UAE FTA publishes VAT Public Clarifications on recovery of expenses and financial options

The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published new Value Added Tax (VAT) Public Clarifications on disbursements/reimbursements and on options/option premiums.

VATP013 on disbursements and reimbursements

VATP013 discusses transactions where a person incurs expenses and then recovers these expenses from another party, and sets out the criteria for determining if the recovery is a ‘disbursement’ (out of scope of VAT) or ‘reimbursement’ (within scope of VAT). These are differentiated as follows:

Disbursement: the recovery of a payment made as an agent on behalf of another person, with the supply taking place directly between the supplier and the other person.

  • Example: Company A makes a payment to a supplier on behalf of their client Company B, and then invoices Company B for the payment. The supply was made directly from the supplier to Company B, the supplier invoiced Company B, and Company B authorized Company A to make the payment on its behalf. The expenses that Company A recovers from Company B will be out of scope of VAT.

Reimbursement: the recovery of expenses incurred as a principal (i.e. the supply took place directly between the supplier and the person recovering the cost).

  • Example: Company A enters into a contract with Company B to provide Company B with marketing services. Company A incurs costs in its own name while providing these services and then recovers these amounts from Company B as per the existing terms of their contract. The expenses that Company A recovers from Company B will follow the VAT treatment of the main supply.

The following principles will help you to determine whether the recovery of an expense from another is a disbursement or a reimbursement:

Disbursements (outside the scope of VAT)

Reimbursements (subject to VAT)

  • The other party (from who you are recovering such expenses) should be the recipient of the goods or services;
  • The other party should be responsible for making the payment to the supplier;
  • The other party should have received an invoice or tax invoice in their own name from the supplier;
  • The other party should have authorized you to make the payment on his behalf;
  • The goods or services paid for should clearly be additional to the supplies you make to the other party;
  • The payment should separately be shown on the invoice and you should recover the exact amount paid to the supplier, without a mark-up.
  • You should have contracted for the supply of goods or services in your own name and capacity;
  • You should have received the goods or services from the supplier;
  • The supplier should have issued the invoice in your name;
  • You have the legal obligation to make payment to the supplier;
  • In case of goods, you should own the goods prior to making any onward supply.

Action for businesses:

Businesses should review their recharges of costs to understand whether they have been treated correctly as disbursements or reimbursements in accordance with the above principles.

To the extent there is any under or over-declared VAT, corrections should be made.

VATP014 on the VAT treatment of options and option premiums

VATP014 discusses the VAT treatment of financial options and option premiums. A financial option gives the holder the right to buy or sell the underlying financial instrument at a specific price, and an option premium is the fee received for selling an option.

The Public Clarification states that supplies of options in respect of debt securities and equity securities in return for premiums are exempt from VAT.

This treatment does not apply to options in respect of underlying commodities or other non-debt and non-equity instruments. Where such options are supplied in return for explicit premiums, they will be taxable supplies.

VATP014 further states that where a supplier has incorrectly treated the supply of exempt options as subject to VAT at 5% before 31 July 2019, a tax credit note should be issued to the recipient which corrects the VAT treatment.

Output tax on such options which has been accounted for on a prior VAT return can be adjusted by the supplier in the VAT return for the period in which the credit note was issued.

Conversely, a recipient that has already deducted input tax related to such a supply and receives a credit note to correct the VAT treatment would have to negatively adjust the input tax in the tax return for the tax period in which the tax credit note was received.

Discussion and action points

The new Public Clarifications set out criteria for determining the VAT treatment of transactions that many businesses have sought greater clarity on.

Businesses should evaluate how they have been treating such transactions since the implementation of VAT, in order to determine if action must be taken to achieve compliance with the VAT legislation and Public Clarifications.

Where such transactions have been treated incorrectly from a VAT perspective, businesses should communicate with suppliers/customers in order to agree on modifying existing arrangements and issuing credit notes for any necessary adjustments.

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