UNITED ARAB EMIRATES - One year of VAT
2018 was a momentous year for the UAE, with the implementation of VAT in a country that was previously untouched by any taxes. VAT was rolled out on 1 January 2018. Since then, the Federal Tax Authority (FTA) has made significant strides forward. For example, it is increasingly active in its management of VAT compliance and it has released a broad catalogue of VAT guidance material.
In this issue we summarise some of the FTA’s recent VAT guidance.
Guide for input tax apportionment
Early in 2019 the FTA published some long-awaited guidance on input tax apportionment for businesses that make a mixture of taxable and exempt supplies. In the UAE, this includes providers of financial services, insurance companies, real estate businesses, and providers of local transport.
The rules on input tax recovery in the UAE follow the same principles as in most VAT systems around the world: businesses can claim a deduction of input tax against output tax liabilities if it relates to taxable supplies but not if it relates to exempt supplies. Input tax that relates to both taxable and exempt supplies, such as input tax incurred on overheads, must be apportioned.
The law provides a standard method for apportionment that is based on the ratio of input tax attributable to taxable supplies to input tax attributable to both taxable and exempt supplies. As a simple example, if 50% of the attributable input tax incurred by the business relates to taxable supplies, the business can deduct 50% of its input tax attributed to overhead.
Since the standard method of apportionment may not give a fair result for all businesses, the new guide sets out details about the following ‘special methods’, which can be used as an alternative:
- An outputs-based method, available to Islamic and non-Islamic insurance companies, retail wholesale and investment banks, and local passenger transport service providers;
- A transaction count method, available to Islamic and non-Islamic banks engaged in wholesale and investment trading activities;
- A floor space method, available to businesses in the commercial and residential real estate sale and leasing business; and
- A sectoral method, which is expected to be used by large, complex businesses that conduct different business activities through different divisions that are independent of each other from an operational and accounting perspective.
FTA approval for the use of a special method will typically be given for two years for a sectoral method and four years for a non-sectoral method. Applicants cannot normally apply to change the approved special method for at least two years.
Though this guidance provides some help to businesses that are affected by the need to apportion input tax, it is a complex subject and the guidance leaves many questions unanswered. Also, the proposals for special methods seem to be inflexible and may not be practical in some situations.
It is likely there will need to be further guidance and clarification from the FTA on this subject.
Refunds for foreign businesses
The FTA has announced that non-established foreign businesses can file claims from 1 April 2019 for VAT incurred in the UAE during the calendar year 2018. To qualify, claimants must be from a country that has a reciprocal scheme and there is a minimum claim size of AED 2,000.
Date of supply for services provided by independent directors
Board fees charged by independent directors attract VAT under the UAE VAT law. The FTA has clarified that where the level of directors’ fees are not known at the outset, the date of supply will be when the fees are confirmed at the conclusion of the company’s annual general meeting. However, if the directors’ fees are known upfront, the date of supply would be based on the normal date of supply rules for continuous services.
Bank interest and dividends
Interest on bank deposits is to be treated as outside the scope of UAE VAT and there is no requirement to report such income in the VAT return.
The UAE VAT law suggests dividends are exempt from VAT. However, the FTA has now confirmed that dividend income does not constitute consideration for a supply and should be treated as outside the scope of VAT.
Donations, grants, and sponsorships
The VAT treatment of donations, grants, and sponsorships depends on whether the donor, grantor, or sponsor has received any benefit in return for the payment. Where any benefit is received in return for the payment, VAT will be chargeable. However, where no benefit is received, the payments will be treated as outside the scope of VAT.
The FTA recently issued a guidance note that explains the VAT treatment of a full range of financial services and includes specific guidance on the treatment of Islamic finance. The guide confirms that the exemption for financial services is not limited to bodies that are regulated by the Central Bank of the UAE. It applies to all businesses providing financial services, such as holding companies providing finance to subsidiaries.
The guidance includes a useful appendix that lists the treatment of common services or charges in the financial services industry categorised into exempt, standard rated, and outside the scope of VAT.