Recovering value-added tax (VAT) is a crucial part of an effective indirect tax strategy. Learning how to claim VAT refund in the UAE for your business is sometimes difficult, and long delays are common. Taxpayers must not only know the cases, but they also need to understand how they can obtain the requested VAT tax refunds within a short time frame. Otherwise, the problems which may arise during the VAT return processes might adversely affect the financial management of their businesses. To expedite the VAT tax refund process, the refund file must be completed along with all other procedures.
Although there are several mechanisms for VAT recovery, it may be difficult for businesses to fulfill the requirements in practice. Furthermore, tax authorities apply strict criteria before they authorise a repayment. Barriers to recovering refunds include a lack of understanding of the detailed indirect tax rules, difficult administrative procedures, insufficient or incorrect documentation and missed deadlines for a reply to the Federal Tax Authority (FTA). Unclaimed tax credits and missed or delayed refunds commonly cause negative cash flow and tax leakage, thus increasing business costs and reduced profitability.
The FTA in the UAE has successfully registered over 300,000 taxpayers. While most of those taxpayers have supplies attracting a standard rate of VAT i.e., five per cent, some taxpayers have supplies that are eligible for zero rating. The industries such as healthcare, residential real estate or construction, international logistics and transportation or companies in the designated zone often find themselves in the category of zero-rated VAT. Further, companies with projects under construction stage may also have a VAT refund position for the initial years of incorporation. While applying for a VAT refund, we need to concentrate on the below mentioned areas:
Data in specific format: The VAT returns in the UAE require only summary data concerning supplies and input VAT. However, at the time of VAT refund request, the transaction-wise details, i.e., invoice number wise data are required for each field in the VAT return as well as standard rated/zero rated/exempt supplies, import of goods/services and input tax claimed for purchases/expenses. The total breakup for each field should match with the VAT return for which the refund is being claimed. In many instances the ERP system/accounting software of many companies does not generate such report required by FTA, which leads to delayed or unsuccessful refund applications.
Justification of the zero-rated or out of scope supplies: The eligibility of zero-rated or out of scope supplies is subject to various conditions for each type of supplies. For example, to prove zero-rated export of goods, the exit certificate of exports is a necessary document for eligibility. For export of services, the proof of performance of services outside the UAE or proof of the existence of a non-resident customer is required for the eligibility. In case of non-availability of necessary supporting documents, the FTA may reject the VAT refund application and may levy VAT and apply administrative penalties on the tax payer for non-compliance.
Reconciliation of VAT return data with accounting books: The taxable supplies as per the VAT return may not always match with revenue recorded in the trial balance for a particular tax period. The reasons may be an advance received from the customer, retention, sale of fixed assets, recharge from related parties recorded in cost accounts as deduction, etc. FTA may ask for reconciliation of revenue as per trial balance with the taxable supplies reported in the VAT return. Non-availability of the same may result in rejection of the refund application.
Recovery of non-claimable input tax: The FTA has issued many public clarifications/guidance notes on the recoverability of input tax. However, in practice, it is observed that many taxpayers are incorrectly claiming ineligible input tax credit such as expenses related to mobile phone, expenses related to car and expenses related to exempt supplies in some cases etc. In many cases, even though the expense is recoverable, the claim is not accepted due to the incorrect format of the tax invoice issued by the supplier. Here, the taxpayers are required to submit voluntary disclosure or are required to adjust in the subsequent period.
MBG Corporate Services is a registered tax agency with the Federal Tax Authority comprising of professionals dedicated to client satisfaction and high quality services. We have an extensive network of tax agents and VAT professionals with in-depth understanding and experience in refund procedures. Our experts can assist your business to develop or improve related business processes to reduce the time and administrative costs associated with making claims, and increase your chances of success.
To know more or if you have any queries, please get in touch with us:
Vipin Kumar Ahuja is associate partner — indirect tax and Mihir Soni is assistant director—indirect tax at MBG Corporate Services.
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