Think, Rethink & Then Act….

Today FTA released a new VAT Public Clarification on VAT recoverability on Entertainment Services. This 10 page document clears lot of uncertainty over what expense qualifies as entertainment services and what qualifies as incurred in normal course of business. In the coming week, you will see many articles, bulletins and updates from multiple consultancy houses explaining all the different scenarios covered by the clarification. Hence, I will skip this part and will directly jump into my concern.

After going through the document, I felt that now we will see another level of unnecessary advisory where business houses will be advised to charge a nominal fee to enable recoverability of input tax incurred on gala lunches, extravagant dinners, staff parties, annual functions. While Day Delegate Rate (DDR) on these lunches, dinners, parties and functions will be in range of AED 200 to 400; the attendees will be charged in between AED 1 to 10 to manipulate the wordings of public clarification which is “(recoverability) would depend on whether any fee is charged from the attendees.”

But before adopting to the advice or considering this as a tax planning approach, I would like to bring to your notice another wordings from the same public clarification document which states and I quote

“Where the business cannot establish or is uncertain whether or not hospitality is provided in the normal course of business meeting, it should refrain from recovering input tax on the expenses”

[Last Para of Page 7 in VAT Public Clarification VATP005]

So friends, please do take care of what you are claiming as input credit and under what basis because any incorrect recovery of input tax will tantamount to unpaid tax. And penalty on unpaid tax ranges from 5% to 50% in line with Cabinet Resolution No. (40) of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE.

Alternatively, the authority could have used the words “Fair Market Value” instead of “Any Fees” and these interpretations could have been avoided.

The authority has already defined “Market Value” under Article 26 of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No (8) of 2017 on Value Added Tax. “Fair Market Value” could have been the child of “Market Value” with lower percentage ceiling on such market value.

The question may arise – Why another term “Fair Market Value” when “Market Value” is already well defined in Article 26. My submission is that the market value will always consider the value of these entertainment services either equal to or higher than DDR rate; while under “Fair Market Value”, the business will be allowed to consider a lower value within the prescribed percentage. Say 45% to 55% of total expense on such events will be considered as “Fair Market Value” and the fee should be charged accordingly to participants. If that is the case, business houses will not be charging notional value of AED 1 or 10 to participants incurring such expenses and then live in a constant fear that the authority may contest it in Tax Audit.

However, since no such term has been used currently by the authority, let us wisely apply the meaning of words “any fees” and not the notional meaning.