Reimbursement and Disbursement of Expenses in UAE VAT, Whether Taxable or Not?
Reimbursement and disbursement of expenses in UAE VAT, whether taxable or not, is always an uncertainty among the business community from the date of implementation of VAT in the UAE since 1st January 2018.
The Federal tax authority (FTA), the governing body of the UAE VAT, recently released a public clarification wide No VATP013. The said public clarification discusses the applicability of VAT on reimbursement and disbursement of expenses charged by a taxable person on another person.
This article contains a detailed analysis of taxability on reimbursement and disbursement of expense in the light of the UAE VAT Law provisions and above-mentioned public clarification issued by the FTA in this regard.
What is the meaning of the term disbursement and reimbursement?
In general, the term ‘disbursement’ means spending or distributing money.
The public clarification makes it clear that, in the context of the UAE VAT law, the term ‘disbursement’ refers to the recovery of payments made by a taxable person on behalf of another person.
Payment can be treated as a disbursement if;
- The other person is the recipient of goods or services.
- He is responsible for making the payment to the supplier.
- He receives an invoice or tax invoice in his own name from the supplier.
- He authorizes the taxable person to make the payment on his behalf.
- The goods or services paid for should clearly be added to the supplies the taxable person makes to him.
- The payment should separately be shown on the invoice and the taxable person should recover the exact amount paid to the supplier, without a mark-up.
Let us see a practical example;
Company ‘A’, a resident in the UAE, has approached a customs broker for clearing goods imported from South Africa. In the course of providing the service, the customs broker paid charges namely; port fee, customs duty, dock due, container detention charges and transportation charges on behalf of the company ‘A’. Invoices for the said charges were received in the name of company ‘A’ itself. The customs broker issued a single invoice to company ‘A’ for each charge paid by him on behalf of company ‘A’. In addition to that, the service charges for the customs broker is also collected in the same invoice.
Here the expense recovered by the customs broker from company ‘A’ except its service charges is considered as disbursement because he has not made any supply attributable to that amount. The customs broker has made the payment for the expenses (namely; port fee, customs duty, dock due, container detention charges, and transportation charges) as an agent to company ‘A’. The transaction took place between the company ‘A’ and the provider for the said service and not between the company ‘A’ and the customs broker. Since the amount recovered by the customs broker is only a disbursement and not a consideration for any supply, it will not be taxable. However, the amount received by the customs broker for his service charges from company ‘A’ is chargeable to VAT.
It is to be noted that in this case company ‘A’ can claim the input VAT for all the payment made to the customs broker provided the conditions for recovering the Input VAT has been fulfilled.
Now let us understand the term reimbursement
In general, the word reimbursement means “to make repayment to for expenses or loss incurred”
The public clarification issued by the FTA makes it clear that, in the context of UAE VAT law, the term ‘reimbursement’ refers to the recovery of expenses that a taxable person incurs for another person.
A payment can be treated as reimbursement if;
- The taxable person should have received the goods or services from the supplier.
- The supplier should have issued the invoice in the name of the taxable person and he/it is under the legal obligation to make payment for it.
- In case of goods, the taxable person should own the goods prior to making the onward supply to another person.
Let us see a practical example;
Salim Contracting LLC is a Civil construction company in the UAE enters into a contract with Abdulla and Sons Est. for building a hotel apartment in Dubai. Salim Contracting LLC engaged a third party for drawing the building plan of the proposed hotel apartment. The third-party invoiced Salim Contracting LLC for AED 10,000/- as the service fee. Salim Contracting LLC invoiced Abdulla and Sons Est., AED 50,000/ as part of building construction fee and AED 10,000/ as reimbursement of expenses incurred for drawing the building plan (by the third party). Here even though the drawing of building plan is done by a third party, the expense is incurred by Salim Contracting LLC for providing construction service to Abdulla and Sons Est. Therefore, there are two supplies involved in this example. The first is the supply received by Salim Contracting LLC from designers. And the second supply is the construction services provided by Salim Contracting LLC to Abdulla and Sons Est.
Here Salim Contracting LLC can claim the credit of Input VAT paid by it to the third party. The amount recovered by Salim Contracting LLC from Abdulla and Sons Est. is on account of a taxable supply and the reimbursed amount is the consideration for the said supply.
Further Abdulla and Sons Est. can claim input credit made against the payments made to Salim Contracting LLC subject to the eligibility conditions mentioned as per the provisions of the UAE VAT Law.
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