FTA publishes Public Clarification on the treatment of input tax on entertainment services
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published a new Public Clarification on non-recoverable input tax on entertainment services. This is an important development, as it provides clarity on what has been an ongoing issue for many businesses in the UAE. As noted below, as this has been an area of concern for businesses, and many have adopted a risk averse position toward making any claim for input tax in this area, it would be advisable to use this opportunity to revisit that position.
VATP005 – VAT Public Clarification on non-recoverable input tax – entertainment services
VAT Public Clarification VATP005 discusses the VAT treatment of entertainment services. According to Article 53(1) of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No (8) of 2017 on Value Added Tax (“the Executive Regulations”), input tax incurred by an entity that is not a Government entity is not recoverable on entertainment services provided to anyone not employed by them. This would include entertainment services provided to potential customers, shareholders, or other owners/investors.
The issue addressed in the Public Clarification is what the FTA considers is included in the definition of ‘entertainment services’. According to the document, input tax on an expense may be recoverable if it can be shown that the expense was for a genuine business purpose, or incidental to a business purpose (such as hospitality provided during a business meeting).
However, hospitality which is provided as an end in itself, or where it could be considered to be the main reason for attending an event, will be considered to be ‘entertainment services’ and the input tax will not be recoverable.
It is important to note the distinction made between government and non-government entities. A designated government entity may recover input tax on entertainment services provided to non-employees in certain situations, such as meetings with delegations from other countries where lunch/dinner is provided, or meetings with representatives from other government entities to discuss official business where refreshments are provided.
On the other hand, if a non-government entity provides entertainment services to any non-employee, including shareholders and investors, the input tax on these expenses will be blocked in full from recovery.
In the case of ‘entertainment services’ provided to employees, the input tax incurred will be non-recoverable unless a specific exception applies. This rule applies to designated government entities as well.
The only situations where input tax can be recovered on ‘entertainment services’ provided to employees are:
- If the labour law of the UAE, or Designated Zone where the entity is located, makes it a legal obligation to provide those goods or services to employees;
- If the employment contract or documented policy of the business states that those goods or services will be provided to employees in order to allow them to perform their work, and it can be a proven as a normal business practice;
- If the supply of the goods or services is a deemed supply under the Decree-Law.
The guide gives an example of a recoverable entertainment expense for an employee as being when a newly hired employee is temporarily provided with a hotel accommodation until they find permanent accommodation, as this is necessary for the employee to perform their role. A lunch or dinner for employees, on the other hand, would not be a recoverable expense.
Additionally, the document indicates that the FTA considers the input tax on ‘simple hospitality’ provided in the normal course of a meeting to be recoverable. Also, the input tax incurred on sundry office expenses, which are considered to include normal incidental office expenses for general use by both employees and non-employees, is recoverable.
Further, the guide includes sections on conference and business events, employee entertainment, and employee expenses.
The new Public Clarification indicates that the FTA has drawn a clear distinction between hospitality provided for business versus non-business purposes.
Taxable persons should ensure that they accurately record and account for such expenses, including the circumstances surrounding them, in order to recover only what is permitted by the FTA. They should also ensure that their internal policies are fit for purpose in terms of the types entertainment services and simple hospitality that may be provided, so that they are able to address the appropriate treatment of VAT incurred on the costs. If a business attempts to recover input tax on expenses which are non-recoverable, they risk significant penalties from the FTA.
For those that have denied themselves recovery of input tax incurred where they were uncertain as to what would, or would not be allowed, it might be advantageous to revisit that treatment, and reconsider whether an entitlement to the input credit is in fact available.
FTA publishes guide on voluntary disclosures for VAT and Excise Tax
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published a new Voluntary Disclosure User Guide. This follows the implementation of the voluntary disclosure feature on the FTA’s eServices portal in June. The guide provides an overview of the process of completing the voluntary disclosure form for Value Added Tax (VAT) and Excise Tax, and submitting it to the FTA.
While certainly helpful, it is important to note that the Guide deals primarily with the situation where there is a ‘one-off’ error in a VAT Return. As errors requiring consideration of whether to undertake a Voluntary Disclosure can take a variety of forms, it may well be worth-while obtaining professional advice prior to making any Voluntary Disclosures, so that the potential flow on consequences can be considered and addressed.
When should a voluntary disclosure be made?
A voluntary disclosure should be made by a taxable person to notify the FTA of an error or omission in their tax return, tax assessment, or tax refund application. As per Article 8 of Cabinet Decision No. 36 of 2017 on the Executive Regulation of Federal Law No. (7) of 2017 on Tax Procedures, voluntary disclosures are required to be made in the following cases:
- where a filed Tax Return or a Tax Assessment is incorrect resulting in a calculation of the Payable Tax being less than required i.e. an underpayment of tax due, in an amount of more than AED 10,000;
- where a filed Tax Return or a Tax Assessment is incorrect resulting in a calculation of the Payable Tax being less than required i.e. an underpayment of tax due, by not more than AED 10,000 and there is noTax Return through which the error can be corrected; or
- where a filed Tax Refund Application is incorrect, resulting in a calculation of a refund to which the Taxpayer is entitled being more than the correct amount, unless the error was a result of an incorrect Tax Return or Tax Assessment.
The voluntary disclosure must be made within 20 business days of discovering the error or penalties may apply.
What are the steps to submit a voluntary disclosure in respect of a VAT return?
To submit a voluntary disclosure against a VAT return that has already been submitted to the FTA, the taxable person should go to the VAT201 – VAT Returns tab in the VAT section of the eServices portal and click on the Submit Voluntary Disclosure button in the row of the relevant VAT return for which the voluntary disclosure is to be made.
the link for the voluntary disclosure guide is given below:-
7 Ways to Avoid VAT Penalties in UAE
The United Arab Emirates and the Kingdom of Saudi Arabia began the implementation of Value Added Tax (VAT) on January 1, 2018 at the rate of five per cent, while other GCC countries are expected to follow in the near future.
As VAT is new to the region, it is imperative for business owners to be aware and comply with the new regulations in order to avoid stiff penalties which could be as high as AED 50,000.
Seven tips for UAE businesses to avoid financial penalties that may be imposed due to violations, errors or incorrect record-keeping include:
- Register for VAT
Every company offering taxable goods or services with an annual revenue of AED 367,000 and above is required to register for VAT. However, those with an annual revenue between AED 200,000 and AED 367,000 will have the option to register. The Federal Tax Authority (FTA) has stated businesses must register within the prescribed period, and failure to do so could result in non-compliance penalties as severe as AED 20,000. In addition, unregistered companies will be required to stop sales until they receive their tax registration certificate (TRC).
- Record all transactions
The law requires businesses that meet the minimum annual turnover (as evidenced through financial records) to register and keep a record of all their business income, costs and other associated VAT charges, whilst ensuring all records are up to date. These records will be submitted to the FTA in Arabic.
However, it is advisable for businesses that do not meet the minimum annual turnover to maintain records of all transactions. Supposing the FTA arrange an inspection to determine whether or not your company should be registered for VAT, these records are the only means of evidence to make decision. Otherwise, this may be seen as noncompliance, which would lead to penalties.
- Collect VAT
Every business essentially plays the role of a tax agent, collecting on behalf of the government VAT on goods and services purchased by their consumers. Failure to collect this VAT may result in up to five times the amount of VAT being imposed on your company that would have been payable for the period in question. While there are still some uncertainties regarding the items subject to the tax, it’s recommended to follow best practices to maintain tax compliance.
- File VAT return
VAT returns must be filed monthly if your company has an annual turnover above AED 150 million. Businesses with revenue below that level must file quarterly. This can be done electronically through the FTA website. Failure to file a tax return within the specified timeframe will make the business liable for fines.
- Understand zero rates and exempt suppliers
The FTA has exempted some businesses in priority sectors from tax. Being a zero-rated supplier means that the goods being supplied are still VAT taxable, but at the rate of zero per cent. Therefore, your company is still required to record and report on all supplies. Such industries include real estate developers, jewellery, airlines, schools, clinics and hospitals.
- Reverse charges
Reverse charges are the amount of VAT one would have paid on goods or services if they were purchased in the UAE. These charges apply when goods and services are imported from outside the GCC. As the business is not required to pay VAT at the point of import. the responsibility for reporting the VAT transaction shifts from seller to buyer (under the Reverse Charge Mechanism). In this case, the buyer reports their Input VAT (on the goods purchased) as well as their normal output VAT (on sales) in their return for that quarter.
- Get the basics right
A tax invoice must be issued within 14 days of the date of supply. It is mandatory for a tax invoice to include the name, address and tax registration (TRN) of the registrant making the supply. An invoice must have a unique number and date of issue which enables identification of the tax invoice and the order of the invoice in any sequence. Also, it is mandatory for it to clearly state the unit price, the quantity or volume supplied, the rate of tax and the amount payable expressed in UAE dirham should be specified.
We know from experience in other mature VAT jurisdictions that businesses often struggle to address questions raised during audit by tax authorities. This is mostly due to the inability to produce complete documentation that substantiates liabilities and entitlements reported within the VAT return. Due to the transactional nature of VAT, it would be prudent for businesses implementing the tax to put in place a combination of automated processes and tools that can efficiently produce an audit file, upon the request of tax authorities.
More relief as three UAE free zones are out of VAT scope
The UAE’s Federal Tax Authority (FTA) has added three new free zones to the list of designated zones that will be out of the five per cent VAT scope imposed earlier this year.
The new addition sees the total designated zones increasing to 23 across the UAE.
Federal Decree Law No. (8) of 2017 on VAT specifies that any area meeting certain conditions and mentioned in the Cabinet decision is termed as designated zone for VAT purposes and should be treated as being outside the state for VAT purposes.
According to the FTA, the newly-added free zones are Al Ain International Airport Free Zone, Al Bateen Executive Airport Free Zone in Abu Dhabi, and International Humanitarian City – Jebel Ali in Dubai. The treatment of these areas as designated zones was effective from June 18, 2018.
Thomas Vanhee, partner at Aurifer Middle East Tax, said businesses that have transactions in the new designated zones will be relieved that no VAT applies on the supplies of goods inside the designated zones with some exceptions.
“Some businesses in these designated zones may potentially now deregister for VAT purposes. It will be important for them to assess again their transactions in the zone and determine which ones are actually subject to VAT and which ones are not. Although this constitutes an important relief, the transactions with designated zones can be complex,” said Vanhee.
Currently, eight designated zones are located in Dubai, five in Abu Dhabi, three in Ras Al Khaimah, two each in Fujairah, Sharjah and Umm Al Quwain, and one in Ajman.
International Humanitarian City, which is to be the largest humanitarian hub in the world with the most diverse members, has 70 members including nine UN agencies, 48 non-profit organisations and 13 commercial members. Currently, over 45 free zones are across the country.
Exports from the UAE’s free zones totalled Dh225.5 billion in 2017, a growth of 6.6 per cent from the previous year, according to the Central Bank of the UAE data. That amounts to 19.5 per cent of the UAE’s total exports recorded last year.
The UAE houses one of the highest number of free zones globally at 45 with another 10 under construction. Dubai now houses around 30 free zones.
Nirav Shah, director at Fame Advisory, said all companies in the free zones will be able to avail VAT benefits for all goods that were not to be used within the UAE since all transactions within designated zones for goods movement is outside the scope of five per cent VAT.
Technically, Shah said, the Cabinet can add more free zones, because tge VAT law says that free zones with customs-restricted access will qualify for this, so if any other free zone infrastructures are developed and meet this criteria, those can also be included in the designated zones.
According to Mayank Sawhney, director at MaxGrowth Consulting, the Cabinet decision had said earlier that designated zones can be added or removed from the list.
“In the future, more free zones can be added if they fulfill the criteria of designated zones such as custom control, fenced boundaries and controlled movement of goods going in and out of it,” Sawhney said.
He pointed out companies from specific sectors are increasingly looking at moving into one free zone as it benefits them from cash-flow perspective because they are heavily involved in bilateral trade and dealings.
“In Dafza [Dubai Airport Free Zone], there a number of mobile phone companies that are engaged in buying and selling to each other. So, having a presence in one designated zones will not block their cash flow,” he added.
FTA issues more clarification on labour accommodation
Meanwhile, the FTA also issued clarification about the issue of the applicability of five per cent VAT on labour accommodations.
“In the initial period, there was confusion whether labour accommodation is chargeable or not. Subsequently it was clarified by the FTA that labour accommodation is treated as residential property and hence exempt from VAT. In essence, where additional services such as cleaning, Internet etc. are provided as part of the composite labour accommodation service, there is a single pricing and it is provided by the same supplier, it will be treated as residential property and will be exempt from VAT,” said Girish Chand, director at MCA Management Consultants.
He also pointed out that where the labour accommodation is a mixed supply consisting of various elements and it is charged separately, the tax treatment of each component will have to be determined separately.