Taxable businesses will not be able to reclaim value-added tax (VAT) paid on staff parties and gifts, or any food and drinks that are provided outside of work meetings, the Federal Tax Authority (FTA) of the United Arab Emirates has said.

“VAT incurred on goods or services purchased to be given away to staff free of charge, in order to reward them for long service, should be blocked from recovery,” the FTA said in a press release on Monday that followed the publication of a clarification statement on entertainment services on its website

The authority said examples of gifts for which VAT is not recoverable include: long service awards; retirement gifts or any other benefits provided to mark special occasions or festivals. It added that an exception could be made to companies that provide such goods and services as a business, for whom such gifts are a business cost.

The FTA has been regularly issuing clarification statements over the year on the implementation of VAT since the tax was introduced in the UAE in January. Other clarification statements issued to date include details on the proper use of tax invoices, the difference in the provision of labour accommodation and serviced accommodation, and the VAT treatment of the sale of second-hand goods and antiques.

The introduction of VAT for the first in the UAE in January was part of a wider economic plan by the government to diversify its sources of income after the sharp fall in oil prices that began in 2014. VAT was also introduced for the first time in Saudi Arabia, the world’s top exporter of oil, at the same time for the same reason. All GCC states agreed in principle to introduce VAT at a five percent rate in 2016 and issued a unified tax agreement for the treatment of VAT, but so far only the UAE and Saudi Arabia have actually introduced the tax.

In the statement issued on Monday, the FTA also said that government institutions will be eligible to recover input tax incurred on entertainment services it provides to anyone who is not employed by the entity. 

Entertainment for which VAT is recoverable by government entities include “meetings with delegations from other countries where lunch or dinner is provided; meetings with representatives from other government entities to discuss official business, where refreshments are provided; or ceremonies held to mark significant political events, e.g. the signing of an international agreement, where entertainment is provided to the audience”.

However, the authority said that government and non- government employees will not be able to recover VAT paid on entertainment services or goods to non-employees, including customers, officials, potential customers, shareholders or investors.

The FTA said the only circumstances in which a taxable person is entitled to recover VAT on entertainment costs are “where it is a legal obligation to provide those services or goods to those employees; it is a contractual obligation or documented policy to provide those services or goods to those employees so that they may perform their role and it can be proven to be normal business practice”.

It also said that VAT could be recovered on “tea and coffee” served in offices, “flowers for display in receptions, offices or for decoration during special events”, and dates, chocolates or similar office snacks.

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(Writing by Yasmine Saleh; Editing by Michael Fahy)

(yasmine.saleh@thomsonreuters.com)

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