Bahrain: Related Party Transactions for VAT In Bahrain

The Kingdom of Bahrain under Decree-Law Number 48 of 2018 (Decree-Law) is the pivotal legislation with regards to Value Added Tax (VAT) in Bahrain. Further, the Executive Regulations Number 12 of 2018 (Executive Regulations) are the elaborate rules with respect to the application of the VAT Law. With regards to the related party transactions, Article 22 of the Decree-Law as well as Article 24 of the Executive Regulations, lays down the rule that on the supply between two or more related parties a market value should impose in case the value of the supply is represented or marked lower than the actual market value, and there cannot be full claim on related input tax by the recipient.

With regards to the related party transactions in VAT, the National Bureau for Revenue (NBR) in Bahrain has published clarification notes to calculate the market value of such related party transactions. Article 24 of the Executive Regulations mentions that the market value shall be that fair price tradeable between the independent parties where:

• That the customer and his supplier are not subject to commercial pressure.
• The customer and supplier both works as per their market interests independently.
• There is no undue time pressure in concluding the transaction.

The market value in case of related party transactions needs to be calculated as per the fair price that is currently pitched in the open market for two independent parties on the same date, similar circumstances, and same supply transaction. The transactions between related persons need to be calculated based on the market value in the following cases:

• the value of the supply is lesser than that of the market value
• no deduction allowed for value-added inputs.

When the market value could not be determined according to the above three conditions, NBR made it clear that guidelines related to transfer pricing issued by the Organization for Economic Cooperation and Development (OECD) have to be adopted to calculate the market value of the transaction.

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