Relevant Section of Law: Article 53 of the Cabinet Decision No. 52 of 2017: Non Recoverable Input Tax

Summary:

VAT on Incidental or Genuine Entertainment expenses is recoverable. Whereas if the hospitality itself becomes an end itself or reason to attend an event no VAT is recoverable.

Detailed Discussion:

Public clarification is divided into two parts for the purpose of understanding:

1. Entertainment provided to non-Employees (Only Designated Government Entities can recover)
2. Entertainment Provided to Employees (Both Designated and non-Designated Government Entities can recover.

Entertainment provided to non-Employees:

Designated Government Entities

Article 53 has provided specific privileges to the Designated Government entities to recover even input tax incurred on the entertainment provided to non-employees. Example of such entertainment services are:

• Input tax incurred on meeting with delegations from other countries
• Input tax incurred on meeting with Government representatives from other departments
• Input tax incurred on ceremonies held to mark significant political events

Entities other than Designated Government Entities

All other types of organizations are not allowed to recover entertainment expenses provided to non-staff members. Examples include:

• Customers
• Potential Customers
• Officials
• Shareholders

Entertainment Provided to Employees:

Entertainment provided to employees can both be recoverable and non-recoverable depending upon the circumstances:

Entertainment Expenses where input tax is recoverable:

1. Input tax on foods and Drinks in the normal course of a meeting are recoverable.
2. Input tax on hospitality provided at the venue of the meeting such as tea and coffee is recoverable.
3. Input tax on hospitality provide in short breaks during meeting such as lunch break is also recoverable if such costs does not exceed internal policy the business normally has in place.
4. Input tax on goods and services purchased to be used by the employees free of cost is also recoverable when following situations exist:

• Where it is legal obligation to provide those goods and service
• It is contractual obligation or document policy to provide those goods and services which is a normal business practice in such business
• Where provision of goods and services is deemed supply as per the provisions of Federal Decree Law.

5. Similarly in case of conferences and business events whereby fee is charged to Employees and Vat is accounted for any input tax incurred on catering services is fully recoverable.
6. Input tax on incidental normal office expenses for general use by both employees and visitors are recoverable. Examples of such expenses are:

• Tea, water and coffee used in office by staff and visitors
• Flowers for display at the reception
• Dates, chocolates and snacks etc.

7. Expenses funded or reimbursed to employees for business purposes are also recoverable expenses for the purpose of VAT such as hotel stay or foods and drinks consumed during official business trips.

Entertainment Expenses where input tax is non-recoverable:

1. Where goods and services are purchased by employer to be used by staff free of cost except situations highlighted above.
2. Where foods and refreshments are so substantial that they would constitute and end in themselves or may have encouraged someone to attend the meeting.
3. Where no fee is charged for attending conference and business events, input tax incurred on entertainment for such events will be also non-recoverable.
4. Where events are held purely for the purpose of entertainment of staff input tax incurred shall also be non-recoverable.
5. Goods and services purchased to be provided to staff free of charge in order to award them for long term service such as long service awards, retirements gifts, Eid gifts etc. also give rise to non-recoverable input tax.
6. Input tax on expenses incurred by employee on entertainment of current or potential customers are also non recoverable.