Viewpoint: Mubeen Khadir
Since Bahrain implemented VAT on January 1, 2019, the National Bureau for Revenue (NBR) has seen a rise in tax disputes and reassessments. In some cases, these have resulted in litigation between the taxpayer and the NBR. With the VAT rate doubling as of January 1, 2022 – with a one-year transitional period – we are likely to see more such disputes in the years ahead.
Certain situations have seen the NBR impose penalties. For example, in areas of the economy such as construction, retail or exports, a standard-rated item is given a zero rating without meeting necessary criteria. Other situations that have led to penalties include the incorrect recovery of input VAT; a failure to account for VAT on recharges; discrepancies between recorded sales and VAT returns; and errors in interpretation, resulting in companies making incorrect tax payments.
Since VAT is first self assessed by companies, these issues come to the attention of the NBR after an audit is conducted, returns are amended or a voluntary disclosure is made by the taxpayer. The NBR was initially relatively lenient in imposing penalties, and internal teams processed the data gathered during audits to understand the types of issues that arise in various sectors. However, the NBR is training teams and recruiting tax professionals in order to conduct more robust VAT audits. Companies being audited are rated by the NBR according to their internal risk criteria. Businesses were initially reluctant to challenge NBR assessments, although this is changing as the impact of the higher VAT rate becomes more apparent.
If a taxpayer disagrees with all or part of a decision from the NBR, the taxpayer must first request that the NBR conduct an internal review of their ruling. An internal review request must be submitted within 15 days of the date of the assessment. If the taxpayer is not satisfied with the outcome of the review, they may then appeal to the Tax Appeals Review Committee (TARC) within 30 days. Unlike a review request, appeals to the TARC can be made only after settling the disputed tax liability and penalties. A hearing is then scheduled, during which an authorised representative from the firm or a tax agent presents the case before the TARC. Typically, the committee considers whether the taxpayer acted in good faith and whether the circumstances were within their control. The manner in which the appeal letter is drafted and the grounds for appeal are identified is crucial, so the role of a tax advisor is imperative. In some cases, the TARC has issued favourable orders with penalty reductions for multiple businesses. In other cases, the committee has considered whether the NBR lost any revenue in issuing their decision.
If the taxpayer is unable to obtain a favourable ruling from the TARC, they still have the right to go to court within 60 days with the assistance of a lawyer. Although few cases have reached this stage, we expect the litigation system to evolve given the rise in tax complexities.
The tax sector in Bahrain is going through a major transformation, which requires businesses to have strong processes and sufficient resources to handle tax matters and disputes. Organisations should seek advice before the implementation of key decisions to ensure that tax does not become a cost burden.
Although VAT disputes are nascent in Bahrain and other GCC countries, we can expect to see complex legal challenges, as seen in more mature jurisdictions such as the UK and EU, given that the GCC VAT framework draws many parallels from that in the EU. With the announcement regarding the implementation of a corporate income tax, Bahraini businesses can expect such a tax to be implemented in 2024, paving the way for more high-value tax disputes. As such, the finance and tax functions of businesses need to be ready to adapt to the rapidly changing tax landscape.
Complex legal issues require expert solutions, and it is better to get them right at the start rather than be involved in a costly dispute with the tax authority. Firms that act proactively will be more capable of dealing with the challenges of the rapidly evolving tax landscape.
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