FTA publishes Guide on Input Tax Apportionment
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published the much anticipated Value Added Tax (VAT) Guide on Input Tax Apportionment (VATGIT1). This provides businesses across multiple industries with much anticipated detailed guidance around the right to recover input tax when making a mixture of both taxable and exempt supplies.
Who is this alert for?
Any business that is making both taxable and exempt supplies in the UAE. More specifically, we would expect this alert will be of particular interest to businesses operating in the following industries:
- Financial Services (e.g. Financial institutions providing both margin-based and fee-based financial products);
- Real Estate (e.g. businesses providing both commercial and residential accommodation);
- Education (e.g. Institutions providing both education, as well as student/staff housing & transportation services);
- Transportation (e.g. businesses providing local transport and non-transport services).
The Input Tax Apportionment Guide (VATGIT1)
The Input Tax Apportionment Guide confirms that a business may only recover input tax where this is permissible under the VAT Decree-Law.
Under article 54(1) of the VAT Decree-Law, a business has an entitlement to recover input tax incurred on goods and services that are used, or are intended to be used, for making taxable supplies.
Accordingly, where purchases are directly linked to exempt supplies or non-business activities, then the input tax is not recoverable.
Any input tax a business incurs which cannot be directly attributed to either category above, is categorized as “residual input tax”. The amount of VAT recoverable in the residual input tax pot is based on the following calculation as per the VAT Decree-Law (i.e. “Standard Method”):
X % =
("Total amount of input tax" @"recoverable under art 54 of the Law")
The FTA goes on to say that, if there is a difference of more than AED 250,000 in any tax year between the recoverable input tax as calculated above and the input tax which would have been recoverable if the calculation was made on the basis of the actual use of the goods or services purchased, then the taxable person must make an additional adjustment to input tax recovery in respect of the difference.
Actual Use and Special MethodsThe above calculation has to be performed at the end of each VAT period (typically a quarter or a month). At the end of the Tax Year, the business must also perform a wash-up calculation for the whole year using the same principles and make a further adjustment if necessary.
The FTA has specified a number of methods that it permits businesses to use to calculate recovery of residual input tax based on actual use. These are as follows:
- Outputs based method (available to Islamic and non-Islamic insurance companies, Islamic and non-Islamic retail & wholesale banks and local transport providers);
- Transaction count method (available to Islamic and non-Islamic banks engaged in wholesale and investment trading activities);
- Floor space method (broadly available to businesses in the commercial and residential real estate sectors); and
- Sectoral method (expected to be used by large complex businesses that conduct different business activities through different divisions which are independent of each other from an operational and accounting perspective; for example, a bank may have different divisions dealing with retail customers and investment banking; or an insurance company may, in addition to its core business, have a real estate division which deals with renting out properties).
In circumstances where the actual use of goods and services (calculated based on one of the special methods above) leads to a difference compared to the standard method of more than AED 250,000 of VAT in the last tax year, then the taxable person will be required to make adjustments in the first tax period following the tax year.
Application for a special input tax apportionment method
In addition to the above, the FTA is now also allowing businesses to apply for a special input tax apportionment method (“special method”). It should be noted that any applications approved by the FTA shall only be effective from 1 January 2019 onward and cannot be applied retrospectively.
A new specific FTA form need to be completed to agree a special method. As part of the application for permission, the business is required to identify which special method it is applying for and provide support for the contention that the special method will be more appropriate than the standard method.
FTA approval for the use of a special method will typically be given for 2 years for a sectoral method and 4 years for a non-sectoral method.
Applicants cannot apply to change the approved special method for at least two years, unless specific criteria are met.
What businesses need to consider
The Input Tax Apportionment Guide makes it clear that many businesses making standard rated and exempt supplies will have mandatory end-of-year VAT requirements to fulfill, regardless of whether they intend to apply for a special method.
Based on the guidance provided by the FTA, we strongly recommend businesses consider the following. Failing to meet the requirements in a timely manner could lead to penalties being imposed by the FTA.
- Know when your tax year ends – Based on the guidance provided, a business might need to make mandatory adjustments for actual use during the filing of its first tax return following the previous tax year;
- Review current cost allocation – Many businesses already find VAT cost allocation challenging; the method adopted to date now needs to be compared to the actual use of those goods and services at the end of the tax year;
- Review appropriate Actual Use based method – What actual use based method is most appropriate to your business activities? Does sufficient information exist in systems and processes to allow the appropriate calculations be performed? New records may need to be maintained in the future to maintain VAT compliance; and
- Benchmark Actual Use & Year-end provisions – It may be that your tax year is not aligned with your financial year. Nonetheless, we recommend that businesses consider comparing VAT recovery under standard method and actual use methods as soon as possible, in order to consider whether a year-end financial provision might be prudent.
How can we help?
Deloitte has dedicated teams of highly experienced VAT specialists in all of the industry sectors affected by VAT partial exemption in the UAE.
We can assist with modeling exercises to compare different input tax recovery methods, including deployment of specialist proprietary technology for this purpose. Our teams also have extensive experience of agreeing partial exemption recovery methodologies with tax authorities around the world.