The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published a new Public Clarification on non-recoverable input tax on entertainment services. This is an important development, as it provides clarity on what has been an ongoing issue for many businesses in the UAE. As noted below, as this has been an area of concern for businesses, and many have adopted a risk averse position toward making any claim for input tax in this area, it would be advisable to use this opportunity to revisit that position.

VATP005 – VAT Public Clarification on non-recoverable input tax – entertainment services

VAT Public Clarification VATP005 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 (“the Executive Regulations”), 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.

The issue addressed in the Public Clarification is what the FTA considers is included in the definition of ‘entertainment services’. According to the document, 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.

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.

The only situations where input tax can be recovered on ‘entertainment services’ provided to employees are:

• If the labour law of the UAE, or Designated Zone where the entity is located, makes it a legal obligation to provide those goods or services to employees;
• If the employment contract or documented policy of the business states that those goods or services will be provided to employees in order to allow them to perform their work, and it can be a proven as a normal business practice;
• If the supply of the goods or services is a deemed supply under the Decree-Law.

The guide gives an example of a recoverable entertainment expense for an employee as being when a newly hired employee is temporarily provided with a hotel accommodation until they find permanent accommodation, as this is necessary for the employee to perform their role. A lunch or dinner for employees, on the other hand, would not be a recoverable expense.

Additionally, the document indicates that the FTA considers the input tax on ‘simple hospitality’ provided in the normal course of a meeting to be recoverable. Also, the input tax incurred on sundry office expenses, which are considered to include normal incidental office expenses for general use by both employees and non-employees, is recoverable.

Further, the guide includes sections on conference and business events, employee entertainment, and employee expenses.

The new Public Clarification indicates that the FTA has drawn a clear distinction between hospitality provided for business versus non-business purposes.

Taxable persons should ensure that they accurately record and account for such expenses, including the circumstances surrounding them, in order to recover only what is permitted by the FTA. They should also ensure that their internal policies are fit for purpose in terms of the types entertainment services and simple hospitality that may be provided, so that they are able to address the appropriate treatment of VAT incurred on the costs.  If a business attempts to recover input tax on expenses which are non-recoverable, they risk significant penalties from the FTA.

For those that have denied themselves recovery of input tax incurred where they were uncertain as to what would, or would not be allowed, it might be advantageous to revisit that treatment, and reconsider whether an entitlement to the input credit is in fact available.

Source: https://www2.deloitte.com/xe/en/pages/tax/articles/fta-publishes-public-clarification-treatment-input-tax-entertainment-services.html.