Written agreement concerning the supply of goods or services, between two VAT-registered persons, could be regarded as a tax invoice for recovering input credit

The European Court of Justice (ECJ) is amongst the leading judicial authorities whose decisions are accepted as authoritative precedents by the tax authorities across the globe. In this week’s tax conversation, let us discuss important ECJ decisions to get global tax insights. I must caution that one has to examine the context and facts of each case to determine if the ECJ’s jurisprudence will also be applicable in the GCC region.

1. A written contract in place of a tax invoice

In Raiffeisn Leasing case, the ECJ held that a written agreement concerning the supply of goods or services, between two VAT-registered persons, could be regarded as a tax invoice for recovering input credit. The contract should contain all the information necessary for the tax authorities to determine that the material conditions for the right to recover VAT credit have been satisfied.

A supplier is allowed to claim back, from the FTA, the excess output tax charged on a tax invoice in prescribed scenarios

Last week, we discussed the top eight changes in the VAT laws that business owners should know about. Year 2023 will see many more changes in the tax laws and the tax procedures. Considering the significant impact on businesses, we discuss the next five important changes in depth.

 14-day time limit for tax credit notes and loss of input credit

A supplier is allowed to claim back, from the FTA, the excess output tax charged on a tax invoice in prescribed scenarios e.g. discounts, sales return, sales cancellation etc. The supplier needs to issue a tax credit note to the buyer/recipient and the buyer/recipient is obliged to reverse the proportionate input tax credit recovered on the original invoice.

Effective January 1, 2023, the supplier could claim back the output tax only if the tax credit note is issued within 14 days from the date when the prescribed scenario took place. Once the 14 days period is lapsed, VAT could become a cost in the value chain. The seller would lose the right to claim back excess output tax paid. The buyer would anyway be able to recover only such input credit as is proportionate to the net amount paid to the supplier.

Globally, the VAT laws often allow to issue credit notes without any VAT adjustment if the seller and buyer are not engaged in any exempt supplies.

2. Issuing tax invoices even if VAT is not charged

Since 2018, any person who receives an amount as VAT pursuant to any document issued by him was rightly obliged to pay the amount to the FTA even if it is not due. The provision has been updated to include that any person issuing a tax invoice in respect of an amount, must pay such amount to the FTA.

Due to ERP restrictions or accounting controls, companies often title their invoices as ‘tax invoices’ even if no VAT is charged on one or more items therein. The updated provision creates an ambiguity on the tax liability in such cases. A clarification from the FTA would help the business community.

3. Invoices for the import of goods

Last week, it was highlighted that the taxpayers will need to receive and retain invoices for any import of service on which reverse charge is applicable. The obligation to receive and retain invoices and import documents will equally apply for the import of goods.

It appears that some taxpayers do not verify the correctness of the import VAT payable under reverse charge that automatically appears in their VAT returns and recovers input credit of the complete amount without verification. The FTA wants a taxpayer to ensure that the credit is recovered only for the verified imports undertaken by the taxpayer.

4. Mandatory voluntary disclosure even if no additional tax payable

The tax procedures are also being amended effective 01/03/2023. Taxpayers would be required to submit a voluntary disclosure to correct an error or omission even if such error or omission does not result in any change in net tax due reported in the original VAT return.

This amendment could cover situations where a taxpayer omitted to report zero-rated supplies, exempt supplies or import of goods/services under reverse charge. Once a voluntary disclosure is submitted, penalties could also apply for the errors in the original VAT returns.

5. Reduction in the maximum amount of administrative penalties

Since 2018, the maximum amount of administrative penalties, e.g. for delay in payment of tax, was restricted to 300% of the tax amount. Effective 01/03/2023, the maximum amount of administrative penalties would be restricted to 200% of the tax amount. However, the minimum threshold of Dh500 for penalties would be removed thereby allowing the FTA to impose penalties less than Dh500 as well.

Concluding Remarks

We alerted in an earlier column about the 4Rs principles for effective tax management: (i) Ready to comply; (ii) React for advice; (iii) Reveal to optimise; and (iv) revolutionise to maximise. Business owners should take note of the upcoming VAT changes and proactively take corrective actions.

Source:https://www.khaleejtimes.com/business/uae-vat-next-5-important-changes-you-should-know

The cost-plus method is a very traditional method and easy to understand. Generally, this method is applicable where it involves the transfer of semi-finished products to the related party, where joint facility agreements have been concluded, or where the controlled transaction is the provision of services

There are three traditional transaction methods to ascertain the transfer price, two of which we have already discussed in detail. The cost-plus method is the third one that we have covered in this article.

As the name suggests, the transfer price under the cost-plus method is the cost plus a comparable markup based on the functions performed and risk involved, and the same has been defined in the transfer pricing guidelines issued by the Organisation for Economic Cooperation and Development (OECD) as follows:

“A transfer pricing method using the costs incurred by the supplier of property (or services) in a controlled transaction. An appropriate cost plus markup is added to this cost, to make an appropriate profit in light of the functions performed (taking into account assets used and risks assumed) and the market conditions. What is arrived at after adding the cost plus mark up to the above costs may be regarded as an arm’s length price of the original controlled transaction”.

Under this method, the actual cost involved in the controlled transaction is calculated. The cost can be direct and indirect costs related to the transaction. Direct cost is the cost that is incurred specifically for producing a product or rendering service, such as the cost of raw materials, and this cost can be directly traced to the related product and service. While indirect cost is a common cost like the costs of a repair department that services equipment used to produce different products, and this cost is allocated to the respective product and service by applying various methods like high low method.

An appropriate markup is added to the above-calculated cost based on the functions performed, risk involved, and market conditions involved. A comparable markup should be added to the comparable cost basis. Like, if one supplier conducts business with the leased assets, its cost base would be different from the supplier who conducts its business through the owned assets, and this factor should be considered while adding the mark up.

The cost plus markup of the supplier in the controlled transaction should be compared with the cost plus markup of the same supplier in the uncontrolled transactions (internal comparable). This means the cost plus markup earned by the supplier from the related party should be compared with the cost plus markup earned from any unrelated party. If there are any differences, an adjustment should be made.

In addition, the cost plus markup that would have been earned in comparable transactions by an independent enterprise may serve as a guide (external comparable). External comparable is the cost plus markup that have been or would have been earned by the external supplier who is in the same business-like an internal supplier and selling the same goods and services under the same terms and conditions to any third party.

While comparing with cost plus markup of the uncontrolled transaction, if there are no differences, then the existing cost plus mark up should be considered an arm’s length price. However, if the material differences have been identified, then a reasonable adjustment should be made to eliminate the material effects of such differences. So, we can say that “transfer price under the cost-plus method = external/Internal comparable + adjustment (if any)”.

We should not ignore the level and type of expenses – operating expenses and non-operating expenses. If there are higher expenses due to more assets and risk involved, then an adjustment should be made. If more expenses are due to additional functions that bring efficiency, then compensation should be given. If due to the inefficiencies, there are higher expenses like supervisory, general, administrative expenses etc., then no adjustment should be made to the margin.

While calculating the cost, we should not ignore the accounting consistency. If the accounting treatment in a controlled transaction is different from the accounting treatment in an uncontrolled transaction, appropriate adjustments should be made to the data used to ensure that the same type of costs is used in each case to ensure consistency.

The cost-plus method is a very traditional method and easy to understand. Generally, this method is applicable where it involves the transfer of semi-finished products to the related party, where joint facility agreements have been concluded, or where the controlled transaction is the provision of services.

The biggest challenge in this method is to get the mark up from the other party, which is not easily available. Moreover, keeping in view the functions performed and the risk involved, the adjustment on account of transactional differences would not be an easy job.

Source:https://www.khaleejtimes.com/finance/what-is-the-cost-plus-method-to-assess-the-transfer-price

A systematic data-driven framework can help organizations in the GCC to reduce waste