FTA VAT Public Clarification on the VAT treatment of compensation-type payments
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published its first Public Clarifications, on the Value Added Tax (VAT) treatment of compensation-type payments.
This clarification highlights the FTA’s approach to clarifying complex matters will be to issue short and helpful clarifications of this nature. Businesses should ensure they take action to consider whether the FTA’s interpretation aligns with the current treatment adopted by the business.
It should however also be noted that the clarifications, while having general application and providing assistance on how to apply the law, will rarely deal with all possible types of transactions and how they should be addressed. Essentially, this means that businesses still own the responsibility for ensuring that their transactions are VAT compliant, and the guidance given by these clarifications should be considered in the context of the transactions that are under question.
VATP001 VAT treatment of compensation-type payments discusses the VAT treatment of compensation-type payments. The issue addressed in it is whether or not VAT is due on payments made between businesses to compensate each other for losses, omissions, or other wrongdoings.
VATP001 states that where a payment is not a consideration for a supply, there is no VAT due on the payment.
The document seeks to address the question of whether a compensation-type payment as described qualifies as consideration for a supply. The key factor to determine this is whether the recipient of the payment has provided anything in return for the payment.
The Public Clarification describes scenarios to illustrate the basis of making such a decision and provides guidance where the FTA will set the boundary regarding what entails a genuine compensation.
Businesses which impose fines or penalties on customers should review the current VAT treatment to such income in light of this release to determine whether any corrective action is required.