Apportionment of Input Tax – UAE VAT
This blog provides information on Input Tax Apportionment relevant to any taxable person who makes taxable supplies. In conducting business activities, a taxable person may incur expenses that are subject to VAT (Input VAT credit). This can be recovered by them, subject to certain conditions. This is to ensure that VAT will not be a cost to such a taxable person. Under Article 54(1) of the VAT Decree-Law, a business can recover input tax incurred on goods and services that are used or are intended to be used, for making taxable supplies. Accordingly, where purchases are for exempt supplies or non-business activities, then the input tax is not recoverable.
Input tax which is incurred in respect of purchases which are used partly for making supplies that allow for VAT recovery and partly for making supplies for which VAT is not recoverable is known as “Residual Input Tax”, and it must be apportioned between those supplies. Recovery will be restricted to the proportion relating to supplies that allow for VAT recovery. The percentage of VAT paid on purchases attributing to supplies for which VAT cannot be recovered needs to be calculated. Applying this percentage on the total VAT paid will help us find out the Input VAT credit we cannot claim from the FTA.
The FTA accepts, however, that the standard method of apportionment may not be appropriate in every situation. Each business is different, and the standard method of apportionment may give rise to outcomes that might not be reflective of the actual use of goods or services by the business. As a consequence, the FTA is introducing a number of alternative methods of input tax apportionment to be used where the standard method does not provide an outcome that is reflective of the actual use of the acquired goods or services.
The special input tax apportionment methods which are available to taxable persons are:
- Outputs based method;
- Transaction count method;
- Floorspace method; and
- Sectoral method.
To be eligible to apply for the special method of input tax apportionment, all of the following conditions must be met:
- The applicant has been registered for VAT for at least 6 months;
- The applicant makes both taxable supplies and exempt supplies; and
- The standard method of input tax apportionment does not give a fair and reasonable result to input tax recovery.
Submissions will be accepted where they are submitted by the applicant himself or on behalf of the applicant by either the appointed tax agent or the appointed legal representative.
Understanding Out of Scope Supplies – UAE VAT
Out of Scope Supplies are supplies that do not come under the VAT provisions of UAE. Although Out of Scope, exempt and zero-rated supplies does not increase the VAT liability of a supplier, exempt and zero-rated supplies of goods and services come within the bracket of VAT provisions of UAE.
More about Out of Scope supplies….
If an overseas supplier or a non-registered entity supplies goods to an overseas person, these supplies will be considered out-of-scope for VAT in the UAE.
For example, a local trader A sells goods to local company B. The goods are shipped directly from Company A’s factory in Singapore to Company B’s branch in London through 3rd port shipment. The goods do not pass through the UAE, so the sale of these goods is an out-of-scope supply.
There are two basic kinds of out-of-scope supply:
(i) When goods are purchased from an overseas supplier and sold to an overseas customer, without being brought into the UAE, it is considered Out-of-scope of VAT.
(ii) import to free zone and export from freezone,
(iii) purchase and sale within the free zones of goods, when place of supply is not in UAE
The following are the examples of Out of Scope supplies:
- Supplies from a non-registered entity,
- Certain government activities,
- Goods or services provided to a different department within the same business,
- Supplies not made in the course or furtherance of a business,
- Transfer of business as a going concern etc.
Note : A supplier whose business is involved only in goods that are qualified as Out of Scope, are not required to register with the FTA. In such a case, Input Tax Credit on the purchases made or expenses incurred to supply these goods has to be added to the cost of the purchase/expense as he cannot claim that amount.
VAT Treatment of Labour Accommodation in UAE – Residential versus Serviced Property
Labour accommodations across UAE are places of residence provided by employers to the labourers of their business. This accommodation could include several additional services like pest control, garbage collection, security etc. in addition to being just a housing facility. Based on the nature of these additional services we can classify labour accommodations into –
- Residential building, therefore exempt from VAT (in case of first supply zero-rated)
- Serviced accommodation considered as a standard rated supply.
Distinction of these two types of accommodation needs to be understood carefully to analyse the VAT liability correctly. The extent of these services along with accommodation helps determine the nature of supply.
A labour accommodation would be considered as a residential building if :
- If it is the principal place of residence of the employees.
- The building is fixed on the ground (as opposed to a port-a-cabin construction)
- The building has been constructed lawfully
- It is not similar to a hotel, motel, bed and breakfast facility etc or a service apartment for which services in addition to supply of accommodation is provided.
A labour accommodation would also be considered as a residential building if, along with residence, additional services which is ancillary to the main supply are available and not provided for an additional fee like cleaning of communal areas, pest control, utilities like electricity and water etc.
However the following services would create a VAT liability as the residence would qualify as a serviced accommodation.
- Telephone and internet access
- Cleaning of rooms, other than communal areas
- Laundry service
- Maintenance other than general upkeep of the property
In case the suppliers of labour accommodation are making mixed supplies (components of both residential and service) each component must be valued and a VAT treatment should be applied.
UPDATED ECONOMIC SUBSTANCE REGULATIONS
There has been an amendment in the Economic Substance Regulations. Cabinet of Ministers Resolution No.31 of 2019 is now replaced by Cabinet of Ministers Resolution No.57 of 2020. This new ESR is applicable retrospectively from 1st January 2019.
Economic Substance Regulations in the UAE
Economic substance regulations were introduced in the UAE in April 2019 under Cabinet Resolution no. 31/2019. The UAE introduced the Economic Substance Regulations to honor its commitment as a member of the Organization for Economic Co-operation and Development (OECD) on harmful tax practices, an all-inclusive framework of OECD on Base Erosion and Profit Shifting (BEPS).
Non-Recoverable Input Tax (Entertainment Services)
There are a number of circumstances in which businesses have sought clarity over the definition of ‘entertainment’ for the purposes of the input tax restriction, and in particular what should constitute entertainment of staff or business contacts as opposed to incidental business-related expenses which would be recoverable under normal VAT rules.
Disbursements and Reimbursements – VAT Implications
Every business transaction is involved in recovering the expenses it has incurred. The VAT treatment of such recovery is subject to whether it is a disbursement or a reimbursement.
VAT Impact for Export of Services
Whether to apply zero-rating to the export of services and how to do so, has been a recurring concern amongst businesses in the UAE, especially to those providing consultancy services. Federal Law no. 8 of 2017 on Value Added Tax (“VAT Law”) and Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree-Law no. 8 of 2017 on Value Added Tax (“Executive Regulations”) have clearly defined the services which are zero-rated and those that are exempt.
UAE has no plans to hike VAT rate
Saudi Arabia recently increased Value-added Tax (VAT) to 15% which is three times its initial rate of 5%, which will come into effect from July 1st. The Kingdom has also suspended the cost of living allowances as of 1st June as a measure to support the country’s economy and increase the revenues amid the COVID-19 the pandemic. An unprecedented Sharp Decline in oil prices and non-oil revenues caused the kingdom to make the surprising decision. This decision of Saudi Arabia will prompt a discussion in the UAE and other neighboring GCC countries to increase the VAT rate in their respective countries.
Differentiating Zero Rated & Exempt sales – UAE VAT
In UAE, VAT is applicable at the rate of 5% on supplies of goods and services (if eligible under standard supplies). It is important to understand that products and services offered by suppliers will be under the category of standard 5%, zero-rated and exempt supplies. Failing to understand these compliances might result in the non-filing or late filing of VAT return in UAE, thereby attracting penalties. There are two types of supplies under the provisions of VAT law in UAE, viz, taxable (5% & zero-rated) and non-taxable (exempt) supplies.