GCC Indirect Tax Weekly Digest
July 29, 2020
FTA clarifies input tax recovery rules for COVID-19 expenses
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has clarified the input tax recovery rules for expenses related to the ongoing COVID-19 pandemic.
In a press release detailing a virtual workshop held for tax agents, the FTA stated that expenses related to COVID-19, such as workplace sterilization and testing of employees, are considered general expenses. The input tax incurred on such expenses is recoverable to the extent that a business is eligible for VAT recovery (e.g. fully recoverable for businesses making only taxable supplies and partially recoverable for businesses making both taxable and exempt supplies).
However, the FTA further stated that input tax incurred on the testing of employees’ families is not recoverable unless the employee bears the cost.
FTA publishes VAT Public Clarification on zero-rating of export of services
The UAE FTA has published a new VAT Public Clarification on the zero-rating
of export of services.
This follows the publication of an updated version of the Executive Regulations to the Federal Decree Law No. 8 of 2017 on VAT (“the Regulations”) earlier this month. Please refer to our relevant client alert for more information.
VATP019 provides an overview of the FTA’s view of the zero-rating conditions in Article 31 of the Regulations. A supply of services may only be zero-rated if (1) the recipient does not have a place of residence in an Implementing State and (2) is outside the UAE at the time the services are performed.
Place of residence
Where a recipient has establishments in multiple jurisdictions, the establishment most closely related to the supply of services must be determined. UAE suppliers are only entitled to apply the zero rate of VAT on services supplied, if the establishment of its recipient, that is most closely connected to the supply, is outside the UAE.
The Public Clarification sets out criteria to consider in determining the establishment most closely related to the supply where there is uncertainty regarding whether a supply of services is received by a foreign or UAE establishment of a recipient.
Location of recipient
The Public Clarification states that only the physical presence of the recipient during the period of supply and consumption needs to be taken into account; the location of the recipient before and after performance and consumption of the services should not be taken into account.
Importantly, VATP019 states that when determining the location of the recipient, only the establishment most closely related to the supply should be considered. This means that if a recipient has both UAE and non-UAE establishments, and the non-UAE establishment is most closely related to the supply, the condition that the recipient is outside the UAE may still be met, despite the recipient having a UAE establishment.
However, a non-UAE recipient of services (including one which already has a UAE establishment) may no longer be considered ‘outside the UAE’ if it creates even a temporary presence (i.e. one month or more) in the UAE at the time the services are performed, which relates to the supply being made.
The FTA expressly states that where all conditions for the zero-rating of the export of services cannot be ascertained, the supplier must standard rate the supply.
Action to take
With the release of this Public Clarification, the FTA will expect businesses to carefully consider whether or not the criteria for zero-rating the export of services are satisfied and ensure that appropriate supporting evidence is available. For businesses with high volumes of overseas transactions, this may present a challenge. Some key questions that UAE businesses should consider
- Do we currently know if our overseas customers have any kind of presence in the UAE, and is that presence greater than one month?
- If our overseas customer has a presence in the UAE, could their local presence be connected in any way with the supplies we make?
- Do our on-boarding processes identify whether our customers have a UAE presence?
- Do our contracts contemplate a situation where VAT could become chargeable now or in the future? Would we be allowed to charge VAT on top of the value of our services and would the customer be obliged to pay it?
Businesses that supply services to overseas customers should carefully review their arrangements to ensure that the correct VAT treatment is applied. To this end, businesses should explore expanding customer identification procedures and amending contracts as necessary.
We recommend that businesses establish an audit trail where possible in order to establish that steps are taken to ensure that the zero rate is correctly applied to supplies of services. This may require changes to existing processes and procedures.
For more information about the new VAT Public Clarification, please refer to our
most recent client alert.
We understand the VAT law is now being reviewed by the State Council, and if all goes to plan, the VAT statute will be put before the Sultan after the Eid Al Adha holiday.
For more information, please contact the Deloitte Oman Indirect Tax team or your usual Deloitte contact. Additionally, we will be hosting a webinar surrounding all Tax developments within the Sultanate. The full details will be forthcoming.
This digest is for information purposes only and should not be construed as advice. It does not necessarily cover every aspect of the topics with which it deals. You should not act upon the contents of this alert without receiving formal advice on your particular circumstances.