Will UAE’s latest VAT clarification change anything for imports of goods and services?

UAE businesses– both on the free zone and mainland – seem to have been caught off-guard by a recent clarification on VAT. Are they required to issue tax invoices to themselves for each import of goods and services?

A recent public clarification (VATP041) – replacing the earlier VATP036 - discusses the import of SWIFT services by UAE financial institutions and accounting for VAT thereon, referred to as ‘reverse charge mechanism’ (RCM).

Being an import, UAE financial institutions are treated as making a taxable supply of such SWIFT services to itself. VATP041 has clarified that these entities - being responsible for all applicable VAT obligations under RCM - are otherwise required to issue a valid tax invoice to itself for each SWIFT transaction. Conditional exceptions have been provided.

A recent amendment in VAT executive regulations prescribes that a ‘simplified’ tax invoice - instead of a ‘full’ tax invoice - cannot be issued where RCM applies in accordance with Art. 48 of the VAT Decree Law. Art. 48 inter-alia covers domestic supplies (within UAE) of prescribed crude oil etc., precious metals/stones/jewellery, and electronic devices.

However, Art. 48 also covers import of goods and services under RCM. Considering VATP041, a doubt has arisen if all UAE businesses are obliged to issue tax invoices to itself for each import of goods and services under RCM? Would the failure attract administrative penalties?

Effective January 1, 2023, input credit of VAT paid under RCM (on goods and services) is allowed on ‘receiving’ and retaining invoices. The international banking system exchanges SWIFT messages – and not invoices - for the SWIFT services. Overseas banks are unlikely to issue invoices for each SWIFT transaction.

The absence of suppliers’ invoices could have jeopardised the input tax recovery for UAE financial institutions. The clarification, originally issued in 2024, allows qualified SWIFT messages as a supporting document to recover input tax of the VAT paid under RCM.

The clarification notes the administrative burden on UAE financial institutions to issue tax invoices to itself for a high number of SWIFT transactions, and allows a conditional exception from issuing tax invoices.

A high number of tax invoices to oneself is perhaps unlikely for SWIFT transactions.

UAE VAT laws already allow a supplier to issue one monthly ‘summary’ tax invoice - instead of separate tax invoices - for all the supplies made to the same person e.g. monthly tax invoices for electricity, mobile, bank charges etc.

As UAE financial institutions are treated as making taxable supplies to itself (i.e. the same person), a single summary tax invoice should be acceptable for the monthly imports including SWIFT services.

The pertinent question thus arises - is it the tax invoices issued to oneself? Or is it the overseas suppliers’ invoice, which is critical to recover input VAT under RCM? If it is the former, businesses should re-examine the VAT amendments effective from January 1, 2023. If it is the latter, are tax invoices required only for domestic RCM supplies or for all imports of goods and services?

If applicable for all imports, the accounting for the tax invoices issued to oneself, apart from receiving overseas suppliers’ invoices, could also be an ERP/accounting software challenge. The corporate tax laws would require accounting of the overseas suppliers’ invoices.

The exchange rate selection would be another challenge. Should a business follow the central bank’s rate as on the date of the tax invoice or as on the date of overseas supplier’s invoice as per the pubic clarification (VATP004)?

For the import of goods, would the rate used by the custom authorities be still acceptable? For the proposed e-invoicing regime, it has been clarified that there will be no additional obligation on taxpayers to report the transactions of import of goods and services when invoices are received from foreign vendors.

Among many solutions, businesses are being advised to seek private clarification or administrative exception from the Federal Tax Authority (FTA) on issuing tax invoices to itself for imports of goods and services. A flurry of such applications could impinge on FTA’s resources. A general clarity could help the entire business community, both administratively and financially.