Tax Insights

Bahrain VAT -Reimbursement or disbursement?

November 2020, By KPMG Bahrain.

Background
As per the Bahrain VAT Executive Regulations, where a taxable person incurs an expense in his name and subsequently recharges the expense to another person, such recharge will be taxable. However, where the expense is incurred directly in the name of the other person, recovery of such expense by the taxable person from the other person will be outside the scope of VAT. Many businesses incur expenses on behalf of their customers as well as related parties. Therefore, it is critical to examine the following:

  1. Do you know the VAT treatment of billing those costs to your customer/related party?
  2. Should the cost be treated as a disbursement (outside the scope of VAT) or a taxable recharge?
  3. If it is a taxable recharge what is the applicable VAT rate?

Taxable reimbursements:
Where an expense is incurred directly by a business in the course of making supplies to its customer, the expense should, generally, be treated as a reimbursement subject to VAT. Examples include:

  • ABC Consultants will incurs flight and hotel costs in the course of conducting a client engagement and recharges these to its client.
  • ABC Consultants will engages a law firm to provide input on a legal point which forms part of the advice it delivers to its client and recharges the lawyers’ fees to its client.
  • Parent Company will incurs rental costs for the premises occupied by it and its subsidiaries and then recharges the relevant portion to its subsidiaries.

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