Bank charges are an expense of administrative nature. It is fees levied by banks for the banking facilities and the services used by the individuals or businesses.
General examples of bank service charges are:
A Circular issued by the Central bank of UAE effective from 19th June 2018 related to VAT in UAE in accordance with the Federal Decree Law No 8 of 2017 and the Cabinet Decision No (52) of 2017 allows the banks to charge the tax on the fees and services wherever applicable. This includes both individuals as well as companies will have to pay VAT @5% in addition to the fees and commissions charged by banks with no exception to the same.
For example if Emirates Islamic bank charges AED 10 for issuing duplicate bank statement. VAT will be levied on the same @5% on AED 10 which is 0.50 fills.
The same amendment has been declared by most of the banks on their websites informing customers of the VAT charges levied in accordance with UAE VAT Law. All the banks are registered under VAT and are required to charge and collect VAT on its taxable supplies of goods and services made in UAE. The VAT charged will then be remitted to the Federal Tax Authority.
A supply of financial products /services by banks conducted in return for an explicit fee, charge, discount, commission, or similar shall be subject to VAT. However supplies of other financial services if remunerated by an implicit margin (such as interest) shall not be subject to VAT as these are qualified to be treated as exempt supplies.
When the services are rendered to the recipient who does not have place of residence in UAE at the time when services are performed, these supplies are zero rated.
For example: International transfers, it will be treated as export and therefore be zero rated supply.
Bank has one VAT group tax registration number for all the branches within UAE. For example Standard Chartered bank will have one VAT registration number for all the branches across emirates.
VAT treatment of a supply of any service in a designated zone will be treated as made in UAE. Therefore VAT shall be applicable on such companies in the usual manner. In such cases input credit may be availed in accordance with the VAT recovery rules of the companies registered under designated zones.
With wealth management products such as bonds, mutual funds, structured notes and WRAP products, bank charges are often in the form of commission and there will be 5% VAT applicable on such commission charges.
VAT on repayment of principal amount borrowed from bank- loan and credit cards; the repayment of principal amount borrowed will not constitute consideration of supply and therefore will be outside the scope of VAT and no VAT will be charged. However if additional services are rendered as a part of the transaction, for example administration fees, these will be subject to VAT.
Derivates, Foreign currency exchange or swaps is on an implicit margin basis and hence will be exempted from VAT. However and service fees charged by the bank on above financial services of will be subject to VAT. The amount of VAT would be in foreign currency and will be converted to local currency based on the rates prescribed by the Central Bank of UAE at the time of issuing tax invoice to the client.
The Federal Tax Authority has advised companies that interest earned on bank deposits and dividends and outside the scope of VAT and hence not required to be disclosed. However if the dividends are in lieu of management fees, they will be subject to VAT. And if dividend is paid as a consideration for product and service, then it will be liable for VAT.
If the taxable fee or charge is cancelled and/or unsuccessful, the corresponding VAT charges will also be reversed and the Tax credit note can be issued for the same.
The frequency of VAT entries will correspond to the frequency of charges. For example for monthly fees, VAT will be on monthly basis. For others like credit card fees, VAT will be the separate entry at the time when the fees in levied.
The tax invoice is received by the client from bank after completion of each calendar month either in hard copy or electronically. This will serve as an evidence for an input tax claim by VAT Registrant from FTA as per Article 55 of UAE VAT Law.
Article 59 Part 7 of the Executive Regulations allows in certain cases for tax authority to determine that it is not always practically possible to issue them. In such cases whether showing the VAT applied to fees on bank statement is enough for businesses to reclaim the VAT or not, details should be sought from FTA or written clarification should be taken from bank.
Similarly VAT will be applicable under an Islamic financial arrangement in the same manner as their non-Islamic counterparts.
Disclaimer : Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each article/view/comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate. and is not intended to provide, and should not be relied on for tax or accounting advice.
2 Likes
8764
