Taxing times ahead: Input VAT on mobile phone expenses

It would be helpful if a business can recover input credit on the fixed monthly rental without monitoring the actual usage and forfeit the VAT credit on the excess usage, if any.

The Federal Tax Authority (FTA) has issued a public clarification (VATP028) on mobile phones, airtime, and data packages (‘MP, A, DP’ for ease of reference) made available to employees for business use. It is a pragmatic step by FTA to clarify VAT position on the issues faced by all taxpayers at large.

A potential personal use of MP, A, DP cannot be ruled out thereby restricting the recoverability of input VAT on such items. The public clarification has given a clear path for the input tax recovery of such expenses.

In essence, a business is entitled to recover input tax on MP, A, DP only if the following requirements are met: The business is VAT-registered; The business’ name and tax details are reflected on the tax invoices which are duly retained; A strict documented policy is in place to restrict the use of MP, A, DP for business purposes and states the consequences of any personal use; The use of airtime and packages should be regularly monitored and justification for the variances must be retained; and Action must be taken against employees for personal use in accordance with the documented policy

A careful reading of VATP028 has also resulted in following doubts amongst the taxpayers.

Scope of the Clarification?

VAPT028 states that it covers the situation where businesses have entered into agreements with telecom operators to make MP, A, DP available to their employees. Though airtime and data packages are always contracted from the operators, the phone instrument could either be contracted or purchased from the open market.

If the clarification covers business assets purchased from the open market, the argument of ‘potential personal use’ could be extended to other items such as laptops, uniforms, bags, safety shoes etc. provided to employees. Restricting input tax on such items could lead to additional costs to businesses.

Monitoring the usage within the fixed rentals?

The clarification states that business should acquire packages on the basis of the historical/expected business requirements. Thereafter, any airtime and data used in excess of the package would be regarded as non-business use unless there is robust monitoring in place to substantiate the actual use or employees are charged for the excess.

Most of the telecom packages provide a specified, or even unlimited, airtime/data allowance for a fixed monthly rental. Excess usage is charged at actuals.

It would be helpful if a business can recover input credit on the fixed monthly rental without monitoring the actual usage and forfeit the VAT credit on the excess usage, if any.

Monitoring the data usage?

While the usage of the airtime can be reviewed through the phone numbers dialled, practical difficulties could arise in monitoring the data usage. The usage details would not list down out the websites visited or the messages sent on communication apps.

Expenses incurred by employees less than Dhs 10,000?

Employees often incur expenses less than Dhs 10,000 for their company which are later reimbursed by the company. They receive tax invoices either in their names or without any name. Such invoices are often treated as simplified tax invoice and input tax credit is duly recovered by the businesses. Mobile phone bills are also generally less than Dhs 10,000. The clarification requires that the tax invoice should be in the name of the business and contain its details. If a similar condition is applied for other business expenses incurred by employees, businesses could incur significant tax losses on small value expenses.

Conclusion

An express guidance from FTA on the above issues will be very helpful and ease the administrative efforts by the companies on small value expenses. The businesses could also approach FTA for private guidance/clarification on their specific tax issues.

The writer is the managing director of AskPankaj Tax Consultants. For any queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.