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Post By: admin June 12 2024

Implication of VAT on Financial Institutions Engaged in SWIFT Transactions

In the world of ever-changing technology and multiple financial transactions, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) plays a vital role by ensuring systematic and secure, communication and transactions between the financial institutions across borders. However, along with seamless communication and transactions, there comes a need for meticulous tax compliance which financial institutions cannot afford to overlook. The Federal tax authority in the UAE has recently issued a Public Clarification VATP036 to provide insights on VAT implications of SWIFT transactions. 

In this blog, we will explore the VAT compliance guidelines provided by FTA for financial institutions engaged in SWIFT transactions, providing vital points of clarification as well as actionable insights.

Understanding VAT Implications of SWIFT Transactions

VAT (Value added Tax) is collected on the value added to both goods and services at different stages of production or distribution. In the context of SWIFT transactions which are the essence of international finance, VAT applies to various services provided by financial institutions such as payment processing, transaction facilitation, advisory services, etc. However, the challenge arises during the recovery of this VAT as the transactions are evidenced by SWIFT messages and these messages do not meet the standard requirements to qualify as tax invoices to fulfill the UAE VAT obligations.

Guidance for Financial Institutions engaged in SWIFT Transactions

With an aim to facilitate the recovery of VAT by financial institutions, the FTA offers guidance on the use of SWIFT messages for documenting international bank charges and input tax recovery. As per the UAE VAT, the financial institutions are required to self-account for the VAT by using the Reverse charge mechanism and to make the payment of the VAT to the FTA. 

  • Recovery of Input Tax

Financial institutions are enabled to recover the input tax on expenses related to taxable supplies, even when the expenses are incurred through SWIFT communication with non-resident banks. If the financial institutions retain the Qualifying SWIFT Message, then it can recover the VAT incurred on the interbank expenses. The recovery process of input tax is subject to the standard VAT regulations, which ensures a fairer tax treatment for financial institutions, leading to a reduction in their overall tax burden.

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  • Issuing Tax Invoices for SWIFT Transactions

Financial institutions that are registered for VAT in the UAE are required to issue a valid tax invoice to themselves as recipients of the supply for all SWIFT transactions that incur interbank charges. Hence, Article 59(7)(b) of the Executive Regulation has stated that for a transaction where sufficient records are already available for the establishment of the particulars of a supply, it would not be practical for taxable persons to issue tax invoices. 

Thus, certain transactions (those with adequate records) are exempted from the issuance of tax invoices, which ultimately streamlines the documentation process for financial institutions.

  • Acceptance of SWIFT Messages as Evidence

FTA considers that issuing tax invoice for each SWIFT transaction can be highly impractical owing to the high volumes of SWIFT messages received daily. This will increase the administrative burden of financial institutions significantly as they will be required to issue tax invoices in respect of international bank charges incurred from non-resident banking institutions.

For this reason, FTA accepts SWIFT messages as valid documentary evidence when documenting interbank services. However, these SWIFT messages are required to meet certain criteria to be considered a “Qualifying SWIFT message”.

As per the public clarification, a “Qualifying SWIFT message” must include the following information:

  • Name as well as address of the non-resident bank (SWIFT sender/supplier)
  • Name of the UAE financial institution that is receiving the service (SWIFT receiver/customer).
  • Date of the transaction
  • SWIFT message reference number
  • Transaction reference number
  • A description of the transaction
  • Consideration charged and currency used

If the SWIFT message meets the above requirement, then it would be seamlessly accepted as sufficient documentary evidence that proves the supply of the interbank service from the UAE financial institution to the non-resident bank. This practical stance, thus, ensures that the regulatory framework is adaptable in situations where specific challenges are faced by the UAE financial institutions in documenting their transactions.

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Public Clarification VATP036 marks a significant step taken by FTA in providing a much-needed roadmap for financial institutions that are required to navigate the complexities of VAT compliance with SWIFT transactions. As the global financial landscape continues to evolve, adherence to the guidelines related to the “Qualifying SWIFT messages” can help financial institutions mitigate compliance risks, streamline processes, reduce administrative burdens, and safeguard their reputation and financial integrity while reaping the benefits of global connectivity through SWIFT communication.

Thus, financial institutions should review their documentation practices to ensure they align with the outlined criteria for VAT compliance and contribute to a more transparent and robust financial ecosystem.

How Can CDA Help?

CDA being one of the best accounting and auditing firms in Dubai, UAE has a well-trained team of tax consultants, who are always ready to serve their expertise in providing tax advises to the clients. CDA can assist your businesses in Dubai to stay complied with the tax demography in UAE whether it be VAT or Corporate tax, our team is always on standby to serve you. The professionals at the CDA can assist you in registration under the tax laws, filing the tax returns on time, determining the taxable amount and many more services within short time and in compliance with the regulations.

To know more about the services, contact out professionals right away!