VATP005 – VAT Public Clarification on Non-Recoverable Input Tax – Entertainment Services
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published a new Public Clarification on non-recoverable input tax on entertainment services.
VAT Public Clarification VATP005 ("Clarification") discusses the VAT treatment of entertainment services. According to Article 53(1) of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No (8) of 2017 on Value Added Tax, input tax incurred by an entity that is not a Government entity is not recoverable on entertainment services provided to anyone not employed by them. This would include entertainment services provided to potential customers, shareholders, or other owners/investors.
According to the clarification, input tax on an expense may be recoverable if it can be shown that the expense was for a genuine business purpose, or incidental to a business purpose (such as hospitality provided during a business meeting).
However, hospitality which is provided as an end in itself, or where it could be considered to be the main reason for attending an event, will be considered to be ‘entertainment services’ and the input tax will not be recoverable.
It is important to note the distinction made between government and non-government entities. A designated government entity may recover input tax on entertainment services provided to non-employees in certain situations, such as meetings with delegations from other countries where lunch/dinner is provided, or meetings with representatives from other government entities to discuss official business where refreshments are provided.
On the other hand, if a non-government entity provides entertainment services to any non-employee, including shareholders and investors, the input tax on these expenses will be blocked in full from recovery.
A gist of the discussion forming part of the VAT Public Clarification VATP005
|Particulars||Designated Government Entities||Non - Designated Government Entities||Exceptions|
|Input Tax Credit||Example||Input Tax Credit||Example|
|Expenditure on employees||Not allowed||1) Where a business organizes a lunch or dinner for employees e.g. a Ramadan Iftar / 2) Events are held purely for the purposes of entertaining staff (unless a charge is made to the employee for attending) 3) Goods or services to be given away to staff free of charge||Not allowed||1) Where a business organizes a lunch or dinner for employees e.g. a Ramadan Iftar / 2) Events are held purely for the purposes of entertaining staff (unless a charge is made to the employee for attending) 3) Goods or services to be given away to staff free of charge||The only situations where input tax can be recovered on ‘entertainment services’ provided to employees are: 1) Where it is a legal obligation to provide those services or goods; 2) It is a contractual obligation or documented policy; 3) Where the provision of goods or services is a deemed supply under the provisions of the Decree-Law Eg: where a new employee joins a business and is provided with hotel accommodation for a short initial period prior to finding their own accommodation|
|Expenditure on Non-Employees (Customers, Potential customers, Officials, Shareholders, or other Owners or Investors)||Allowed||1) Meetings with delegations from other countries 2) Meetings with representatives from other Government entities such as Ceremonies held to mark significant political events||Not allowed||-||-|
In the case of ‘entertainment services’ provided to employees, the input tax incurred will be non-recoverable unless a specific exception applies. This rule applies to designated government entities as well.
|Particulars||Input Tax Credit||Important Remarks|
|Food and drinks “in the normal course of a meeting” Conditions to be met: - Provided at the same venue as the meeting; - Meeting is interrupted, only by a short break for the provision of the hospitality - The cost per head of providing the hospitality does not exceed any internal policy - The food and beverage provided is not accompanied by any form of entertainment e.g. a motivational speaker, a live band||Allowed||Where the food and refreshments are considered to be so substantial that they would constitute an end in themselves, in such a case Input credit would not be allowed.Eg - A gala dinner event with a short introduction by a speaker would not be considered to be food and beverage in the normal course of a business meeting|
|Conference and Business events where any fee is charged from the attendees||Allowed||Where a fee is charged and VAT is accounted on the same, the input tax incurred on catering services would be recoverable on the basis that the expense is attributable to making taxable supplies|
|Sundry office expenses||Allowed||Eg: tea and coffee, flowers for display, dates, chocolates for employees / non-employee|
|Employee Expense||Allowed||Eg: overnight accommodation / food expense of the employee during a business trip|
How can we help?
VAT in itself is a newer concept to the UAE. At Karm, we can assist you with assessment of the impact of the VAT Regulation along with the subsequent clarifications issued by FTA; and advise you on the recoverability of input VAT (READ saving money in the most legally compliant manner possible).
For more information or help contact: Chandni Teckchandani
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