FTA issues public clarification on input tax recovery using SWIFT messages

Background

The Federal Tax Authority (FTA) has issued a clarification¹ for banks and exchange houses (i.e., financial institutions) regarding the recovery of input tax on interbank services provided by non-resident banks using SWIFT² messages.

When local financial institutions receive interbank services from non-resident banks, they are regarded as supplying the supplies to themselves in respect of these interbank services and are required to issue tax invoices to themselves in respect of these supplies.

Financial institutions may only recover the related input tax to the extent the cost is incurred to make taxable supplies and provided that the required supporting tax invoices are obtained and retained.

Recognizing the administrative burden involved in issuing tax invoices for a large number of SWIFT transactions, the FTA has now set specific conditions and requirements under which SWIFT messages can be used as evidence to support input tax recovery, eliminating the need for financial institutions to issue tax invoices for each SWIFT transaction.

 

Import of services

When a UAE financial institution incurs international bank charges from banking institutions outside the UAE using the SWIFT system, this is considered an import of ‘Concerned Services’.

If the local financial institution is registered for VAT purposes, and imports services from abroad, it is regarded as making a taxable supply to itself. Consequently, it must fulfil all VAT-related responsibilities, including accounting for VAT on these imported services using the reverse charge mechanism.

 

Tax invoice

Under the reverse charge mechanism, the UAE financial institution is considered to make a supply of interbank services to itself. This means that the financial institution is required to issue a valid tax invoice to itself as recipient of the supply, in respect of each SWIFT transaction for which it incurs interbank charges.

 

Qualifying SWIFT messages

To reduce the administrative burden for financial institutions, the FTA has established specific criteria and guidelines for SWIFT messages. When these criteria are satisfied financial institutions will not be required to issue tax invoices for every transaction.

SWIFT messages that include the following information are considered ‘Qualifying SWIFT Messages’:

• Name and address of the non-resident bank (SWIFT sender/supplier)
• Name of the UAE financial institution receiving the service (SWIFT receiver/customer)
• Date of the transaction
• SWIFT message reference number
• Transaction reference number
• Description of the transaction
• Consideration charged and currency used

Qualifying SWIFT Messages will be accepted as sufficient documentary evidence to prove the supply of the interbank service received from the non-resident bank, and the UAE financial institution will be considered as having supplied the service to itself.

In such case, the UAE financial institution is not required to issue a tax invoice to itself, provided it retains the relevant Qualifying SWIFT Message as evidence of the transaction.

This is based on a provision in the VAT Executive Regulations which allows the FTA to determine that it is not required to issue a tax invoice in certain cases where the FTA considers that there are or will be sufficient records available to establish the particulars of any supply or class of supplies, and that it would be impractical to require that a tax invoice be issued by the taxable person.

 

Input tax recovery

If the UAE financial institution retains the Qualifying SWIFT Messages, it will be able to recover VAT incurred on the interbank charges, to the extent such costs are incurred to make taxable supplies, and provided all other requirements for input tax recovery are met (in particular in relation to the timeframe for recovering input tax).

 

Conclusion

Recognising the practical challenges and administrative burden involved in issuing tax invoices for every transaction involving interbank charges, the FTA has specified the conditions under financial institutions can use SWIFT messages to recover input tax.

The FTA's clarification introduces a more efficient way for financial institutions to comply with VAT requirements on imported services.

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¹ VAT Public Clarification (VATP036) regarding the use of SWIFT messages for input tax recovery
² Society for Worldwide Interbank Financial Telecommunications