FTA issues clarification on the recoverability of input VAT for ‘entertainment services’ and guide on designated zones
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:
- catering services for conferences where a fee is charged;
- food and drinks purchased by an employee for own consumption during a business trip; and
- sundry office expenses such as tea and coffee supplies or flowers for display in offices.
Examples of costs incurred for entertainment services which constitute an end in itself include:
- gala dinners for no charge;
- Ramadan Iftars; and
- staff parties.
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:
- the FTA have clarified that the movement of goods from a designated zone into the UAE mainland will be treated as an import of goods into the UAE and the importer would be required to account for VAT on the import of the goods;
- the FTA have indicated that supply of goods from a business established in a designated zone to outside the UAE will be outside the scope of VAT rather than zero rated for VAT purposes as had been assumed by some businesses;
- the place of supply of water and energy for the purpose of consumption is treated as being within the UAE even if it is used in the process of production of other goods in the designated zone; and
- the FTA have reiterated that, for the purpose of the designated zones rules, real estate is not treated as consumed when sold or leased within a designated zone and accordingly such supplies of real estate are outside the scope of VAT. However, the supply of real estate other than by way of sale or lease (e.g. the right to use hotel accommodation) will be treated as a supply of services related to real estate and subject to VAT in the normal way.
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.