financial services, for which the consideration is margin-based, such as loan interest, have been exempted. VAT is not chargeable, nor is it recoverable when incurred making them. Other financial service supplies, where the consideration is a fixed fee or a commission, are standard-rated (5%) and VAT incurred in making those supplies can be recovered. While the GCC VAT treaty allows some discretion, Bahrain seems likely to maintain the status quo with Saudi Arabia and the UAE.

The financial services sector is complicated. Variations in the VAT treatment of financial services supplies, and the fact that the use of every purchase and the VAT treatment of every sale must be assessed, means that VAT is a bigger challenge for financial services business than other sectors. Ultimately, a significant proportion of the VAT incurred on purchases could become an absolute cost unless it can be passed on to customers through price increases. Of course, prices cannot always be increased unilaterally. VAT being chargeable doesn’t automatically mean a business can pass the cost on to its customers.

As banks and other financial services businesses in the UAE and Saudi Arabia have already experienced, price caps applied by regulators have meant that, even where contractually permissible, increased charges may be prohibited. Where capped supplies are taxable, the VAT remains chargeable and payable to the tax authorities, resulting in a further cost, and impacting margins. The position taken by the Central Bank of Bahrain will be critical to the financial services sector.

All business sectors in Bahrain should expect the VAT environment to be ‘dynamic’. In Saudi Arabia, on 3 January, GAZT outlined its view on the tax points and time of VAT accounting for lease or rent-to-own assets, such as ijara leases, which was fundamentally different to the expected VAT treatment. This change, just two days after VAT was implemented, required amendments to systems, contracts and communication with customers. Businesses should expect further changes, compounding the complexity of VAT for all businesses.

George Campbell is a chartered tax advisor who has focused on VAT for over 10 years. He is currently an Associate Director in Keypoint’s tax practice.


About Keypoint's tax services

Keypoint has the largest specialist on-the-ground VAT and IT implementation team serving Bahrain and Saudi Arabia. Currently delivering VAT engagements locally in Bahrain, Saudi Arabia and the wider GCC, our team has worked on numerous VAT implementation engagements in sectors including financial services and insurance, oil & gas, real estate and construction, family businesses, automotive and healthcare.

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