Bahrain: Recoverable input VAT incurred on capital asset

Bahrain: Recoverable input VAT

Value added tax (VAT) is usually charged on purchase of capital assets. However, the recoverability of this VAT is not straightforward. There are a number of considerations for registered businesses when seeking to recover input VAT incurred on capital assets.

1000

Related content

In general, a taxable person may recover the input VAT incurred subject to meeting certain criteria such as the expense being incurred for conducting an economic activity, the required documentation is retained, and the input tax is deducted within the specified timeframe. In addition to these requirements, the input VAT incurred must not be specified as non-recoverable under the VAT regime.

The VAT law in Bahrain defines a capital asset as a tangible or intangible asset that is assigned by the taxable person for long-term use as a business instrument. In other words, a capital asset would be a tangible or intangible asset that is capitalized by a business (i.e., to be expensed over the useful life of the asset). In order for the cost to be capitalized, a number of components are taken into consideration depending on the type of asset. These typically include purchase price, construction cost, import duties, inbound freight and handling, site preparation, installation and assembly and asset start-up testing, among other costs.

Under the VAT regulations, a taxable person must deduct the input tax in the first tax year during which the capital assets are used for the first time. In practice, businesses may be purchasing different components of a business asset before fully recognizing it—a common situation in the construction and oil and gas industries when business assets require a period of time in order to be operational. In such situations, the cost of items is recognized as an asset only if it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably.

From an accounting perspective, prior to recognizing the costs as an asset, these costs are accumulated as work-in-progress until the asset is placed into service and then transferred to the relevant long-term asset account. Depreciation will begin once the asset is put into service. Thus, it is imperative that the “first use” of the asset occurs when the asset is capitalized which gives rise to the right to input tax deduction. However, VAT compliance functions within registered businesses generally have been mostly setup in a way when the input VAT is claimed based on documentation (i.e., once a compliant tax invoice is received or a customs import declaration is in hand), and this poses a serious compliance risk from a VAT perspective because the input VAT is being claimed prior to the “first use” of the business asset.


Read a December 2020 report [PDF 223 KB] prepared by the KPMG member firm in Bahrain

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal