Clarification on Entertainment Tax
Clarification on Entertainment Tax is issued. The Federal Tax Authorities have issued a clarification on the non-recoverability of Input Tax paid on Entertainment Expenses incurred by a person. As per Article 53 of Cabinet Decision 52 on the Federal Decree Law 8 of 2017 on Value Added Tax, it is explicitly stated that Input Tax paid on providing of Entertainment services is not allowed to be adjusted in the VAT Return of a Registrant, subject to the following exceptions:
- Where it is required by Law to be provided to employees.
- It is expressly stated in the contract that such a benefit or service shall be provided to the employee so that they can perform the services required of them. It should be pointed out here that such a service should be proven to be required for the performance of duties as well as is normally provided in the course of employment in the Industry.
- Where the provision of goods or services is a deemed supply.
Significant Need for Clarification Regarding What Constitutes As Entertainment
The clarification issued by the FTA can be summarized as that Entertainment expenditure which is for purposes which are genuinely for the Business can be claimed as an Expense. Also, any expense incurred incidental to the Business also falls under this category. An example of this would be where expenditure incurred on refreshment on a Business Meeting. However, it should be noted the cost of a dinner where a keynote speech is given will not fall under this category.
Entertainment Tax for Non-Employees
The clarification in this scenario makes two distinctions, Government Entities, and Non-Government Entities.
In the former case, any entertainment expenditure incurred by a Government entity it shall be recoverable, whether it is for meetings with other delegations, representatives or ceremonial expenses. There does, however, exist a proviso, which states that VAT on such an expense will only be allowed to be recovered in case such services are provided to personnel not employed by the entity.
In case of Non-Government Entities, the general rule as stated in the clarification is that VAT on entertainment expenses incurred by a person shall not be recoverable where it is provided to a non-employee. This includes Customers, Potential Customers, Officials, and Shareholders or Other Investors.
Entertainment Tax Provided to Employees
VAT incurred on costs sustained by a Company for Goods and Services to be used by an Employee for personal purposes in blocked from being recovered. That being said, there are exceptions to this rule which have been stated in the first paragraph. A particular example which FTA has also included in its clarification is that when a company hires a new employee and provides accommodation to the Employee for a couple of days in a hotel, prior to him finding his own premises, VAT will be recoverable on such costs since it is normal business practice to provide such benefit.
Definition of Entertainment Services
The question does, however, arise as to what constitutes as Entertainment Services and what does not. The most commonly inquired query is that whether food and drink in the normal course of a business meeting are allowed to be recovered or not. The FTA has stated that if simple food and drink is provided, VAT can be recovered on it. It has also issued the following criteria:
- A Venue for food and drink is the same as the meeting.
- The meeting is interrupted by refreshment for only a short period.
- The cost per head does not exceed any internal policy in place for employee subsistence claims.
- The food and beverages are not accompanied by any other entertainment i.e. Live Music etc.
They also state that where food and drink provided are so significant in value that they become an end themselves, then it will constitute as entertainment and not be allowed to be claimed as VAT Input.
Conference and Business Events:
In case of VAT incurred on costs associated with a Conference, FTA has given two straightforward criteria for determination of recoverability:
- If fees for attending such an event is charged, then VAT can be recovered.
- If fees have not been charged, then VAT cannot be recovered.
To remove any ambiguity, FTA has also added that an Entity should only apply for recoverability in case it’s absolutely certain that it can. If it has any ambiguity, Entity should err on the safe side and not claim Input VAT.
Sundry Staff Expenses
Another important point of contention was the treatment of office expenses incurred for the employees at no additional cost. FTA has clarified that normal incidental office expenses which are used by employees and visitors alike do not give rise to non-recoverability. The following general expenses have been clarified by the FTA that are not prohibited from recovery:
- Tea and Coffee available for general use by Employees and Non-Employees
- Decoration items such as flowers at the reception
- Snacks provided free of cost such as Dates, Chocolates etc.
It is also clarified that expenses incurred on any function, gala or event are blocked from recovery unless the attendees are charged a fee.
Where an employee bears any cost for the purpose of Business or for the performance of employee’s duties of employment, VAT paid on the same shall be recoverable the Entity provided that:
- The expense was for the purpose of Business
- The Entity obtains a Tax Invoice.
This includes expenses incurred for accommodation and food.
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