The UAE Federal Tax Authority (FTA) has updated the Input Tax Apportionment Guide (Guide) that impacts businesses engaged in making exempt supplies (such as financial service, local passenger transportation, residential property supply, etc.).
The Guide sets out the FTA’s views on input tax apportionment, including permitting “special method” and annual adjustments. The previous version of the Guide allowed businesses to submit a comparative calculation (between the standard method and proposed special method) for a period of 6 to 12 months preceding the application. However, as per the updated guide, the FTA has requested businesses to furnish a comparative calculation for a full 12-month period.
Further, the FTA has identified several common errors in the applications submitted by businesses. We therefore suggest you refer to the FTA checklist (Annexure 3 of the Guide) before submitting the application for special method. Most importantly, the FTA requires a justification from businesses for any deviation between information submitted in the VAT return vis-a-vis that considered while making calculations for a special method application.
The FTA has also made following method-specific remarks:
- Standard method: Blocked input tax (eg. entertainment expenses) should be excluded from the calculations
- Outputs method: Reverse charge expenses should be excluded from the calculations (as these are input supplies and not output supplies)
- Transaction count method: Input transactions (including the reverse charge expenses) should be excluded from the calculations
- Floorspace method: Communal areas (such as lobbies and lifts) should be excluded from the calculations
- Sectoral method:
- Allocations: Specify the methodology adopted to allocate residual input tax across different sectors. If the headcount method is adopted then a breakdown of total headcount between front and back office staff (including contracted staff) should be provided.
- Sectors: Activity, method and recoverability percentage for each sector should be specifically provided.
For questions, discussion or assistance, please contact your KPMG Lower Gulf Tax advisors.