Vat Impact On Disbursements And Reimbursements
If you are engaged in business activities that comprise of consignments, agency or any other third-party service arrangements, it is common to encounter practices of reimbursements and disbursements. When such transactions come up, it is essential to be aware of their VAT treatments to ensure proper accounting and reporting in compliance with the regulatory requirements of the region. Payments involving many layers of business arrangements through contracts can make it difficult to determine the VAT impact. To make it easy to interpret the related VAT provisions, FTA has explained in detail the VAT impact on disbursements and reimbursements in a public clarification statement, highlights of which are discussed below.
What is the difference between a disbursement transaction and a reimbursement transaction?
Recovery of expenses incurred by a person from another can either be classified as a disbursement or as a reimbursement based on the status of the person who incurred the expenses. Whether the person incurred the expense at the capacity level of a principal or agent will make the differentiation. If the person was acting as an agent on behalf of another person while purchasing the goods or services, the recovery of the expenses incurred can be classified as a disbursement transaction. In other case where the person acted as principal, the recovery of expense will be of the nature of a reimbursement transaction.
Why is it significant to differentiate disbursements and reimbursements with respect to UAE VAT?
The significance of this differentiation is mainly because of the different type of VAT treatments based on the nature of the transaction. As per the VAT regulation, disbursement of expenses is out of the scope of UAE VAT and reimbursement of expenses falls within the scope of VAT. The disbursement transaction does not consist of any supply as the expense was incurred on behalf of another party. Whereas in the situations of reimbursements, the recovery is part of the consideration for the supply and it will have same the VAT treatment as that of the supply. Hence it is important for the parties involved in the transaction to know about the nature of the recovery for applying the correct VAT treatment so that they can follow the right input VAT credit procedures accordingly.
What are the conditions to be satisfied to recognize a recovery of expense as disbursement?
Below given features will help to identify the disbursement transactions, when the person who incurred the expense was acting as an agent on behalf of another party who is the principal:
- The principal is the actual recipient of the goods or services for which the expense was incurred
- The principal is legally responsible to make the payment to the supplier
- The tax invoice was issued by the supplier in the name of the principal and the invoice was received by the principal
- The principal authorized the agent to make the payment on its behalf
- The expense incurred is additional to the other supplies made by the agent to the principal
- The amount recovered by the agent from the principal should be the exact expense incurred without any mark-up
What are the features to recognize a recovery of expense as a reimbursement transaction?
The following points are features of reimbursements transactions, where a party incurs the expenses itself and later claim for recovery from its customer/client based on mutually agreed terms:
- The party incurred expenses in its own name and capacity
- Goods or services were received by the party who incurred the expenses
- The supplier issued the tax invoice in the name of the party who incurred the expenses
- The party who incurred the expenses is legally responsible to make the payment to the supplier
- If the supply includes goods of any kind, the party who incurred expenses shall own them before making any onward supply to another party.
Feel free to contact CDA for help in determining VAT treatments of your expense transactions in UAE
It can sometimes be challenging to analyze the VAT implications on the payments made, especially when the data involve multiple types of transactions with complex factors. What you need in such situations is assistance of VAT experts of the region to sort out the VAT implications and support you in each of your key decision-making processes. CDA has a dedicated VAT team in UAE providing value-adding services across various business sectors and supporting enterprises to establish proper VAT governance in compliance with the applicable regulatory requirements. We are happy to help you and guide you in completing your VAT functions in a systematic manner as compatible with the nature of your business activities.