Input credit deductions and refunds in the United Arab Emirates

Introduction

Taxable business owners in the UAE are required to levy VAT on all the taxable supplies they make and the final liability that they have to pay to the FTA depends on the input and output VAT. 

What is input VAT?

Tax paid by a person or a business while purchasing goods or services or conducting an import. For example, when retailers purchase goods from wholesalers, they pay tax for the goods procured. The tax paid for the procurement of goods is known as input VAT.

What is output VAT?

The tax charged by businesses on taxable supplies of goods or services.

What is net VAT?

The net VAT of the business is calculated by deducting input VAT from output VAT. If the value of the net VAT is positive, then the business owner owes VAT to the Federal Tax Authority. If the value is negative, the business owner can apply for a claim for the setback amount.

Let us take a look at this flowchart to understand the VAT flow process.

• Tolisso LLC purchased a product of AED 30,000 on which 5% VAT is applicable. VAT paid is AED 1,500. (Input Tax)

• Tolisso LLC sold a product for AED 50,000 on which 5% VAT is applicable. VAT collected is AED 2,500. (Output Tax)

• Net VAT payable by Tolisso LLC to Federal Tax Authority is AED 2,500 - AED 1,500 = AED 1,000.

Claims and refunds

• Purpose of the claim:

Every taxable citizen of the UAE is required to file a VAT return summarizing their VAT due to the Federal Tax Authority for the tax period. When the input tax is greater than the output tax on a VAT return, the person can request a VAT refund. The VAT refund can be requested after submitting the VAT return or at any time later in that tax period.

• Timeframe for repayment:

When a taxable person submits a claim for a refund of tax, the Federal Tax Authority will take twenty business days to review the application and notify the taxable person of its decision to approve or deny the refund claim. Sometimes the FTA might notify the applicant that it requires longer than twenty business days to evaluate the application.

Recoverable input tax

If a buyer is a taxable person and also a VAT registrant, then they’re entitled to recover the tax incurred on the purchase of goods or services. A non-taxable person is generally not entitled to VAT recovery on any purchase.

Recoverable input tax: Tax amount that can be repaid by the Federal Tax Authority to the taxpayer.

Input tax paid for goods and services can be claimed if they are intended to be used for:

• Taxable supplies

• Supplies and services made outside the state which would be taxable had they been made inside the state

• Supplies specified in the VAT Decree Law made outside the state, which would have been exempted had they been made inside the state

If the buyer is not registered for VAT, then the input tax cannot be recovered even if the supplies fulfill the above conditions.

In general, a taxable person can recover input tax in the first tax period if:

• the taxable person has a tax invoice or other documentation of the supply or import, and

• the amount of VAT is paid in whole or in part

Residual/Overhead input tax

When goods and services are used partly for recoverable supplies and partly for non-recoverable supplies, the input tax incurred is known as residual or overhead input tax. Recovery of tax will be restricted to the proportion that is subject to VAT recovery.

Blocked input tax

Input VAT incurred on certain expenses is specifically blocked from being recoverable. Blocked expenses include:

• Entertainment expenses
• Vehicles used for personal purposes
• Employee-related expenses
• Supplies used to make exempt supplies

Input tax before registration

A registered taxpayer can recover input tax incurred before their tax registration for the following:

• Supplies made before tax registration
• Goods imported before tax registration

Recovering the input tax incurred before registration

If a taxpayer had purchased taxable supplies before VAT registration, they will be able to recover the input tax levied on those supplies in the first tax return period following the VAT registration.

Transactions not eligible for pre-registration input tax recovery

Input tax cannot be recovered in the following cases:

• Input tax related to capital asset or a part of it with depreciated value (if the depreciation occurred before the tax registration)
• If the supply of goods and services is not meant for making taxable supplies
• If the services were received 5 years before the date of registration
• If the supplier had moved the goods to another GCC state prior to tax registration in that state