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The Federal Tax Authority (FTA) has set the conditions and methods for Input Tax apportionment for businesses making mixed supplies (taxable and exempt) as per the conditions set out in the Executive Regulations of Federal Decree-Law No. (8) of 2017 on Value Added Tax (VAT) which had set out the criteria for calculating the Input Tax that may be recovered, and the supplies that do not allow recovery.
The Authority issued a guide providing a comprehensive and simplified explanation of Input Tax apportionment methods, available on the FTA’s website on the following link: https://www.tax.gov.ae/pdf/Input%20Tax%20Apportionment%20Guide%20EN%20December%202018.pdf
In a press statement issued today, the Authority explained that the guide detailed four methods available for taxpayers on Input Tax apportionment, namely, the outputs-based method, transaction count method, floorspace method, and the sectoral method.
The FTA noted that there are three basic conditions to recover Input Tax, noting that a Taxable Person is able to recover Input Tax if the acquired goods and services are used, or intended to be used, in making taxable supplies; or if the supplies were made outside the UAE, but would have been considered taxable had they been made in the UAE; or in the case of supplies of financial services, which would have been treated as exempt if they had been made in the UAE, but are instead provided to a Person outside the UAE and treated as taking place outside the UAE.
FTA Director General His Excellency Khalid Ali Al Bustani said: “The Authority is committed to providing accurate and simple methods that enable businesses to seamlessly submit the Input Tax Apportionment Requests to the Authority. This guide was issued to raise awareness among taxable persons submitting requests to recover Input Tax related to the mixed supplies they make, comprising both taxable and exempt supplies.”
The Federal Tax Authority explained that in conducting their business activities, a Taxable Person may incur expenses that are subject to VAT (Input VAT). This VAT can be recovered by a Taxable Person, subject to the three aforementioned conditions being met, which ensures that VAT will not normally be a cost to the said Taxable Person.
The FTA noted that, in certain circumstances, goods or services will be used partly in the course of making supplies that allow for the recovery of Input Tax and partly for making supplies for which VAT is not recoverable. Where an expense is used for making such mixed supplies, the Taxable Person must determine the portion of the Input Tax that can be recovered.
Input Tax that is incurred in respect of goods or services used partly for making supplies that allow for VAT recovery and partly for making supplies for which VAT is not recoverable is known as “Residual Input Tax”, and it must be apportioned between those supplies. Recovery will be restricted to the proportion relating to supplies that allow for recovery.
The Authority explained that in order to identify the amount of the Residual Input Tax, it is necessary to first exclude Input Tax which is recoverable or non-recoverable in full. Consequently, the first step is to divide the input tax into three categories for each Tax Period. Hence the input tax needs to be categorised into the total value of Input Tax that is directly attributable only to supplies for which VAT may be recovered, the total value of Input Tax that is directly attributable only to supplies for which VAT cannot be recovered, and the total value of Input Tax that relates to both supplies for which VAT may be recovered and supplies for which VAT cannot be recovered. This last category is known as the Residual Input Tax of the Taxable Person.
The Federal Tax Authority went on to explain the following step, which is to determine the recoverable part of the Residual Input Tax by applying the Standard method for apportioning the Residual Input Tax as outlined in Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No. (8) of 2017 on VAT, or by applying one of the special input tax apportionment methods listed in the guide in the event that the Standard method does not lead to realistic and reasonable results, and following the approval from the Authority of the taxable person’s request for applying another method.
The guide includes the procedures that need to be followed to submit a request for applying another method as well as the supporting documents to be attached to the application.
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