NON-RECOVERABLE INPUT TAX

Chirag Agarwal     31 January 2021

As a general rule, the Input Tax recoverable is the total of Input Tax paid for Goods and Services which are used or intended to be used for making any of the following:

• Taxable Supplies

• Supplies that are made outside UAE which would have been Taxable Supplies had they been made in UAE.

However, there are certain exceptions for claiming Input Tax in respect of the following Taxable Supplies (Non-recoverable Input Tax):

1. Provision of entertainment services to anyone not employed by the Person, including customers, potential customers, officials, or shareholder or other owners or investors.

2. Where a motor vehicle was purchased, rented, or leased for use in the Business and is available for personal use by any Person.

3. Where Goods or Services were purchased to be used by employees for no charge to them and for their personal benefit including the provision of entertainment services, except in the following cases:

• where it is a legal obligation to provide those Services or Goods to those employees under any applicable labour law in the State or Designated Zone;

• it is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people ;

• where the provision of goods or services is a deemed supply under the provisions of the Decree-Law.

Notes:

a. The phrase “entertainment services” shall mean hospitality of any kind, including the provision of accommodation, food and drinks which are not provided in a normal course of a meeting, access to shows or events, or trips provided for the purposes of pleasure or entertainment.

b. The phrase “motor vehicle” shall mean a road vehicle which is designed or adapted for the conveyance of no more than 10 people including the driver. A motor vehicle shall exclude a truck, forklift, hoist, or other similar vehicle.

CASE STUDIES

I. HEALTH INSURANCE

The provision of health insurance will be liable to VAT at the standard rate. Where this is provided by an employer to an employee as a benefit which is part of a contract of employment, the employer will be able to recover the input tax on such products, subject to the usual rules of VAT recovery. Where an employer provides health insurance to the family of the employee, input tax will only be recoverable if there is a legal obligation to provide the insurance to the family members.

The reason for this is that Article 53 of the Executive Regulations dealing with blocked input tax envisages that costs incurred for the personal benefit of employees (which health insurance would be), will only be recoverable where:
I. It is a legal obligation to provide those services or goods to those employees under any applicable labor law in the State or Designated Zone.

II. It is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people.

The important part of the above is under II, where family health insurance is a contractual obligation, then it must also be required in order that the employee may perform their role . It is not the case that an employee requires their family member to have health insurance in order that the employee may perform their role, and on that basis the input tax on health insurance provided to families under II above should not be recoverable.

In contrast, where the law stipulates that the employee’s family members must be provided with health insurance, this would be dealt with under I above and the input tax incurred by the business would be recoverable (for example, Abu Dhabi government has made it a legal obligation for all the Companies to provide health insurance to dependents as well).

  1. MOBILE PHONE BILLS PAID FOR EMPLOYEES

Mobile phone Bills paid which is being used by employees for no charge to them shall be analyzed based on the following factors:

a. Is it necessary to provide such free services in order to perform their role?

b. Is this the legal obligation to provide such services?

If the answers to any of the above questions is yes, then the Taxable Person is allowed to claim the Input Tax. Please note that the onus is on the taxable person to substantiate that such services provided to employees is necessary for the performance of their roles & responsibilities.

 Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Two Tax Dispute resolution committee for Dubai (Decree No. 691/2020)

Since around September 2020, the tax dispute resolution committee of the Emirate of Dubai has been inoperable (under reformation).

Objections that have been filed since then with the Dubai tax dispute resolution committee had not been decided on.

On 25 November 2020, the UAE Minister of Justice issued Ministerial Decree No. 691/2020 on the Formation of Tax Dispute Resolution Committees for the Emirate of Dubai.

The Decree was recently published in the Official Gazette and orders the formation of two tax dispute resolution committees for the Emirate of Dubai.

The Ministerial Decree is significant because formerly, under Ministerial Decrees No. 109/2019 and 456/2020, the Emirate of Dubai had only one tax dispute resolution committee to hear objections against reconsideration decisions of the Federal Tax Authority.

Since 2018, all taxpayers registered in the Emirate of Dubai would submit their objections to only one committee and the statistics over the past three years reflect a substantial increase of objections that seem to have necessitated expanding the capacities to hear objections:

  • 10 objections filed in 2018 (approximately).
  • 30 objections filed in 2019 (approximately).
  • 160 objections filed in 2020 (approximately).

The two new committees will be assigned objections to decide on based on whether the first numeric of the docket registration number is an odd or even number.

The Ministerial Decree names new chairs (judges) and members (experts), and new general secretaries for the two newly formed tax dispute resolution committees.

Has this happened before and what to expect?

The first tax dispute resolution committee objections were filed on 29 August 2018 with the Ministry of Justice and were a total of five objections addressed to the Dubai tax dispute resolution committee (TDRC).

However, the objections were officially registered upon the formation of the Dubai TDRC on 31 March 2019, and the decisions were issued on 8 April 2019.

In hindsight, one can see that even where objections were filed before the formation of the TDRC, the TDRC formally registered and decided on the objections when it was formed.

However, this is not the only potential outcome for the current objections filed with the Dubai TDRC since September 2020.

In mid-2020, the Federal Courts ruled that if a reconsideration decision is not issued by the FTA within the procedural time-bar, it must be considered an implied rejection triggering the time-bar to challenge the implied rejection (twenty weekdays).

An implied rejection pursuant to Article 84(bis) of the Civil Procedures Law is the general rule that a grievance to an administrative body (in this case the FTA or TDRC) that is not decided upon within the procedural time-bar is to be considered an implied rejection.

This is also supported by Article 33(2)(b) of the Tax Procedures Law which states that challenges against objections that are not decided on may be filed with the Federal Primary Court in case of non-issuance of a decision by the tax dispute resolution committee.

As was the case in 2018 and 2019, the newly formed Dubai tax dispute resolution committees may issue decisions on the backlog of objections that had been registered since September 2020.

On the other hand, the newly formed Dubai tax dispute resolution committees and the Federal Courts may take the position that Article 33(2)(b) of the Tax Procedures Law should have been triggered by those who filed objections and the disputes should have been directed to the Federal Primary Court.

 Disclaimer: Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/ interpretation of the publisher is based on the available Law, guidelines, and information. Each reader should take due professional care before you act after reading the contents of that article/ post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide and should not be relied on for tax or accounting advice.

Tax Insights

Bahrain VAT -Reimbursement or disbursement?

November 2020, By KPMG Bahrain.

Background
As per the Bahrain VAT Executive Regulations, where a taxable person incurs an expense in his name and subsequently recharges the expense to another person, such recharge will be taxable. However, where the expense is incurred directly in the name of the other person, recovery of such expense by the taxable person from the other person will be outside the scope of VAT. Many businesses incur expenses on behalf of their customers as well as related parties. Therefore, it is critical to examine the following:

  1. Do you know the VAT treatment of billing those costs to your customer/related party?
  2. Should the cost be treated as a disbursement (outside the scope of VAT) or a taxable recharge?
  3. If it is a taxable recharge what is the applicable VAT rate?

Taxable reimbursements:
Where an expense is incurred directly by a business in the course of making supplies to its customer, the expense should, generally, be treated as a reimbursement subject to VAT. Examples include:

  • ABC Consultants will incurs flight and hotel costs in the course of conducting a client engagement and recharges these to its client.
  • ABC Consultants will engages a law firm to provide input on a legal point which forms part of the advice it delivers to its client and recharges the lawyers’ fees to its client.
  • Parent Company will incurs rental costs for the premises occupied by it and its subsidiaries and then recharges the relevant portion to its subsidiaries.

VAT on the Recovery of Salik

A Dilemma between Reimbursement and Disbursement

Geet ShahGeet Shah     27 March 2020

VAT on the Recovery of Salik: A Dilemma between Reimbursement and Disbursement

The levying of a toll or a fee for access to a road or a bridge is a practice that has existed since antiquity. Over time, the collection of such tolls advanced from physical toll booths to electronic toll gates. In the UAE, Dubai was the first Emirate in year 2007 to introduce an electronic road toll system. The system popularly now known as ‘Salik’ involves collection of fees by means of a deduction from a prepaid user account, every time a vehicle passes through the toll gates.

In late 2017, at the time of the VAT implementation, there was ambiguity regarding the taxability of the salik fees. The Road Transport Authority (RTA) clarified the matter, stating that such fees were outside the scope of VAT. Although the RTA statement provided relief for the public at large, there was confusion among the car rental companies regarding the treatment that was to be adopted for the subsequent recovery of salik fees from the customer– would they be outside the scope of VAT,as clarified by the RTA,or would they attract VAT of 5% as a part of the car rental service?

After 2 years of VAT in the UAE and following the public clarification by the FTA on Disbursements and Reimbursements, the taxability of salik fees as recovery has gained attention. In clarification, the FTA acknowledges the possibility of commercial arrangements that involve a supplier or a service provider incurring expenses or making payment on behalf of customer and subsequently recovering the same from the customer.The FTA has stated that recoveries can either be classified as ‘reimbursement’ (expenses incurred during the course of making supplies) within the scope of VAT, or as‘disbursement’ (amounts paid purely on behalf of the customer), which are outside the scope of VAT.

Considering the clarification, it is necessary to examine whether salik fees incurred by the car rental companies or any other service provider and recovered from the customer, is a reimbursement or a disbursement from a VAT perspective. The following aspects could be relevant:

Beneficiary of Toll Services: Generally, the consideration for car rental services is based on usage (in kilometers) or on the tenure of the lease. To ease the driving of rental car within the region, the car rental companies provide salik tags affixed to the car on the condition that salik fees, as levied by the RTA, are paid at actual with a separate administrative fee. Using the beneficiary test, it is possible to argue that the services to access the road network was received by the customer directly and the car rental company has merely paid the salik fees on customer’s behalf. As such, the recovery of the salik should qualify as a disbursement.

Legal Obligation: As per Article 3 of Dubai Toll Law No. 22/2006, the authorities have power to levy toll on the vehicle owners who uses the road network in the Emirate. Basis the said article, the VAT authorities can take a view that the owner of the vehicle is the car rental company which has been imposed with salik and not the customer driving the vehicle and therefore, it should qualify as a reimbursement subject to VAT.

Accounting treatment: The accounting of salik cost in the books is one of the critical aspects to examine the correct VAT treatment. The salik paid to the RTA is recognized as receivable from the customer and is not accounted as business expense. This clearly shows that the salik paid is not the incidental cost of car rental business and is recognized as expense paid on behalf of the customer and therefore should qualify as disbursement. 

Conclusion

The issue surrounding the applicable VAT treatment have emerged as a result of salik fees being deducted electronically, rather than being collected by means of a physical toll booth, where the customer would be able to pay the fees, without any VAT impact. Should the VAT position change due to an electronic system for collecting toll fees? It will be interesting to see how the tax position evolves before the authorities, or before a tax dispute resolution committee or the federal courts in a potential tax dispute.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.