VAT could emerge a cost centre for banks irrespective of rates
In VAT exempt categories, banks will have only limited recourse to input tax refunds
Dubai: Implementation of Value Added Tax (VAT) in the UAE
starting from January 1, 2018 will have some adverse implications for the
banking sector’s margins, irrespective of the rate at which the VAT will be
charged on the financial services.
Following the introduction of VAT, it will apply to most
supplies of goods and services and this may be at the standard rate of 5 per
cent or at zero rate, referred to as taxable supplies. There will be a third
category of supplies that will not be subject to VAT, referred to as exempt
supplies.
Going by the indication in the recently introduced UAE VAT Law
(Federal Decree-Law No (8) of 2017 on Value Added Tax), most financial
services, except the fee-based services are going to be in the VAT exempt
category. However, clarity on this will be available only when the government
issues the Executive Regulation of this Decree-Law specifying tax rates and
categories.
Going by the international
practices, most financial service will fall in the exempt category, except fee
based services. According to tax experts, many services offered by banks falling
in the VAT exempt category could mean, these institutions are not able to
recover the tax costs on inputs or pass it on to their customers, implying
significant cost implications ultimately impacting margins.
VAT is likely to be an irrecoverable cost, negatively affecting
margins for the banking sector. It is therefore imperative that the impact of
VAT on UAE banks is clearly understood.
VAT is a tax on transactions and impacts all areas of business
from IT systems to legal, HR to marketing, and procurement to finance. The
standard rate of VAT is going to be five per cent. Whether a service is
supplied at either five per cent or zero per cent VAT, the taxpayer making the
supplies is generally entitled to recover any VAT incurred on their costs.
Blocked VAT cost
For banks, this will include administrative and cash flow costs.
However, it is likely that most financial services will be VAT exempt. VAT
exempt is not a rate of tax and so cannot be added to the price of goods or
services. Supplies that are VAT exempt do not typically allow for VAT incurred
on costs to be recovered, thereby creating a blocked VAT cost.
Transactions involving moving money are likely to be VAT exempt.
International transactions may be zero rated or outside the scope of VAT. VAT
registered businesses that supply goods and services subject to VAT at a
standard rate or zero-rate are usually entitled to claim a “credit” for VAT
paid on their business expenses (input VAT). However, in the supply of exempt
goods and services, no input tax credit will be available. Therefore the VAT
cost will be borne by these businesses.
Exemption means that no VAT will be charged on the provision of
such exempt supplies and VAT incurred in relation to making these supplies
cannot be reclaimed.
The exempt supplies generally include the acceptance of
deposits, the provision of loans or granting of credit, the operating of any
current, deposit or savings accounts, the issue, transfer or disposal of
securities among others. In addition, any services banks provide acting in an
intermediary capacity to facilitate the making of a financial supply, are
generally exempt. Many fee based services such as advisory fees, debt factoring
services, managing and safekeeping of physical securities are taxable.
A bank that provides both taxable (whatever the rate) and VATexempt services will be required to calculate how much VAT it is entitled to
recover. The exact amount will depend on the local legislation would vary from
fixed percentages to reasonable or special methods that may require negotiation
with the tax authority.
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