The Federal Tax Authority (FTA) has recently issued a public clarification in relation to the recoverability of credit pertaining to Mobile Phones (Phones), call minutes (Airtime), and Data Packages (Packages) made available to employees for business use1.
Generally, businesses can recover input tax paid for goods and services used (or intended to be used) for making taxable supplies. However, Article 53(1)(c) of the Executive Regulation prohibits the recovery of input tax which is incurred on goods or services purchased for the personal benefit of an employee, without any charge. These prohibitions are, however, subject to specific instances provided in Executive Regulations, i.e.,
- Legal or contractual obligation on the employer to provide such service for the employee to perform their role; or
- Supply made is considered to be a deemed supply.
In the general course of business, agreements are entered with telecommunication service providers to make phones, airtime and packages available to their employees to perform their roles outside office hours or at locations away from the office. However, many companies have chosen the â?~work from homeâ?T arrangements during the pandemic. Accordingly, usage of phones has substantially increased from â?~personal useâ?T to managing businesses. Hence, the recovery of input tax on such usage is a major issue for companies because such assets are also exposed to personal usage.
In the said regard, the FTA has issued a much-needed Public Clarification regarding the recovery of input tax incurred on phones, airtime, and packages. The Public Clarifications states that businesses should monitor the use of phones, airtime, and internet packages and take appropriate action against employees who use the same for personal use in accordance with the policy formulated by the company at the time when Phones, Airtime, and Packages were made available to the employee.
Furthermore, it also states that the following conditions should be fulfilled for recovering credit on said expenses:
- The business is registered for VAT and tax invoice is received and retained in its own name (invoice in the name of the employee shall not be valid) and valid contract with the service provider should be available;
- The business should have a documented policy in place stating that the phones, airtime, and packages should be used for business purposes, and the consequences that the company would undertake needs to be mentioned in case the above are put to personal use by the employee;
- The business regularly monitors the usage, retains justification for the variances, and takes action against employees for personal use in accordance with the documented policy.
It also states that when Airtime and Packages are purchased based on the expected business requirements, any usage more than the business plan would be regarded as non-business use, unless the additional usage is recharged to the employee with output tax, or if there is robust monitoring in place to substantiate the actual use.
Public Clarification has resolved many doubts that crippled the businesses in the last couple of months regarding the recoverability of said expenses as FTA during the refund review had started disallowing credit on phones, airtime, and packages. With this Clarification, the businesses in UAE would now be able to recover the credit in relation to the said expenses, subject to the conditions being fulfilled.
If the business decides to recover such credit, it will need to deploy proper safeguards as substantiated above and maintain the required documentation as well as the mechanism for recovery.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.