Abu Dhabi

The Federal Tax Authority (FTA) has issued a public clarification regarding tax treatment of compensation-type payments, noting that Value Added Tax (VAT) is imposed on supplies of goods and services and if any payment does not relate to a supply of goods or services, then the payment is not subject to VAT.

The Authority noted that as part of business agreements, businesses usually make payments to compensate each other for any loss, negligence or other errors. VAT should not be applied to such amounts if they do not relate to a supply.

In a recent press statement, the Federal Tax Authority noted that under Article (2) of Federal Decree-Law No. (8) of 2017 on Value Added Tax, VAT is imposed, among other things, on taxable supplies of goods and services. Taxable supply is defined in Article (1) of the same Law as a “supply of goods or services for a consideration by a person conducting business in the UAE and does not include exempt supply”.

The Authority had issued these statements in a Public Clarification on “VAT Treatment of Compensation-Type Payments”, published on its website. The Clarifications are the latest of the FTA’s various instruments used to raise awareness among tax payers about the technicalities of the tax system

“We seek to offer the new ‘Public Clarifications’ service in a simplified and accurate manner, where it can be accessed through the Federal Tax Authority’s website by clicking the ‘Getting Help’ tab,” said FTA Director General Khalid Ali Al Bustani.