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The Federal Tax Authority (“FTA”) has recently issued a new public clarification to explain the recoverability of input VAT on entertainment expenses. They have also published a guide to provide guidance to businesses operating in designated zones (“DZs”) on the VAT treatment of their activities within and outside the DZs.
1. The Clarification
In the Public Clarification VAT P005 (“Clarification”), the FTA confirms that where the costs are incurred for a genuine business purpose or are incidental to such a purpose, VAT will be recoverable. However, where the hospitality becomes an end in itself and becomes the main purpose for attending an event, this would be regarded as entertainment and consequently any VAT incurred on such costs would not be recoverable.
The Clarification also provides detailed criteria to enable businesses to ascertain the circumstances in which costs would be incurred for a genuine business purpose or incidental to such a purpose, or considered to be an end in themselves.
Examples of costs which are considered to be incurred for a genuine business purpose or are incidental to such a purpose include:
Examples of costs incurred for entertainment services which constitute an end in itself include:
2. VAT Guide on DZs
Under the VAT Guide on DZs, the FTA confirmed the VAT treatment applicable to businesses operating in DZs as provided for in the VAT law and related executive regulations and clarified the VAT treatment of supplies in specific cases where there was previously some uncertainty. The key takeaways are as follows:
What should you do next?
Businesses should consider the implications of this Clarification on their transactions to ensure that the correct amount of input VAT is being recovered. Further, businesses should understand the impact of the VAT Guide on DZs on their business operations within and outside DZs and continuously ensure that the correct VAT treatment is being applied to its transactions.
How can we help?
Al Tamimi can assist you to assess the impact of this Clarification and the VAT Guide on DZs, and advise you on the recoverability of input VAT and VAT treatment of transactions involving entities operating in DZs.
Please do not hesitate to contact Al Tamimi’s Tax Team if you require any assistance.