Tax Flash

Extended scope - outputs based special apportionment method

• The outputs-based method was previously available for companies engaged in the following sectors:
  • Insurance companies (Islamic and non-Islamic).
  • Financial institutions, such as banks that provide banking services to individuals, companies, large establishments and investment banks, and similar institutions (Islamic and non-Islamic).
  • Providers of local passenger transportation services.
• As an extension to the scope of sectors that can apply to use the outputs-based special apportionment method, the following sectors have been added:
  • Educational institutions.
  • Establishments, such as art galleries, cultural entities, and similar establishments, that conduct non-business activities.

Extended scope -sectoral special apportionment method

• Large complex businesses may conduct different business activities through different divisions which are independent of each other from an operational and accounting perspective.  
• To ensure that the apportionment method is as tailored as possible for each of the distinct business divisions, such businesses may apply for a “sectoral” method of input tax apportionment.
• There are two methods which can be used for such an allocation:
  • Headcount method
  • Outputs method
• It was previously suggested that the sectoral method was to be used by large, complex companies and establishments with different divisions, such as:
  • Banks with retail, investment and real estate divisions, and similar institutions.
  • Insurance companies providing both life and non-life insurance.
  • As an extension to the scope of sectors that can apply to use the sectoral special apportionment method, the following sector has been added:
    • Real estate companies that have separate divisions for commercial and residential properties.

Timeline for applying for a special apportionment method

• A VAT registrant may apply to the FTA for permission to use a special method of input tax apportionment for the first time if the registrant has used the standard apportionment method for at least 6 months and this method does not yield a fair and reasonable result.

FTA review timelines

• Once the Input Tax Apportionment request is accepted, the FTA may require up to 40 business days from the date the request was received, to respond to the initial input tax apportionment request if a non-sectoral method is selected, and up to 60 business days if a sectoral method is selected.
• If additional information is required in respect of the lodged application, the FTA will request the additional information. It may take the FTA a further 40 or 60 business days (based on the method selected in the application) to respond to the updated request for a special input tax apportionment method.

Effective date of application of the approved special method

• Where the FTA has approved the use of a special input tax apportionment method, the approved method may be used from the first tax period following the date of approval.

Requirements for the re-applicassion for a special apportionment method. 

• Any method approved by the FTA is valid for 2 or 4 years, depending on the method. If the registrant wants to continue using a special method after the expiration of the period, a new application is encouraged to be submited to the FTA at least 40 business days before the expiry of the most recent approved special method.
• Provided the taxable person submitted a request to continue using the previously approved special method before its expiry date, the registrant may continue using the previously approved method up to the end of the tax period during which a new decision on the request is issued by the FTA.
• In case of any major changes in the business, the nature of the supplies and/or expense allocation principles, between the time of the original application data and the new application, such changes should be highlighted to the FTA in the new request.
• The new application shall include the same type of information and calculations as the original application, for a period of 12 months preceding the new application.
• In addition to the above, the new application shall contain a comparative overview of the recovery rates and sectors (where applicable) provided in the original application and in the new apportionment calculation requested, with an explanation of any major fluctuation in the recovery rates.

Examples

• A comprehensive lists of examples have been added to the Guide that the taxpayers are encouraged to read and understand.
• The examples cover the following:
  • examples on the standard apportionment method, the annual wash up adjustment and the actual use adjustment.
  • examples on the input tax apportionment calculations for each special apportionment method.