VAT not recoverable on staff parties in the UAE, clarifies regulator
Tax registered businesses in the UAE cannot recover value added tax (VAT) incurred on expenses associated with activities to entertain personnel, such as staff parties that are free to attend, the Federal Tax Authority (FTA) has clarified.
According to the federal law, VAT incurred on goods or services purchased to be given away to staff free of charge, in order to reward them for long service, should be blocked from recovery of the tax, the FTA said.
Examples of these gifts include: long service awards, retirement gifts, Eid gifts, or gifts for other festivals or special occasions, gifts given on the occasion of a wedding or birth of a child, employee of the month gifts, or a dinner to reward service.
In a recent press statement, the FTA clarified that entertainment services consist of “hospitality of any kind” including the provision of: accommodation; food and drinks which are not provided in a normal course of a meeting; and access to shows or events or trips provided for the purposes of pleasure or entertainment.
However, a ‘designated government entity’ is eligible to recover the input tax incurred on costs to provide entertainment services to anyone not employed by the entity.
The exception is applicable: during meetings with delegations from other countries where lunch or dinner is provided; during meetings with representatives from other government entities to discuss official business, where refreshments are provided; and during ceremonies held to mark significant political events, eg the signing of an international agreement, where entertainment is provided to the audience.
For VAT registrants who are not ‘designated government entities’, input tax cannot be recovered if it is incurred for entertainment services provided to non-employees including customers, potential customers, officials, or shareholders, or other owners or investors.
The FTA also clarified that if goods or services are purchased for use by employees for their personal benefit, including the provision of entertainment services, then the VAT incurred on the cost is not recoverable unless an exception applies.
This means that all companies, including ‘designated government entities’, which provide entertainment services to employees are prevented from recovering any VAT included on such costs.
The only circumstances in which a taxable person is entitled to recover VAT on such costs are: where it is a legal obligation to provide those services or goods to those employees; it is a contractual obligation or documented policy to provide those services or goods to those employees so that they may perform their role and it can be proven to be normal business practice; and where the provision of goods or services is a deemed supply under the provisions of the decree-law.
The authority also outlined certain circumstances where a taxable person will fund or reimburse an employee for certain costs incurred for business purposes.
These include cases where an employee is on a domestic business trip and requires overnight accommodation – in which case the VAT incurred on hotel costs would be recoverable; as well as input tax incurred on subsistence costs – food and drinks purchased by the employee for their own consumption during the trip.
But if the employee incurs costs which are related to entertaining a current or potential customer/supplier, then any associated input tax incurred will be non-recoverable.
The FTA issued the latest public clarification regarding ‘Non-Recoverable Input Tax – Entertainment Services’ on its website to raise awareness among tax payers about the technicalities of the system, a statement said.
FTA director general Khalid Ali Al Bustani said: “These clarifications are formulated after a thorough study of the tax laws, executive regulations, and the guides published on the Federal Tax Authority’s website.”
The UAE introduced the 5 per cent VAT on most goods and services from January 1 this year.