UAE clarifies VAT treatment of disbursements, reimbursements and options

In the first public clarification, the FTA confirmed that reimbursement of expenses incurred by an individual as principal falls within the scope of VAT, but the recovery of expenses paid on behalf of others does not.

The FTA set out the key principles (5 page / 1.1MB PDF) to determine whether the recovery of an expense counted as a reimbursement or disbursement, with the main differentiating factor being the person entitled to receive the goods or services.

VAT expert Joanne Clarke of Pinsent Masons, the law firm behind Out-Law, said the clarification confirmed well-established VAT principles for all VAT-registered businesses in the UAE.

“It should not provide new insights for technical VAT advisers and should not be a shock to businesses, on the basis that they undertook a thorough VAT implementation, supported by an experienced VAT professional,” Clarke said.

“However, the fact that the FTA felt the need to issue this clarification does suggest that they have identified instances where businesses are not applying the rules correctly or they are receiving numerous written requests for clarification on the matter,” Clarke said.

“Therefore, it means that some businesses in the region are potentially still not getting the adequate level of technical expertise - either in-house or external support - to ensure they are compliant with the rules in the region. Alternatively, businesses may understand the rules correctly but are still making human errors within their compliance, which emphasises the need for ‘health checks’ and increased automation of processes as much as possible,” Clarke said.

The FTA’s second clarification (3 page / 1.1MB PDF) was relevant for financial services firms and other businesses dealing in options, Clarke said. It noted that supplies of options in respect of debt securities and equity securities in return for premiums were exempt from VAT.

However options in respect of underlying commodities or other non-debt and non-equity instruments, where they are supplied in return for explicit premiums, are taxable.

The clarification also laid out how suppliers who had treated exempt options as subject to VAT before 31 July should adjust this incorrect treatment, saying suppliers should issue a tax credit note to the recipient of the option or premium. Suppliers who can show that tax credit notes have been issued will be able to adjust VAT in the relevant period.

Clarke said a financial services guide (34 page / 536KB PDF) published by the FTA in February of this year had stated that option premiums for equity trading were standard-rated for VAT.

“This is not aligned with the current ‘public clarification’ and so all businesses who trade in these options, and customers who have purchased such options, should review the treatment applied and consider whether any adjustments are required,” Clarke said.

FTA public clarifications are designed to clarify certain aspects related to the implementation of the Federal Law No 7 of 2017 on Tax Procedures and the Federal Decree-Law No 8 of 2017 on Value Added Tax and their executive regulations. The clarifications state the position of the FTA and do not amend any legislative provisions, making them effective as of the date of implementation of the relevant legislation, unless stated otherwise.