NEW GUIDE FOR INPUT TAX APPORTIONMENT

INTRODUCTION

A taxable person incurs expenses which are subject to VAT while conducting business activity. The Federal Tax Authority has however made legislations for recovering the VAT that is incurred by way of the input tax credit.  This input tax credit ensures that VAT is not a cost to such a taxable person.

The recovery of input tax is however subject to certain conditions which are as follows :

• The goods and services that have been acquired are either used or intended to be used for making taxable supplies
• They should be used for making supplies which are made outside UAE which would have been considered as taxable if they were made in the UAE
• They should be used for making supplies of financial services which would have been treated as exempt if they were made in the UAE. These should be provided to a person who is outside UAE and is treated as taking place outside UAE.  

The person would be able to recover the input tax in full if the acquisition by a taxable person relates solely to the supplies indicated above. If the acquisition is linked to either non-business or exempt supplies, then full input tax would not be recovered. In case goods and services are used partly for making supplies that allow for input tax recovery and partly for making supplies that do not allow recovery, then the taxable person will be required to determine the portion of input tax that can be recovered.

WHAT IS RESIDUAL INPUT TAX?

Residual input tax refers to input tax incurred in respect of goods and services that are partly used for making supplies which allow for VAT recovery and are partly used for making supplies which do not allow for VAT recovery. Recovery of VAT in such case is restricted to the proportion relating to the supplies which allow for VAT recovery.

HOW TO IDENTIFY THE AMOUNT OF RESIDUAL INPUT TAX?

In order to identify the amount of residual input tax, it is first necessary to exclude input tax which is either recoverable or non-recoverable in full.

The following calculations are to be performed in respect of each tax period :

• Calculation of the total value of input tax which is attributable directly with regard to the supplies for which VAT may be recovered under Article 54(1) of the Federal Decree Law No (8) of 2017
• Calculation of the total value of input tax which is directly attributable to the supplies for which VAT is not to be recovered
• Calculation of the total value of input tax which relates to the supplies for which VAT may be recovered and for the supplies for which VAT cannot be recovered    

WHAT IS THE TIME INTERVAL FOR THIS CALCULATION?

This is to be performed in each period in which the taxable person incurs input tax relating to the making of exempt supplies or to activities which are not in the course of business. The taxable person is required to perform a wash-up calculation for the whole tax year using the identified principles for making an appropriate adjustment. In case there is a difference of more than AED 250,000 in any tax year between the recoverable input tax which is calculated, then the taxable person would be required to make an adjustment to the input tax in respect of such difference.  

WHAT ARE SPECIAL INPUT TAX APPORTIONMENT METHODS?

The Federal Tax Authority has introduced a number of input tax apportionment methods which are to be used where the standard methods do not provide an outcome that is reflective of the actual use of the acquired goods or services.

In order to use special methods, a registrant is required to apply to the Federal Tax Authority.  Any Applications that have been approved by the FTA would be effective from January 1, 2019. In the application, the registrant is required to specify the method which he is applying for and is also required to provide an evidence that the special method of apportionment will be more appropriated than the standard method. In case the authority approves the use of such method, the taxpayer would be required to use the approved method for at least 2 years.  

WHO CAN APPLY FOR THESE METHODS?

To be eligible for applying the special input tax apportionment method, the following conditions must be met :

• The applicant should have been registered for at least 6 months
• The applicant should make exempt as well as taxable supplies
• The standard method should not give a fair and a reasonable result for input tax recovery

WHO CAN SUBMIT THE APPLICATIONS?

The input tax apportionment request form is to be submitted by the person who is seeking to use the special apportionment method. In case the application is submitted on behalf of a tax group or for a member of a tax group, the request should be submitted by the representative member of the tax group.

Submissions would also be accepted in case they are submitted on behalf of the applicant by either of the following :

• The appointed tax agent
• The appointed legal representative

WHAT SHOULD THE APPLICATION CONTAIN?

The application should contain the following :

• Reasons for applying for a special input tax apportionment
• A detailed description of the business activities of the applicant
• Historical calculations of the residual input tax apportionment using the standard method of apportionment provided in Article 55 of the Executive Regulations.
• Calculations of the residual input tax apportionment for the same period but using a special method for which the applicant is applying and an alternative method is applicable.

In case the applicant applies for using sectoral method then the applicant will be required to provide special apportionment method calculations for each of the sectors in respect of which the application is made

After the form is complete, it’s soft copy is to be mailed to InputTaxMethod@tax.gov.ae along with supporting documents.  

WHAT ARE THE TYPES OF SPECIAL INPUT TAX APPORTIONMENT METHODS?

The following are the special input tax apportionment methods which are available to a taxable person :

1. OUTPUT-BASED TRANSACTIONS

This method calculates the apportionment percentage for residual input tax on the basis of the outputs which are made by the taxable person. In order to calculate the recovery ratio under this method, a taxable person is required to identify the value of taxable supplies as a proportion of all the supplies made by the taxable person.

The principle behind this method is that VAT on the expenses incurred by a business is directly linked to the income earned. This method is used in business where there is a strong correlation between income and expenses.

WHO IS IT AVAILABLE TO?

This method is available to the companies engaged in the following sectors  :

• Insurance companies (Islamic as well as Non-Islamic)
• Retail banks (Islamic and Non-Islamic)
• Banks which are engaged in certain aspects of wholesale and/or investment banking (Islamic and Non-Islamic)
• Providers of local passenger transportation services

2. TRANSACTION COUNT METHOD

Identifies the apportionment percentage for residual input tax by calculating the number of taxable transactions as a proportion of all the transactions that are made by the business during that period. It is used when the VAT on the expenses incurred by the business is most directly linked to the number of transactions rather than the amount of income earned.

This is available to the banks (Islamic and Non- Islamic) who are engaged in wholesale and investment trading activities since the costs that have been incurred in the course of such activities are similar per trade regardless of the trade’s value.

3. FLOOR SPACE METHOD

This method calculates the apportionment percentage for residual input tax by identifying the proportion of the floorspace used for taxable activity as a percentage of the total floor space used by the business. This method is used in case it is possible to identify as to when a specific area is used in taxable or nontaxable/exempt activity. This method is used in cases where it is possible to identify a specific area which is used in a taxable or non-taxable/exempt activity.

This method is available to all the businesses which deal with supplies of commercial as well as residential properties. It includes real estate companies and other businesses which sell or rent out real estate on an ongoing business. In this case, the expenses are similar for floorspace irrespective of the fact that they are used for making exempt or taxable supplies.  

4. SECTORAL METHOD

WHERE CAN THIS METHOD BE USED?

Under this method, the following steps are to be followed :

• The taxable person is required to identify the residual input tax in accordance with the general rules mentioned in Article 55 of the Executive Regulations
• Secondly, any residual input tax which relates to more than one sector is divided between those sectors in accordance with an appropriate allocation method
• Then, the remaining residual input tax which relates to more than one sector is divided between those sectors in accordance with an appropriate allocation method
• Each sector would be assigned their own apportionment method which us appropriate for that sector. This assigned method would be used by the sector to apportion the residual input tax which relates to that sector.

WHEN IS THIS METHOD APPLICABLE?

• This method is applicable to businesses who conduct different activities through discrete divisions of a single entity and different expenses relate to activities of different divisions.
• It is also used by different entities which are members of the same tax group.  

CONCLUSION

Output-based, transaction count and floorspace methods are used in case of a business which is engaged in a single predominant exempt activity. In case a business is engaged in a number of different types of exempt activities through distinct divisions, the business is required to apply a sectoral method of apportionment.