UAE VAT : How Input Tax Apportionment works

Ziad khawajaZiad khawaja    04 August 2020
UAE VAT : How Input Tax Apportionment works

Value Added Tax was introduced on January 1, 2018, as a tax that is a percentage on the price of all the goods and services supplied within the territorial area of the UAE, except those specifically specified by the Federal Tax Authority (FTA) as exempted from VAT.

Companies that are registered as taxable persons in the UAE, may most of the times, incur expenses which are subjected to VAT, which is as per the law, called "input tax". Input tax can be claimed by taxable persons, provided that those expenses are pertaining solely to business purposes and that there is an intention to make the payment inclusive of tax of the particular expense. This shows that VAT is not an expense on companies, but it is just a movement in the cash flow of the company.

As mentioned previously in this article, VAT is charged on all goods and services sold within the territorial are of the UAE, except for those specifically specified in the law as exempted from VAT. When a company incurs input tax that is pertaining to a supply that is specifically specified as an exempted supply, then the company shall not recover this particular input tax. In other words, input tax pertaining to exempted supplies are not recoverable.

In some cases, companies incur input tax that is pertaining to both taxable supplies and exempted supplies. Here, it shall make necessary calculations, in which it is only allowed to claim the input tax that is pertaining to the taxable supplies only, and not the exempted supplies, this is what we call "Input Tax Apportionment".

To find the proper portion of the input tax "residual value" that shall be recovered, we shall first find the following:

  1. The input tax that is directly attributable only to supplies which VAT may be recovered.
  2. The input tax that is directly attributable only to supplies which VAT may not be recovered.
  3. The input tax that is attributable to supplies that are related to both taxable and exempted supplies (mix of both), and this is the residual value.

Then, we shall determine the proportion that is to be recovered from the residual value. To do that, we need to find the correct percentage, by the following formula
(step 1 above / (step 1 + step 2)) x 100

By that, we would get a percentage. This percentage shall be multiplied by "step 3 above" to

know exactly what shall we recover from the residual value.

Those steps shall be taken into considerations in every tax period (a tax period is a period set by the FTA differently for each taxable person in which a VAT report shall be submitted to the FTA at its end, where it can be monthly, quarterly or semi-annually).

At the end of the tax year, taxable persons who are using the "input tax apportionment" method are obliged to go through the same formula used for each tax period, using the figures of the whole tax year. By that, the taxable person would generate the actual percentage of the whole tax year that is to be multiplied by the residual value of the whole tax year and thus, will come up with the actual input tax that should be claimed for the tax year, and this is the input tax that the taxable person should actually recover from the FTA. If the difference between what is already claimed by the taxable person in the tax year and the amount derived after the annual calculation done at the end of the tax year is more than AED250,000 then the company shall disclose the differences in the final VAT report of the corresponding tax year.

The method explained above is called the standard input tax apportionment method. The FTA understands that the standard input tax apportionment method does not give accurate numeric figures for some companies because of their business nature or business field, and therefore, has provided taxable persons other methods of input tax apportionment - which are called "special input tax apportionment methods" - to be able to be precise with their numeric figures as much as possible. For taxable persons to be able to use the special methods, they shall submit a form, which can be found through www.tax.gov.ae - > VAT - > Guides, References & Public Clarifications - > VAT Guide - > "form" button next to "input tax

apportionment methods". The application form will be subjected to the approval of the FTA. If the taxable person obtains the FTA’s approval, the special method shall be applied in each tax period as well as the annual adjustment at the end of the tax year.

The following are the available special input tax apportionment methods:

  • Outputs based method;
  • Transaction count method;
  • Floorspace method; and
  • Sectoral method.

1. Outputs Based Method

The outputs-based method calculates the apportionment percentage on the basis of the outputs made by the taxable person, as follows;

(Taxable supplies / (taxable + exempt + nonbusiness supplies)) x 100

This method is available for use for companies in the following business sectors:

  • Insurance companies
  • Retails banks
  • Banks engaged in certain aspects of wholesale and/or investment banking
  • Providers of local passenger transportation services

The principle behind the outputs-based method is that the amount of input tax incurred depends on the amount of income that is being earned.

2. Transaction Count Method

The transaction-count method calculates the apportionment percentage on the basis of the taxable transaction proportion to the total transactions made during the period, as follows;

(Taxable transaction count / Total transaction count) x 100

The transaction-count method is used by companies where their input tax is mostly depending on the number of transactions instead of the income earned. Therefore, this method is available for use for Islamic and non-Islamic banks engaged in whole sale and investment trading activities, as costs incurred in each trade in such activities are similar, despite the trade’s value.

3. Floorspace Method

The floorspace method calculates the apportionment percentage on the basis of the floorspace used for taxable activity proportion to the total floorspace available for business, as follows;

(Floorspace used in taxable activity / Total floorspace) x 100 The numeric figures in the above formula shall be square meters.

The floorspace method is used by companies that are identifying areas of their businesses as taxable and non-taxable. Therefore, this method is available for use for business that supply commercial and residential properties, including real estate and other businesses that sell or rent out commercial and residential plots as their main business activity.

4. Sectoral Method

Some large business has different sectors where each sector has its own revenue stream and expenses, in which those sectors are independent from each other. For example, an insurance company may have a totally different sector that deals with real estate. For such companies, none of the above explained special input tax apportionment methods might be as precise as needed. To ensure precise percentages and figures, such businesses may use the "sectoral method". In addition to such businesses, this method can also be used by different companies which are in the same tax group, if needed.

The following are the steps involved in the sectoral method:

Step 1 - The taxable person shall identify the total residual value for all the sectors,

Step 2 - Then each sector shall identify the residual value that is only pertaining to it,

Step 3 - Then the residual value remaining that is pertaining to more than one sector, shall be shared between the same sectors using an appropriate allocation method that will be explained later in this article.

Step 4 - Finally, each sector will be assigned with its own input tax apportionment method that will be appropriate for it to allocate its recoverable input tax.

What is the sector allocation method? (Step 3 above)

The sector allocation method involves two methods, in which the appropriate one shall be used in case part of the residual value is shared between more than one sector. The following are the two methods:

  • Headcount method; and
  • Outputs method.

Headcount method

The headcount method calculates the appropriate allocation percentage using the number of income-generating staff, in which overhead expenses are mostly in relation to the number of employees, as follows:

(Number of staff in the sector / Total number of staff) x 100

In special cases, number of staff will be based on full time workers, and not income- generating staff.

Outputs method

The outputs method calculates the appropriate allocation percentage on the basis of the outputs of the sector, where the input tax is mostly related to the input tax on expenses, as follows:

(Value of supplies in the sector / (Total value of supplies + nonbusiness activities)) x 100

To apply for the special input tax apportionment method, the taxable person must satisfy all of the following:

  • Must be registered for no less than 6 months;
  • Must make both taxable and exempted supplies; and
  • Must get an unfair result to the input tax recovery by using the standard input tax apportionment method.

If the applicant applying for the special apportionment method is a tax group, then the form shall be submitted by the representative member of the tax group. The special apportionment method form shall also be submitted by the appointed tax agent or the appointed legal representative.

It is requested by the FTA through the form, to specify which special input tax apportionment method is the applicant applying for, with providing sufficient evidence that the selected method is more appropriate than the standard method to be more precise with input tax apportionment. In case of selecting a method that does not provide a more precise input tax apportionment, the form will be rejected.

Therefore, it is very important for taxable persons who satisfy the conditions of applying for the special input tax apportionment method to understand which of the special methods would be more suitable for them.

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. The view/ interpretation of the publisher is based on the available Law, guidelines, and information. Each reader should take due professional care 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.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax. 

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