FTA publishes Public Clarifications on compensation-type payments and goods eligible for the profit margin scheme
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published its first Public Clarifications, on the Value Added Tax (VAT) treatment of compensation-type payments and on goods eligible for the profit margin scheme.
This marks an interesting development for businesses, as it indicates that the FTA’s approach to clarifying its interpretation of complex matters will be to issue short and helpful clarifications of this nature. Businesses should continue to monitor the FTA website for Public Clarifications on additional topics and ensure they take action to consider whether the FTA’s interpretation aligns with the current treatment adopted by the business.
It should however also be noted that the clarifications, while having general application and providing assistance to businesses seeking guidance on how to apply the law, will seldom deal with all possible permutations of transactions of the nature being addressed. Essentially, this means that businesses still bear a responsibility for ensuring that their transactions are VAT compliant, and the guidance given by these clarifications should be viewed in the context of the transactions that are actually being undertaken.
VATP001 – VAT Public Clarification on the VAT treatment of compensation-type payments
VAT Public Clarification VATP001 discusses the VAT treatment of compensation-type payments. The issue addressed in it is whether or not VAT is due on payments made between businesses to compensate each other for losses, omissions, or other wrongdoings.
VATP001 states that where a payment is not a consideration for a supply, there is no VAT due on the payment.
The document addresses the question of whether a compensation-type payment as described above qualifies as consideration for a supply. The key factor to determine this is whether the recipient of the payment has provided anything in return for the payment.
The Public Clarification describes various scenarios to illustrate the basis of making such a determination and indicates where the FTA shall draw the line regarding what constitutes genuine compensation.
Businesses which impose fines or penalties on customers should review the current VAT treatment applied to such income in light of this release in order to determine whether any corrective action is required.
VATP002 – VAT Public Clarification on the profit margin scheme – eligible goods
VAT Public Clarification VATP002 sets out which goods are considered to be eligible for application of the profit margin scheme.
The profit margin scheme allows VAT to be accounted for by second-hand goods dealers on the profit made on the supply only, rather than the whole value, provided certain conditions are met.
VATP002 confirms in particular that only those goods which have been previously subject to VAT qualify under the profit margin scheme. This is of particular importance in respect of goods which were originally supplied prior to 1 January 2018.
Businesses which make extensive use of the profit margin scheme, for example those operating within the automotive industry, should ensure they have sufficient records in place to identify those goods qualifying to be supplied under the profit margin scheme and those goods on which they must account for VAT on the full selling price. It is obviously best if the identification of the circumstances for the differing treatment is set up in the ERP system in such a way that it cannot easily be overridden.
It is also imperative that previous transactions are reviewed to identify whether there is a risk VAT has been under-accounted for and whether a voluntary disclosure may be required.