The impact of the Public Clarification VATP036 on SWIFT messages

On February 5, 2024, the Federal Tax Authority ("FTA") issued VAT Public Clarification on SWIFT messages VATP036 ("clarification"), outlining the documentary requirements for VAT recovery for UAE financial institutions (banks and exchange houses) that receive interbank services from non-resident banks.

Summary of the Clarification

According to the FTA, the importer of services must account for VAT using the reverse charge mechanism and is responsible for all tax obligations, including issuing a tax invoice to themselves. The tax invoice issued to itself should be used to recover VAT by the importer. If the importer cannot issue a tax invoice to itself, it may use an alternative supporting document to recover input VAT. Without a supporting document, the importer of services may be unable to claim VAT in his VAT return.

The FTA clarifies that for interbank services received from non-resident banks, SWIFT messages may be used as a supporting document for input VAT recovery. In case a SWIFT message is received, the importer is not anymore required to issue a tax invoice to itself. The SWIFT message must include the following minimum information:

  • Name and address of the non-resident bank (SWIFT sender or supplier).
  • Name of the UAE financial institution that will receive the service (SWIFT receiver/customer).
  • Date of transaction.
  • SWIFT message reference number.
  • Transaction reference number.
  • Description of the transaction.
  • Consideration charged and currency used.

The Impact on UAE taxpayers

The clarification is specific to SWIFT transactions, and the FTA does not state whether it applies to other imported services. However, we believe that the principles laid out in the clarification apply to other types of imported services as well.

The principles outlined in the clarification may imply that any importer must issue a tax invoice to itself in order to recover VAT on service imports, and that the importer may deviate from this requirement only under exceptional circumstances. Given this principle, it appears that the clarification's impact extends beyond the banking industry.

Taxpayers in the UAE do not typically issue tax invoices to themselves for imported services.

The FTA appears to have made a significant policy shift by requiring service importers to issue tax invoices to themselves. As a result, this change is expected to have a significant impact on taxpayers' overall service imports, in addition to SWIFT charges.

Given the FTA's change in policy in the clarification, taxpayers may be required to issue tax invoices to themselves for all services imported in order to recover input VAT, unless they can provide an alternative document to support their input VAT claim. However, for imports of services other than interbank charges, it is unclear which types of documents can be used for input VAT recovery and what minimum requirements must be included on such documents.

Recommended actions for taxpayers

Importers of services must determine whether they can issue a tax invoice to themselves. If taxpayers cannot issue tax invoices to themselves, they should consider using an alternative document to support their input VAT claim. However, because the minimum requirements for the alternative document are unclear, the input VAT claim could be jeopardized. The FTA reserves the right to reject input VAT claims for service imports if taxpayers do not retain the supporting documentation.

We believe that the principles outlined in the clarification will also have a retrospective effect on taxpayers. The reason is that the clarification is based on the FTA's interpretation of current VAT laws and regulations, rather than any legislative changes.

If taxpayers have not issued a tax invoice to themselves for previous transactions, it will be practically impossible to issue backdated tax invoices to itself. Taxpayers should reassess whether they have received any alternative documents for importing services from outside the UAE for previous transactions. Taxpayers should then determine whether the alternative document is sufficient for input tax recovery. The request for a Private Clarification may be a solution for taxpayers seeking certainty on the supporting document used for input VAT recovery on imports.

If no (sufficient) supporting document for service imports has been retained, the taxpayer should consider correcting the input VAT claimed in his previous VAT returns. A voluntary disclosure may be required to correct the historical VAT returns.

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.