Part of a regular series on the imminent tax and what it means to you
The energy industry is a key pillar of the economy, as it encompasses companies that are directly and indirectly involved in the production and distribution of energy required to power the economy.
In Bahrain, oil and gas extraction plays a dominant role in Gross Domestic Product (GDP) – a role that is expected to grow following last month’s announcement of newly discovered oil and gas reserves.
According to Trading Economics, refined petroleum ($3.63 billion), crude petroleum ($2.19bn) and special purpose ships ($358 million) were the top goods exported from the country in 2016.
With the introduction of Value Added Tax (VAT) expected by the end of this year, it is important to understand how indirect tax will apply to this sector and, therefore, estimate its impact on the business environment.
The GCC’s unified VAT agreement states it is down to the discretion of each member state to subject the energy sector, as well as the oil and gas derivatives sectors, to zero per cent VAT.
If applied in Bahrain this would mean oil and gas exports are zero-rated, putting exporters in a VAT refundable position.
The world’s largest oil exporter, Saudi Arabia, has applied a five per cent VAT charge on all streams of domestic oil and gas operations.
Therefore, VAT charges apply on royalty payments, production sharing arrangements and the exchange of crude oil and natural gas between companies in the Saudi sector.
However, the UAE has introduced a relief of zero per cent VAT on supplies of crude oil and natural gas.
The relief is placing taxpayers in a continuous net refund position.
This means they have to constantly reclaim VAT paid on investment goods or on inputs, which may include drilling services, pipeline installation and maintenance, and storing and handling services at installations.
The primary source of VAT charges associated with the oil and gas sector is expected to be from importation of capital goods, given that the sector is highly dependent on its import needs during project development.
However, many countries provide VAT exemptions for imported capital goods and, sometimes, imported inputs for crude oil and natural gas extraction.
The local VAT law has not yet been issued in Bahrain.
However, I believe the magnitude of the VAT refunds – particularly during periods with large investment – will cause challenging obstacles when anticipating VAT refunds from authorities.
This includes impact on cash flow and investment required in systems and training to ensure VAT compliance throughout the entire blockchain cycle.
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