No VAT on Donations, Sponsorships and Grants: Said FTA

vat on sponsorship

The FTA (Federal Tax Authority) has recently confirmed that VAT (Value Added Tax) will not be charged for donations, grants and sponsorships only in cases when they are made for no return benefit. It further added that if any benefit is received in the return of a donation, then VAT will be charged.

On the official website of FTA, a new update has been released by the authority on VAT treatment for donations, grants, and sponsorships in order to make the taxpayers aware about the changes in technicalities and procedures in the tax system.

FTA has today released a statement saying that the VAT eligibility for payments such as “donation”, “sponsorship” and “grant” cannot be simply determined by the definition, as businesses must consider the associated facts and terms before making a decision. Khalid Ali Al Bustani, Director-General FTA, further added that VAT has been designed such as to encourage charity and social activities with a focus on keeping the underlying principles in mind.

Consideration has been defined under Article (1) of the Federal Decree-Law No. (8) of 2017 on VAT as, “All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment.”

According to that definition, donations should not be treated as considerations only if no exchange of services or benefits is taking place.

FTA further said that payment in the form of donations and grants can be received by any registered taxpayer from any third party such as an employee, relative, customer and others. The eligibility of such payments for VAT will depend on whether these payments can be treated as a payment against taxable supplies/services.

As has already been clarified several times before, the VAT can be implicated only in the case when a taxable supply is made, as the definition of consideration is quite wide under the VAT system. If a donation, grant or sponsorship is made in exchange for a direct benefit in the form of a service, VAT would be levied on such payments. However, if a donation or similar act is made without any implied benefit or service, no VAT is levied on that.

In short, a donation or grant must be unconditional and unrestricted in order for it to be eligible for VAT exemption.

As an example, FTA said that if a business is donating money to a hospital and in exchange getting space to market its offerings/products/services, it would be considered as a taxable supply and VAT would be levied on the same.

Similarly, sponsorships are usually made in exchange for a benefit or supply, such as business advertisements or promotion, then this kind of supply would not be exempted from VAT.

Conditions to Allow Foreign Businesses to Refund VAT in UAE

Conditions to Allow Foreign Businesses to Recover VAT in UAE

The foreign businesses had problems in recovering the VAT (Value Added Tax) in UAE(United Arab Emirates). So to solve this problem, the FTA (Federal Tax Authority) has given some conditions.

Conditions to be eligible for the VAT refund

The FTA gave four conditions that will help the foreign businesses to allow the recovery of VAT in UAE.

  1. The foreign businesses must not have a fixed establishment or a place of establishment in any of the VAT-implementing GCC (Gulf Cooperation Council) states or in the UAE.
  2. The foreign businesses must not pay tax in the UAE.
  3. The Foreign businesses with a capable authority must also be registered as an establishment in the jurisdiction in which the businesses are established.
  4. The Foreign businesses must be from the country which implements VAT and also gives VAT refunds to UAE businesses in the same situations.

Time period for claiming refund

The Authority said that the time period for claiming refund must be a calendar year.

  • To claim the refund of 2018, the refund applications can be made before April 2019.
  • For the succeeding year, the opening date for accepting the application is March 1, 2020.

Read Also: VAT Refund Scheme for Businesses in UAE

Minimum claim amount of each VAT refund application

The minimum claim amount of each VAT refund application submitted by the foreign visitors is Dh2,000 which might be single or multiple purchases said FTA. The Authority told that the applicants will need the tax invoices to submit it with the refund applications due to which on the purchases for which the applicants wants to reclaim the VAT, they have to hold on to the original tax invoices.

Situations where VAT cannot be reclaimed:

To reclaim the VAT in UAE under this plan, the state might submit the VAT refund application guaranteed FTA, stating the three condition in which the VAT cannot be reclaimed.

  1. In case the receiver of supplies being done by the foreign business, liable under reverse charge mechanism for the VAT.
  2. If the ITC of any goods or services is “blocked” from the recovery, then the VAT cannot be processed further due to which no recoverable can be done by a taxable person in the UAE.
  3. If the foreign business is a non-resident tour operator, then they cannot reclaim the refund.

Khalid Ali Al Bustani, director-general, FTA said “This procedure reflects positively on many sectors, including tourism, trade, exhibitions, conferences, etc. The reciprocity is a key condition for the procedure, whereby the Authority will refund the VAT to businesses resident in countries that refund VAT for UAE businesses visiting their territories”.

Cosmetic Services Prone to 5% VAT in UAE

Cosmetic Services Prone to 5 percent VAT in UAE

The tax experts said that the healthcare services like the cosmetic will now subject to a 5 percent VAT rate.

Most of the healthcare services are classified as zero-rated under the UAE VAT law which means that such services are subject to zero percent VAT. But it allows the VAT recovery on associated costs.

While addressing a seminar on VAT, Nimish Goel, partner at WTS Dhruva Consultants, said “The government has a keen interest and focus on promoting the healthcare industry in the UAE. Keeping this intent in mind, the government has kept basic and preventive healthcare supply at a zero rate of VAT. But there are a lot of activities that are still subject to VAT”.

As per the research reports, the healthcare expenditure is calculated to reach more than $100 billion in the GCC in which the UAE will play a very important role. It is calculated that by 2020, the UAE healthcare will reach Dh 71.56 billion.

Dr Ramadan AlBlooshi, CEO, Dubai Healthcare City Authority – Regulatory (DHCR), said that the VAT was introduced at the beginning of 2018 and after its introduction, the authority got to know about its implementation.

He said “We are keen to provide a platform to help stakeholders have a better understanding of VAT to facilitate compliance in the free zone“.

For the companies which are operating in the healthcare sectors, WTS Dhruva Consultants launched a comprehensive VAT guide at the seminar. The title of the guide is “VAT on Health Care in UAE – Impact and Insights” which gave the information about the issues related to healthcare insurance companies, service providers, and related products.

It is for the first time that someone has prepared a VAT guide for the healthcare sector in the UAE said Dinesh Kanabar, CEO and founder of WTS Dhruva addressing the VAT guide prepared by WTS Dhruva.

He said, “The guide addresses numerous issues related to the activities of healthcare service providers”.

UAE VAT Deregistration [Criteria & Disadvantages]

UAE VAT Deregistration

The VAT UAE Laws provide registered taxpayers (including voluntary registrants) and companies with provisions for VAT deregistration too. An entity can apply for deregistration if the annual turnover did not exceed Dh187,500 ($51,000) 13 months after registering with the FTA.

The VAT UAE Deregistration Criteria

Under the VAT Decree Law and Executive Regulations, VAT Registered Taxpayers and companies must fulfill the below criteria to put into motion the VAT Deregistration:

  • Total Taxable Supplies within 12 months from the date of VAT registration do not exceed Dh187,500.
  • Anticipated taxable supplies for the succeeding 30 Day period starting from the end of tax year will also not make cumulative taxable supplies or expense cross the Dh187,500 threshold.

If the above two criteria hold true for a particular entity, taxpayer or company, it can apply for deregistration.

Note: Failure to do will attract an administrative VAT deregistration penalty of Dh10,000.

The Tax Year in UAE

Tax Year varies with respect to the date of application for Tax Registration. To cite an example, if the applicant applied for voluntary registration on May 1, 2018, his/her tax year will end on April 1, 2019.

In the above case if the registrant has not made supplies equal to Dh187,500 for the tax year. And has also assessed his supplies and expenses for the next thirty days (ending on May 30) to be confirmed that the, an application for deregistration can be made before June 20.

Reportedly, more than a few thousand companies in UAE will file for deregistration owing to liquidation or any of the above-mentioned criteria. Accordingly, a number of companies will apply for registrations as they meet the registration criteria for the first time this year.

VAT Deregistration Disadvantages

One of the primary disadvantages would be the inability of businesses to make VAT input claims on supplies made by them. This will make their supply dearer by a considerable fraction which may force VAT-registered customers to look for other alternative suppliers.

Moreover, non-registered businesses would be required to pay VAT against inventory and assets procured while they were registered under VAT. This would be applicable irrespective of any VAT Claims on them.

All such supplies would be treated as deemed-supplies or self-supply of assets from date of deregistration. Hence, Businesses need to be careful while applying for deregistration.

However, there are a few underlying benefits of deregistration too. The primary among this is that they can make supplies to unregistered individuals and businesses at cheaper rates than their registered counterparts.

Also, businesses would not have to pay VAT Compliance Fees. However, experts say that the nominal threshold limit will mean that very few businesses will be eligible for deregistration.

7 Business expenses on which Input VAT can be recovered

7 Business expenses on which Input VAT can be recovered

VAT Regime was introduced in UAE on January 1, 2018. It has been almost one year in the introduction of VAT in UAE and we are pretty sure that businesses enterprises are aware of how to claim for the Input VAT recovery.

The UAE government also has clearly mentioned the conditions for the businesses while there is also a detailed list expense wherein the businesses are allowed to recover the Input VAT.

The eligibility of Input VAT has clearly mentioned under the VAT regime. However, there are various types of expenses which people might think not directly related to outward supplies but VAT has allowed people to claim Input VAT recovery on it.

In this article, we are going to tell you about 7 types of expenses which have been frequently incurred by the businesses and they are eligible to recover Input VAT on it.

Input VAT Recovery on 7 business expenses

1. Food and drinks For Customer or clients

If an employer has offered lunch, soft drinks, coffee or any kind of beverages to the customers during the course of the business meeting then the businesses are liable to claim for Input VAT. If providing additional benefits to the customers by presenting gift, movies or lunch in this case businesses would not be liable to claim input VAT on it.

From the above definition, it is clearly stated that the VAT regime allows taxpayers to claim Input VAT on the entertainment expenses only if it is incurred during the course of business meeting otherwise it is totally restricted.

2. Fuel expenses

For instance, if you deal in supplying goods and on the daily routine basis you incurs petrol expenses to deliver goods to the customers in this condition businesses would be allowed to recover input VAT. However, it can be applied in both personal and professional purpose. It is quite difficult to evaluate and distribute the Input VAT recovery. People who are working in the marketing field are allowed to claim petrol expenses.

3. Employee Conveyance Expense

Under the Employment Contract Act, it is clearly mentioned that the conveyance facility should be provided to the employees during the late night hours which includes ‘To’ and ‘From’ the office. Here the business can claim for the petrol expenses incurred by them under the VAT regime.

Reason being a contractual obligation or the documented policy of the organization which has included the said services to the employees for assisting them in performing job responsibility and is a normal business practice.

4. Visa to employee Expenses

The Visa Cost of expat employees has been incurred by businesses in UAE and they pay 5 percent of the cost of Visa. Therefore, businesses would be allowed to recover the input VAT on such kind of expenses. Here, the Visa cost incurs by business enterprises allow employees to perform his duties and it is a normal course of the business activity.

5. Employee Medical insurance Expenses

Businesses in Dubai provides health insurance facility to their employees and pay 5 percent VAT on it. Under the VAT regime, the business can claim for the VAT paid on medical insurance which should be compulsorily provided to the employees.

6. Expenses on legal consultation

In case a business firm indulged in the supply of taxable goods has paid Value added tax on the legal fees on a continuous basis for getting legal consultation service from a legal consultancy, is entitled to get the VAT paid on legal services by the business firm even if it is not directly attached to the supply of goods.

Reason being the non-necessity of link each & every purchase with the outward supply within the business unit as various purchases such as the legal consultancy is used by the business firm other than the supply

7. Service industry Capital Expenditure

For instance, law-based firm deals in supplying taxable services has purchased the new furniture or office table for its employees. Although, the law firm has been using the furniture or table to perform its taxable activities so the law firm is liable to claim for the input VAT incurred on purchasing the new furniture.

Impact of VAT in UAE [1 Year and Counting]

vat in uae in one year

UAE recently celebrated its first VAT anniversary. The country, known for its rich oil reserves and a booming global tourist hub, had introduced VAT to open up a new source of non-oil revenue for offering efficient and much improved public services, including medical facilities, good roads, transportation facilities, public schools, parks, waste control, and more.

The VAT in UAE was introduced on Jan 1, 2018. More than a year later, tax experts acknowledge the role of FDA (Federal Tax Authority) and UAE public for the successful implementation. Reportedly, the 5 percent VAT was the first of any form of TAX introduced in the Emirates.

The Role of FTA in VAT UAE Success

FTA was at the realm of all VAT related decisions in UAE. Their principle role includes key functions like :

  • Clearing all impending ambiguities (if any).
  • Issuing timely circulars and guides on VAT related provisions.
  • Ensuring compliance from UAE traders, business owners and the public at large.

The UAE VAT rates are one of the lowest in the world right now. VAT UAE provisions mandate VAT registration for all natural and legal UAE person with taxable business supplies exceeding Dh375,000 ($100,000) during the previous 12 months.

In case the total taxable supplies have not exceeded Dh375,000 ($100,000) but expected to cross the threshold within 30 days of the succeeding year, VAT registration must be done.

While registration is key for a robust VAT, filing VAT returns are also equally important. VAT UAE norms mandate large businesses to file monthly returns. Other business can file quarterly returns based on revenues.

FTA must be applauded for ensuring maximum registration and easing compliance burden with timely guides. This ease of process coupled with companies embracing VAT readily by restructuring business processes and systems have made the transition period smooth and frictionless. FA is yet to release tax revenue figures but the recent increment in federal budget spending surely hint towards better days ahead.

The role of FTA is particularly more prominent considering the fact that VAT UAE was in itself the first among any form of tax introduced in the emirates. However, UAE and FTA exempt precious metals such as gold, silver, and platinum as well as sectors such as healthcare, education, and transport from the VAT ambit.

The Tourist VAT Refund Scheme

The VAT Tourist Refund Scheme has now been completely put into place. The first phase was launched on November 18. The second and final phase was introduced on December 16. The achene now facilitates international tourists in UAE to make timely VAT refund claims against purchases made by them on the UAE soil.

Tourists visiting UAE can make claims while leaving the country from any of the following international airports – Dubai, Abu Dhabi, Sharjah, Al Ain International Airport, Al Maktoum International Airport and Ras Al Khaimah International Airport.

In addition to this, tourists can also claim refunds via two ­sea ports – Zayed Port in Abu Dhabi and Port Rashid in Dubai; and four land ports – Al Ghuwaifat Border Post in Abu Dhabi, Hili Border Port and Al Madeef Border Crossing in Al Ain and Dubai’s Hatta Border Exit. Refunds are transferred within 90 days of the claim.

The Projections

The first UAE VAT accrues are projected to touch the Dh12 billion mark in 2018. For 2019, the prediction is a whopping Dh20 billion. Amidst years of the dependence of fledgling crude prices as the primary revenue source, the VAT UAE not only opens new diverse revenue sources but also shows the way ahead for other GSS states and oil producing nations.

The Audits

As the new year slowly sets in, businesses in UAE are gearing up for VAT Audits. The FTA Audits will ensure that businesses stick to fair book-keeping. FTA Audits will be carried out over a period of five working days starting with the day following the particular emails release date.

The Audit periods will include two phases for January 1, 2018-to-April 30, 2018 and May 1, 2018-to-July 31, 2018 tax periods. Businesses must ensure that their expense claims are backed by legitimate and appropriate documents. Last but not least, businesses must also ensure robust book-keeping with timely payment of due tax.