Financial Services VAT guide

Federal Tax authority has recently released Financial services VAT guide (VATGFS1) which provides guidance for the financial services industry to understand which of the services and functions it provides are liable to and exempt from VAT and in turn, the extent to which VAT recovery on costs is possible.

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VAT update highlights

This VAT update highlights key points of the Financial services VAT guide:

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• Supplies of financial services where an explicit fee, discount, commission, rebate or similar type of charge is made are subject to VAT at the standard rate of VAT (i.e. they are treated as taxable supplies) to the extent of the amount of that separately identifiable charge.

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• Supplies of financial services where they are remunerated by way of an implicit margin or spread (i.e. no explicit fee is charged in respect of them) will be exempt from VAT.

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• FTA guide includes a detailed appendix covering transactions across 8 different sub-sectors within the financial services industry, together with the FTA’s view on their VAT treatment.

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• The supply of investment grade precious metals is subject to VAT at the zero rate. (where the Investment Precious Metal means gold, silver and platinum where the metal is of a purity of 99 percent or more and the metal is in a form tradeable in global bullion markets). VAT incurred in relation to these supplies can be recovered in full.

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• The supply of financial services to a recipient established outside the GCC (whether or not they would otherwise have been exempt where supplied in the GCC) will be zero-rated.

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• Multiple Supplies Vs Single Composite Supplies.

  Where one makes a multiple supply, one must determine the correct amount of VAT to charge.
  Where the individual supplies are not liable to VAT at the same rate, one must use a method of valuing each supply, which is fair and reasonable. This could include using the cost of each element of the supply as a proxy for assigning a value to each component of the supply. The value of each supply must be disclosed to the customer
  

  Single composite supplies are one, single indivisible supply of a mixture of goods and/or services. The supply is treated as a single supply and is subject to VAT at one rate, which is applied to the value of the supply as a whole. One must not use apportionment where one makes a composite supply. The test of singe composite supply is where one or more elements of the supply comprise the principal component, with other elements being ancillary – i.e. not an aim in itself, but a means of better enjoying the principal component

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• Late payment fees – FTA guide mentions that late payment fees to be treated as standard rated whereas interest on late payment will be treated as exempt.

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• Input tax apportionment: The guide explains that all businesses must take care when making use of an input tax apportionment method and should ensure that it is “fair and reasonable” for their particular circumstances. The FTA has highlighted that it will closely examine the results of input tax apportionments methods used by businesses and, where necessary, will intervene in order to ensure that a fair and reasonable outcome is secured.

Other Financial Services – VAT Treatment:

• 1.
• Where a financial service provider makes a payment, which is a return on an investment, such as, interest on deposits, dividends, drawings, etc. and where there is no service nor transaction provided in return for such a payment, then these returns on investment will be outside the scope of VAT.

• 2.
• The issue, allotment, or transfer of ownership of an equity security or a debt security will be exempt from VAT. This also includes stocks and other securities. Fees charged by brokers or dealers who act as intermediaries to the above types of transactions will be subject to VAT at the standard rate.

• 3.
• The management of a portfolio of investments is subject to VAT at the standard rate.

• 4.
• Trustee Services are subject to VAT at the standard rate.

• 5.
• Payments into a pension or a collective investment scheme are outside the scope of VAT. However, fees for the management of a pension fund or collective scheme are standard-rated.

• 6.
• The lending of shares is not subject to VAT. However, if a fee is charged for this service, it will be subject to VAT at the standard rate.

• 7.
• Interest Rate Swap: Where banks and other financial institutions exchange fixed interest rates on their debts and there is no explicit fee for this service, this is exempt from VAT.

• 8.
• Currency swaps – Where banks and other financial institutions undertake currency swaps and there is no explicit fee for this service, this is exempt from VAT.

• 9.
• Derivatives – Trading in derivatives where income is derived from arbitrage, or gains from net margin or spread is exempt from VAT. Devising, advising on, originating and the issuing of derivatives is liable to VAT at the standard rate, where this is carried out for an explicit fee (e.g. arranger’s fee, rollover fee, upfront fee). Where consideration is derived from an explicit premium, this is also standard-rated. Settlement of futures contracts by delivery of commodities is taxable at the appropriate rate of VAT for the underlying supply of those commodities.

• 10.
• Debt Recovery and Litigation: Services related to debt recovery, litigation and the management of the recovery of debts due from debtors are subject to VAT at the standard rate. This includes all services related to debt factoring.

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Article prepared by: Bhawna Chopra – Director Taxation, Premier Brains with inputs from Naim Abbas Virani – Assistant Manager, Premier Brains Article Preparation date: 18 March 2019

DISCLAIMER:

This document is only for information purposes and should not be construed as an advice. It does not necessarily cover each aspect of the topic with which it deals. You should not act upon the contents of this document without receiving formal advice on your particular circumstances.

If you would like to discuss any VAT matters or VAT services in Dubai& UAE, please drop us an email at info@premier-brains.com or call us at + 971 4 3542959.