March 23 2023

Federal Tax Authority Publishes Guide to Clarify Allocation of Input VAT

Source: IBFD Tax Research Platform News

The Federal Tax Authority (FTA) has clarified the general rules and special methods available for the allocation of input VAT, as well as the procedure for applying for these methods, by updating the guide on the allocation of input VAT.

Input VAT incurred in respect of goods or services that are used partly for making supplies that allow for VAT recovery and partly for other purposes for which VAT is not recoverable is referred to as "residual input tax". Residual input tax must be apportioned between those activities. Recovery will be restricted to the portion relating to supplies that allow for VAT recovery. At the end of the tax year, the taxable person proceeds to an annual wash-up to determine the annual wash-up adjustment.

If the taxable person considers that the standard method does not give a reasonable result, it has the possibility to apply one of the following special methods of apportionment depending on the nature of his activities:

  • the outputs-based method;
  • the transaction count method;
  • the floorspace method; or
  • the sectoral method.

The request form must be submitted to the FTA if the following conditions are met:

  • the applicant has been registered for VAT for at least 6 months;
  • the applicant makes both taxable supplies and exempt supplies / carries on non-taxable activities; and
  • the standard method of input tax apportionment does not give a fair and reasonable result for the applicant's input tax recovery.

The guide provides a diagram showing which special method is most appropriate for each type of activity.

The FTA's clarification was published as a guide (VATGIT1) on 22 March 2023

Federal Tax Authority Value Added Tax

Federal Tax Authority Value Added Tax