VAT PO036: Input VAT Recovery on SWIFT messages

The Public Clarification released by the FTA relates to the bank charges that a financial institution incurs on account of using Society for Worldwide Interbank Financial Telecommunications (SWIFT) communication system. While the public clarification is relevant only for banks and exchange houses (which are collectively referred as financial institutions for the purpose of this clarification), the concepts clarified in the document may have implications on all businesses in the UAE which are involved in importing good or services

Legislative Background:

The UAE VAT Law provides for reporting of certain transactions under the Reverse Charge mechanism (RCM). RCM, as a concept, shifts the responsibility of reporting and discharging any VAT liability on the recipient of goods or services rather than the seller. While there are some defined cases of domestic RCM applicability under the UAE VAT Law, RCM generally applies in cases of cross border transactions

As per Article 48 of the UAE VAT Law “If the Taxable Person imports Concerned Goods or Concerned Services for the purposes of his Business, then he shall be treated as making a Taxable Supply to himself, and shall be responsible for all applicable Tax obligations and accounting for Due Tax in respect of these supplies”

Accordingly, any importer of goods/services in the UAE is required to disclose the value of imports in the VAT returns. The importer is required to disclose the VAT output liability under Box 3 (for services) and in order to claim back the VAT input, the transaction shall be reported in Box 10 subject to meeting the conditions of claiming VAT input

Article 65(1) of the Decree-Law states that a registrant making a taxable supply shall issue an original tax invoice and deliver it to the recipient of goods or recipient of services.

Since the transaction of import is considered as that supplied by the recipient to itself, this creates an obligation on the recipient to issue a tax invoice on itself for the value of such services. Further, basis this tax invoice, the recipient shall be able to claim the input VAT in Box 10

Issue for financial institutions

UAE Financial Institutions receive interbank services from non-resident banks for the use of SWIFT communication systems. The provision of the right to use SWIFT communication service constitutes a ‘service’ for VAT purposes and as per the general rules, the place of supply of such services will be the UAE.

Accordingly, the financial institutions are regarded as making supplies to themselves in respect of these interbank services. This creates an obligation on the UAE financial institution to account the transaction under RCM and also issue tax invoice to themselves in respect of each of these supplies.

Financial Institutions may only recover the related input tax provided they meet the general conditions of tax recovery i.e.

• The cost should be incurred to make taxable supplies and
• Financial instituions shall obtain and retain the tax invoice against such transactions

Considering the volumes of SWIFT messages UAE financial institutions receive on a daily basis, it would be impractical to require financial institutions to issue a tax invoice to themselves (i.e. self-invoice) for each SWIFT transaction.

Key Aspects of Clarification:

The Public Clarification provides for an administrative relief to financial institution by exempting them from the requirement of self-invoicing subject to the conditions mentioned.

The key aspects of the clarification are summarised below.

Key Aspects	Particulars
Legislative provision for granting such relief	Under Article 59(7)(b) of the Executive Regulation, the FTA may determine that a tax invoice is not required to be issued in certain cases Accordingly, in cases where there are (or will be) : a) sufficient records available to establish the particulars of any supply or class of supplies, and b) that it would be impractical to require the issuance of a tax invoice by the taxable person the FTA may determine that issuance on a tax invoice will not be necessary
Nature of relief granted	The FTA has recognised the impracticality for financial institutions to issue tax invoices to itself for all cases of SWIFT related charges particularly due to the large volumes of such transactions Accordingly, through the clarification it been confirmed that the SWIFT message received from the non-resident bank will be accepted as a sufficient record to establish the particulars of the supply provided the following information is reflected on SWIFT message: a) Name and address of the non-resident bank (SWIFT sender/supplier). b) Name of the UAE financial institution receiving the service (SWIFT receiver/customer). c) Date of the transaction d) SWIFT message reference no. e) Transaction reference no f) Description g) Consideration charged and currency used   Considering the above, a UAE financial institution is not required to issue a tax invoice to itself if it retains the relevant Qualifying SWIFT message as evidence of the transaction.
Implication on financial institutions	The clarification will reduce significant administrative burden on the financial institutions to create and maintain invoices for all SWIFT related charges It will enable the financial institutions to claim VAT input (under Box 10) for all SWIFT related charges It is important to note that the exemption is granted only for SWIFT related bank charges and thus in all other cases, the banks shall continue to fulfil the requirement of self-invoicing

While the Public Clarification relates only to specific charges and applies only for banks and exchange houses, it has highlighted a very important compliance requirement of self-invoicing for import related transactions.

The requirement to self-invoice applies in all cases where a taxpayer imports goods or services from overseas. The taxpayer is thus required to create and maintain a tax invoice on itself in order to fulfil the compliance requirement of the VAT law. It is important to note that the failure to meet the requirement may result in disallowance of the VAT input claims for RCM transactions, thereby creating a negative cash impact for the taxpayers for an otherwise tax neutral transaction