An important aspect for the purpose of claiming input tax is to obtain valid tax invoice from the vendors in UAE. While this could be a challenge as certain miss-outs in the format of tax invoice is likely, there is a potential risk which Company carries if input tax is claimed on the basis of such tax invoices.
Apart from obtaining an appropriate tax invoice, another challenge is to claim input tax within the timelines prescribed, i.e. two tax periods. Article (55) of the VAT Decree Law states that input tax is to be claimed in the first tax period in which the following conditions are satisfied:
Further, if the taxable person has not recovered input tax in the tax period in which the conditions stated above have been met then such input tax can be recovered in the following tax period.
Here, an important challenge for the businesses is to ascertain when can a tax invoice can be regarded as received. If the tax invoices have been received through post / courier then the date when the invoices are physically received at the premises could be regarded as received or the tax invoices have been sent through email then the date of receipt of email could be regarded as receipt of tax invoice. The receipt of tax invoice should be at the first point of the Company and not receipt by the Finance team for recorded the expense. This is often mis-interpreted by the business to mean that receipt of tax invoice is the date when finance team receives the tax invoice. Also, the date of receipt should be documented / captured in the accounting system as this is one of the fields required in the purchase report format issued by the Federal Tax Authority (FTA) during Audit.
On a practical basis, businesses follow robust process such as confirming that the goods have been supplied / services is complete before actually accepting the invoice, the tax invoice would require multiple approvals such as from operations team, project team, etc before it is sent to the finance team for accounting. This process may take months for certain businesses and if the tax invoice is in dispute then the finance team does not account the tax invoice. In sum, there is a possibility that if the businesses have processes which may take months for approval, then there is a probability that the same would take more than two months’ time leading to lapses in claiming input tax (for businesses with monthly tax periodicity). While a solution is to develop a robust internal process to ensure that input tax is always claimed within two tax periods from the date of receipt of tax invoice, same requires constant monitoring and review. Also, a check could be developed in the accounting system if the date of receipt is captured. If the said field is missing and there is no documentary proof of receipt maintained by the Company such as receipt stamp, etc then it is likely that FTA would consider the date of invoice as receipt date.
An alternate thought (not tested with the FTA) is that as there are two conditions to be fulfilled to claim input tax, i.e. receipt of tax invoice and intention to make payment within six months from the agreed date of payment; the latter can be said to be fulfilled only when business intends to pay – say only when expense is accounted in the books. With this perspective, the test of two tax periods should initiate from the date transaction is accounted in the books.
Usually the timing of claiming tax should be same for all the businesses. Tax Authorities cannot have differential time-limit for set of businesses filing return on a monthly basis vis-à-vis businesses filing returns on quarterly basis. Differential treatment may lead to monthly filers being at disadvantage with the quarterly filers. A positive ruling from the FTA could be sought by the businesses on this ground.
To summarize, businesses should look at developing robust internal process to ensure claiming of input tax within the prescribed timeline. Also, businesses with monthly tax periodicity can seek administrative exception from the FTA to change the tax period to quarterly. This may provide additional time for the businesses (i.e. more than two months) to claim input tax.
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