SKP Group
8 August 2018
UAE VAT Updates: Clarifications Issued
Use of Exchange rate for VAT purposes[1]
VAT Decree-Law mandates that where supply is made in a currency other than the UAE Dirham, then for the purpose of tax Invoice, the amount stated shall be converted into UAE Dirham as per the exchange rate approved by the Central Bank at the date of supply. Furthermore, the Central Bank of UAE has already commenced publishing of the aforesaid exchange rate from 17 May 2018 onward. The VAT public clarification aims to aid businesses understand the practical applicability of exchange rates.
Key pointers have been listed below:
  1. There is no requirement for businesses to reissue historical tax invoices for the time before 17 May 2018 to reflect the Central Bank exchange rate, provided that the exchange rate used is from a reliable source and the same source has been used consistently.
  2. Businesses must use the exact exchange rate as published by the Central Bank, which includes using the same number of decimal places as published post 17 May 2018.
  3. The Central Bank updates the exchange rates on its website every day on or after 6 p.m., to cover the rate applicable for that day.
  4. Where a tax invoice is issued prior to 6 p.m. on any given day, it will be acceptable to use the exchange rate published on Central Bank’s website at the time the tax invoice is raised, i.e., the rate for the day before.
  5. A foreign supplier who is not registered for VAT in the UAE is likely to issue an invoice which is not a tax invoice for UAE VAT purposes. It is acceptable to use the date of the invoice as the date of supply of the imported service and the use of the exchange rate applicable for the same date.
  6.  In case if the Customs exchange rate used differs from that of the exchange rate of the Central Bank , businesses shall be permitted to use the exchange rate that was applied by the Customs department for the purpose of declaring the VAT due on import of goods.
VAT clarification on non-recoverable input tax[2]
This clarification explains the reason behind the application of one of the important provisions under the VAT Regulations, which was subject to interpretation. There was a caveat on the eligibility of input VAT credit that would be available with respect to entertainment or hospitality, which could be incurred during the course of business. We have summarized the critical points in the clarification below:
  1. The phrase “entertainment services” includes the provisions of accommodation, food and drinks that are otherwise not provided in the normal course of a meeting, apart from access to shows, events or trips for pleasure or entertainment.
  2. The phrase stating “simple food and refreshment” that are provided in due course of a meeting) may be considered as a normal business expense, and hence is recoverable. The Federal Tax Authority (FTA) seeks to clarify the intent of the article. It states that  if the food and refreshments can be  considered to be  substantial enough  to  qualify as an end supply in themselves and the same may  encourage  higher attendance  in the meeting, the input tax thus incurred will be  non-recoverable. Furthermore, the FTA states that if the business is uncertain of whether hospitality is to be provided or not in the normal course of a business meeting, it should refrain from recovering input tax on the expenses.
  3. VAT incurred on entertainment services that are provided to non-employees by a designated government entity shall be recoverable in full.
  4. Entertainment services for customers, officials and shareholders of non-government entity will not be eligible for input VAT recovery.
  5. If  goods or services that are purchased by any person to be used by employees for no charge to them and for their personal benefit, including the provision of entertainment services, then the VAT incurred on the cost is not recoverable unless, the only circumstances under  which the aforesaid taxable person is entitled to recover VAT  costs are:
    1. If  it is a legal obligation to provide those services or goods to those employees under any applicable labour law in the UAE or designated zone in which the entity is;
    2. If it is a contractual obligation or documented policy to provide those services or goods to those employees   so that they may perform their role, and it can be proven to be normal business practice in the course of employing those people; or
    3. If  the provision of goods or services is a deemed supply under the provisions of the Decree-Law.
For example, in case of  a new employee joins as a registered taxpayer and is provided with hotel accommodation for a short initial period prior to finding their own accommodation, this would not be considered entertainment and hence  VAT incurred on such costs would be recoverable, as this cost is necessary for the person to perform their role.

However, when a business organizes a lunch or dinner for its employees, e.g., a Ramadan Iftar, this would be considered to be a source of entertainment, and hence the VAT incurred thereby would be blocked from recovery.
  1. Expenses incurred by businesses during conferences or other business events without charging a fee to the attendee would be ineligible for input VAT recovery.
  2. The FTA has clarified that normal incidental office expenses for general use by both employees and visitors do not give rise to non-recoverable input tax under Article 53.
  3. Taxable persons may also purchase goods or services that are to be given away to staff free of charge, in order to reward them for their long service. However, input VAT on the same would be blocked from recovery.
  4. Input VAT could be recovered on expenses that are incurred during  business trips made by the employees, which are subsequently reimbursed by the business (except for expenses incurred for customers/officials during the business trip).
VAT guide on Designated Zone[3]
The guide aims to provide a direction  for businesses that are operating in Designated Zones, and are seeking to understand the VAT implications with respect to their activities within and outside the Designated Zones.
Some of the key points of the guide are listed below:
  1. Free Zones meeting the criteria of Designated Zone have been specifically identified by way of a Cabinet Decision. If  a Free Zone is not a Designated Zone, it is to be treated on par with  any other part of the UAE.
  2.  Businesses that are established, registered or have a place of residence within the Designated Zone are deemed to have a place of residence in the UAE for VAT purposes. This means that they have the same obligations as the non-Designated Zone businesses have and therefore they have to register, report and account for the VAT under the normal rules. It also means that they can join a tax group (VAT group) provided they meet the required conditions.
  3. Supply of goods within a Designated Zone is treated as made outside the UAE. This means that the default position is that such supplies are not subject to UAE VAT. This default position is overridden if a supply of goods is made within a Designated Zone to a person to be consumed by him or another person. In such situations the place of supply will be treated in the UAE and VAT will be applicable under the normal rules. The onus will be on the supplier to ensure that he treats a supply correctly for VAT purposes. A written statement from the recipient that the goods will not be consumed should be sufficient for these purposes.
  4. If goods are moved between Designated Zones, the FTA may require the owner of the goods to provide a financial guarantee for the payment of VAT, which that person may become liable for, should the conditions for movement of the goods are not met.
  5. Goods that are located in a Designated Zone, which the owner has not paid VAT on, will be treated as imported into the UAE where such goods are consumed by the owner.
  6. If a supply of goods between the tax group members results in the goods being moved from a Designated Zone into the mainland, this importation of the goods would trigger the obligation to pay import VAT. The payment of import VAT will be done using the normal process for such payments. Similar implications shall arise in case of movement of goods within the branch office and head office where either of the entity is located in Designated Zone and the other within UAE mainland.
SKP comments
Businesses should ensure their accounting systems are adequately equipped to capture the exchange rates that are published by the Central Bank of UAE. Additionally, given the clarification on entertainment expenses and recovery of VAT thereto, which may be blocked given the interpretation provided, they should ensure to take requisite remedial steps wherever VAT has been recovered prior to issuance of such clarification. The option to apply for voluntary disclosure may be explored.

Additionally, a written statement from the recipient for supply within Designated Zone should be adequately documented.
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