The Federal Tax Authority (‘FTA’) has released a Public Clarification on “Disbursements & Reimbursements” which addresses how to distinguish reimbursements and disbursements, and to clarify the applicable VAT treatment.
U.A.E. businesses incur expenses and subsequently recover such expenses from another party. The VAT treatment of the subsequent recovery of expenses depends on whether the recovery is a “disbursement” or a “reimbursement”.
The first step to determine whether a recovery is a disbursement or reimbursement is to establish whether you have acted as a principal or an agent in purchasing the goods or services
General principles to determine the VAT treatment of such recoveries:
Where a taxable person acts in the capacity of an agent, the recovery would generally amount to a disbursement.
A disbursement does not constitute a supply and is,therefore, not subject to VAT
Where a taxable person acts in the capacity of a principal, the recovery would generally amount to a reimbursement.
A reimbursement is part of consideration for the supply and follows the same VAT treatment as the main supply.
Principles
* The other party (from who you are recovering such expenses) should be the recipient of the goods or services;
* The other party should be responsible for making the payment to the supplier;
* The other party should have received an invoice or tax invoice in their own name from the supplier;
* The other party should have authorized you to make the payment on his behalf;
* The goods or services paid for should clearly be additional to the supplies you make to the other party;
* he payment should separately be shown on the invoice and you should recover the exact amount paid to the supplier, without a mark-up.
* You should have contracted for the supply of goods or services in your own name and capacity;
* You should have received the goods or services from the supplier;
* The supplier should have issued the invoice in your name;
* You have the legal obligation to make payment to the supplier;
* In case of goods, you should own the goods prior to making any onward supply.
Examples
Company A procured group medical insurance from a local insurance company and received an invoice directly from the insurance company.
* Company A requested Company B to make the payment on its behalf.
* The subsequent recovery of the amount by Company B from Company A will amount to a disbursement, and would not be subject to VAT.
* Company A should ensure that the Tax Invoice is addressed to it from the insurance company and should recover the input tax through its UAE VAT return, subject to the normal input tax recovery rules.
Company A entered into a contract with Company B to provide marketing services.
* The contract stipulated that Company A would be eligible to reimburse the expenses from Company B.
* Company A incurred the expenses in its own name and subsequently recovered the amounts from Company B as per the terms of the contract.
* The recovery of expenses from Company B would follow the same VAT treatment as that of the main supply.
We recommend;
* Identify the nature of your contract and agent/principal relationships (if any) based on the above principles;
* Ensure that all disbursements have proper authorizations (contracts); and
* Re-view all inter-company disbursements/ reimbursements (cross-charges).
