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VAT could mean higher costs for banks

Tax could impact profits of banking sector

Gulf News

Dubai: The new tax law and the executive regulations point to a system that UAE banks and financial institutions will have both exempt as well as taxable supplies.

This means that value-added tax (VAT) incurred on common costs and general overheads such as marketing and promotional expenses, utilities, professional fees, purchases of office furniture will not be fully claimable and would need to be apportioned.

Experience from other jurisdictions that have implemented VAT shows financial institutions tend to recover only a small percentage of the total VAT cost incurred on exempt category. Thus costs are expected to increase for financial institutions as a result of VAT. These costs will be further compounded by the higher compliance costs faced by these institutions to ensure correct tracking and attribution of all inputs and VAT claims.

As a result, some jurisdictions adopted different models, aiming at reducing the complexity and the economic distortions that arise under the exemption system.

In VAT exempt categories of banking services, banks are not able to claim refunds on tax paid on inputs. These additional costs could mean a drain on banks’ profits. Tax experts say banking sector service charges will require some fine-tuning to account for the non-recoverable input VAT costs. The irrecoverable VAT may constitute an important cost for financial institutions and potentially impact their pricing policy to ensure that prices and margins are rebalanced to maintain current levels of profitability.