FTA issues guidance on input tax relating to mobile phones
Since the introduction of VAT in the United Arab Emirates (UAE), the Federal Tax Authority (FTA) has provided detailed guidance on many areas of the tax. However, until recently, there has been no official guidance on one of the most common everyday expenses for many businesses: mobile phones and airtime packages. This has led to some confusion for taxpayers and inconsistency in the treatment of the input tax on these costs.
This issue has been resolved with the FTA’s 6 December 2021 release of a public clarification that gives a detailed explanation of the FTA’s policy on the recovery of input tax relating to the costs of providing mobile phones and airtime/data packages to employees.
Input tax on phones and packages acquired for use by employees will be recoverable provided the business has a strict policy in place to restrict the use to business purposes. According to the clarification, the following conditions must be fulfilled for the business (taxable person) to be entitled to deduct input VAT incurred on mobile phones and airtime/data packages:
- The business must have a documented policy on the restricted use of mobile phones and airtime/data packages;
- The business must demonstrate that it monitors the use of airtime and packages and takes appropriate action against employees who do not adhere to the documented policy; and
- Employees should be made aware of the repercussions of failing to comply with employer’s policy and the business should retain proof of action taken against noncompliant employees.
As part of the process of monitoring usage, the taxable person will be expected to consider any variance between the actual usage and the expected average business usage for the employee’s role. Any excess usage identified from this monitoring will be regarded as non-business use, and input tax recovery will not be allowed unless the additional use is recharged to the employee with output tax or there is robust additional monitoring in place to substantiate the actual usage.
The clarification confirms that the FTA will only consider documented policies that were already in place at the time the mobile phones and airtime/data packages were made available to the employee.
Businesses in the UAE will welcome the fact that guidance has been issued on this topic. However, the rules, as set out in the clarification, are very rigid and detailed. Some taxpayers may choose to forgo any claim to input tax on mobile phone costs rather than attempt to fulfill the conditions.