If not, you need to start thinking more about value added tax (VAT).
Too many businesses in Bahrain still think VAT doesn’t apply to them, or that VAT is a passing phase that can be avoided by burying your head in the sand. They couldn’t be more wrong – and the NBR is bringing this to light with very heavy non-compliance penalties.
VAT is a self-assessment tax – Bahraini businesses self-assess their input tax claim (VAT on purchases) and their output tax liability (VAT on sales) and lodge periodic returns with the NBR. Businesses need to do this in accordance with Bahrain’s VAT legislation and published guidance by the NBR.
In some instances, VAT legislation may be unclear or there may be no guidance on a particular issue – which means businesses will need to take a position based on advice from a tax adviser or seek a ruling from the NBR.
An NBR audit is essentially the NBR checking to see if a business has complied with the VAT legislation – not only the letter of the law but also the spirit of the law.
The NBR checks whether a business has collected and paid the right amount of VAT and not over-claimed any VAT – and within set deadlines.
The NBR has very broad powers to gather information – so a VAT audit can start with the NBR:
1. Very politely asking you via email to answer some questions
2. Sending someone to your business to ask questions
3. Requesting copies of certain documents
4. Contacting your customers or suppliers, banks or other government departments to ask them questions about your business (you may not even know they have done this until after the audit)
5. Notifying you formally that they are auditing you
In some cases, the NBR will already know the answers to the questions it is asking.
We have already seen the NBR approach the customers of a business they are auditing, asking for information about transactions made by a supplier to them. We know the NBR is visiting businesses and seeking the assistance of other government departments (such as the Industry, Commerce and Tourism Ministry) to carry out inspections.
Is your business fully compliant? Do you know how to respond when any of the above occurs?
Businesses can minimise the risks of a VAT audit by:
- Conducting their business with the mindset that they will be audited
- Obtaining appropriate tax advice from a qualified tax adviser
- Maintaining all documentation
- Complying with filing and other deadlines imposed by the NBR.
What happens if you don’t take VAT seriously?
VAT audits risks include:
- Discovery of non-compliance with VAT obligations
- Imposition of penalties and fines – the NBR can fine or prosecute non-compliant businesses, especially where a request for information is more formal
- Negative publicity – in certain situations, the NBR can publish the names of non-compliant businesses
- Disruption to business operations
The penalties the NBR can impose are some of the strictest in the world – so it is important to consult a tax adviser if you receive notice of an NBR audit.
The author is a senior director of Keypoint