UAE: Preparing for VAT annual input tax apportionment

UAE: Preparing for VAT annual input tax apportionment

Businesses engaged in making a mixture of taxable and supplies exempt from value added tax (VAT) must apportion the input tax which they incur for making such mixed supplies. Apportionment calculations must be undertaken by the taxable person on a period-by-period basis with an annual “wash-up” calculation to be performed in the period following the end of the tax year.

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Taxable persons filing monthly returns with a 31 December 2020 tax year-end must undertake the annual wash-up calculation and make any required adjustments to input VAT recovered in the January 2021 VAT return to avoid potential penalties for late or underpaid VAT. Businesses operating in the following sectors generally are required to undertake apportionment calculations:

  • Real estate, residential supplies
  • Banks and financial institutions
  • Local transport service providers
  • Insurance companies

The requirement to undertake apportionment calculation is not limited to these sectors and can apply to any entity that makes both VAT-exempt and taxable supplies.


Apportionment

The UAE tax authority issued an updated guide (December 2019) covering special apportionments methods and annual adjustments. Based on this guide and the legislation, the tax authority requires the following:

  • Comparative calculation for a full 12-month period (wash-up calculation):
    • With the monthly/quarterly apportionment done using the standard method, and
    • With the actual use calculation using one of the approved special methods listed in the guide
  • Special apportionment methods include: output-based method, transaction count method, floor-space method and sectoral method. The tax authority stipulates that only certain methods will be available to businesses from certain industries (not all methods will be available to all industries and businesses).
  • A taxpayer must apply to the tax authority to use a special method of apportionment, and there is a formal process to obtain permission (a taxpayer cannot simply elect to start using a particular method at its own discretion). Typically, once approved, the taxpayer will be required to use this method for at least two years.
  • It is not compulsory for a VAT registered business to apply for a special apportionment method; however, the tax authority expects when there is a difference of more than AED 250,000 in any tax year between the recoverable input tax as calculated in accordance with the standard apportionment method (outlined in the legislation) and the input tax which would have been recoverable if the calculation was made on the basis of the actual use of goods or services (applying a special method), the taxpayer is to request permission to use a special method.
  • When the tax authority has granted permission to use a special input tax apportionment method, the taxpayer cannot apply to change the approved method for at least two years following the approval. However, the taxpayer will be required to notify the tax authority when the result produced over the full year by the input tax apportionment method approved by the tax authority differs more than 10% from the result the method generated at the time of application, in order for the tax authority to consider whether the approved method is still suitable for the business.

Read a January 2021 report prepared by the KPMG member firm in the United Arab Emirates 

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