What do we mean by Input Tax Apportionment?
A taxable person is entitled to recover input tax incurred on the purchase of goods and services where certain conditions are met. Thus, the recovery of input tax will be permitted where acquired goods and services are used, or intended to be used, in making any of the following:
- Taxable supplies;
- Supplies that are made outside the UAE which would have been considered taxable had they been made in the UAE; and
- Supplies of financial services which would have been treated as exempt if made in the UAE, but which are provided to a person who is outside the UAE at the time of the supply, and the services are treated as taking place outside the UAE
Input tax which is incurred in respect of goods or services which are used partly for making supplies that allow for recovery of VAT in UAE and partly for making supplies for which VAT in UAE is not recoverable is known as “residual input tax”, and it must be apportioned between those supplies. Recovery will be restricted to the proportion relating to supplies that allow for recovery of VAT in UAE.
Methodologies for Input Tax Apportionment in UAE
There are two methods of Input Tax apportionment in UAE:
- Standard Input VAT Apportionment Method:
We would have to follow the following Steps to calculate amount of recoverable Input Tax-
- Segregate the input vat into Wholly Taxable, Wholly Exempt and Mixed/Residual.
- We will determine the input tax which may be recovered in respect of the residual input tax and is calculated by following formula: a/a+b * 100/1.
a = Wholly recoverable input tax and b = Wholly non-recoverable input tax.
- The recoverable portion of the residual input tax is calculated by multiplying the total value of residual input tax by the percentage calculated under the step above or by following this
Input Tax Sharing Formula:
Input VAT Claimable = Total VAT Paid*(Taxable Supplies / Total Supplies).
- Total Recoverable Input Tax = The recoverable portion of the residual input tax + Fully recoverable input tax
Registrants are required to perform Annual Wash up calculations and Actual Use adjustment at the end of each tax year.
- Special Input Tax Apportionment Methods:
This Method is available for Insurance Companies, Financial Institutions, Local passenger transport Services, educational institutions, establishments conducting non-business activities and is implemented by following the given formula:
Taxable supplies/Total supplies (taxable + exempt + non business)*(100/1)
- Transaction Count Method:
This Method is available for Financial Institutions such as Banks(Islamic and non-Islamic) and is implemented by following the given formula:
Taxable transaction count/Total transaction count * (100/1)
- Floorspace Method:
This Method is available to businesses which deal with supplies (sales and rental) of commercial and residential properties and is implemented by following the given formula:
Floorspace used in taxable activity/Total floorspace *(100/1)
- Sectoral Method:
This Method is a Mixture of applicable special methods per sector and is available to for Large, complex companies with different divisions and is implemented by following the given formula:
Number of staff in the sector/Total number of staff*(100/1)
Application of Input Tax Apportionment Method
Any applicant that has been registered for VAT for at least 6 months and makes both taxable supplies and exempt supplies and the standard method of apportionment of input tax does not give a fair and reasonable result to input tax recovery can apply Special Input Tax Apportionment Methods.
Generally, the Input Tax Apportionment Request Form should be submitted by the person seeking to use the special apportionment method or Representative in case of Tax Group or If any appointed Tax agent or legal Representative.
Most applicants will be limited in respect of the types of special methods for which they can apply but where a business is engaged in a single predominant exempt activity, depending on the type of the activity, the business is able to choose the outputs based method, the transactions count method or the floorspace method of input tax apportionment. In contrast, where a business is engaged in a number of different types of exempt activities through distinct divisions, the business is able to apply for a sectoral method of apportionment.
Input Tax Apportionment Request Form
We are required to provide the Detailed description of the business activities, Reasons for applying, calculations of residual input tax apportionment using the standard method of apportionment and Calculations of the residual input tax apportionment for the same period.
It may take the FTA up to 40 business days to respond to your initial input tax apportionment request if you have selected a non-sectoral method, and up to 80 business days if you have selected a sectoral method.
When to reapply?
Any method approved by the FTA is valid for 2 or 4 years, depending on the method If the registrant wants to continue using a special method after the expiration of the period, a new application is encouraged to submit the application to the FTA at least 40 business days before the expiry of the most recent approved special method.