The Federal Tax Authority has advised companies not to report interest income earned from bank deposits and dividends which are outside the scope of value-added tax (VAT).

dubai — The Federal Tax Authority (FTA) on Tuesday advised companies not to report interest income earned from bank deposits and dividends which are outside the scope of value-added tax (VAT).

Citing an example, it said that if a retail business deposits its income into a bank account and earns interest on the deposited amount, and the said retail business does not do anything to earn this income aside from merely depositing the money in the account. So this will be categorised as passive income. Hence, the interest income earned is not deemed as a supply and the company will not have to declare this income on its VAT returns as it will out of the scope of VAT.

The authority noted, however, that the above position only applies to interest derived from bank deposits and does not have any bearing on the interest generated from extending loans or credit, which are exempt supplies for VAT purposes.

VAT is a tax imposed on the import and supply of goods and services at each stage of production and distribution, therefore, VAT implications arise only when there is a supply. If there is no supply, there is no VAT implication.

“The UAE tax system stands out for its transparency and accuracy in all its procedures; it strives to establish a conducive environment, setting up all the necessary infrastructure and legislation to conduct business efficiently and effectively and ensure its growth across all sectors. This includes the banking and finance sector, which enjoys high confidence both locally and internationally, while maintaining a steady growth and contributing to economic development,” said Khalid Ali Al Bustani, director-general, Federal Tax Authority. Mahmood Bangara, chairman, the Institute of Chartered Accountants of India (ICAI) – Dubai chapter, said bank interest received or paid need not be disclosed in the VAT returns for being out of scope.

“There is no supply involved in it except placing the money in deposits or borrowing from bank. But nonbanking interest which is forming part of a consideration for taxable product or service is liable for tax and shall be disclosed,” he clarified.

ICAI chairman noted that payment of dividends does not require disclosure for being out of scope. “If the dividend is paid, in lieu of management fee, it exposes to VAT. And if dividends are paid as a consideration for product or service, then it will be liable for VAT and shall be included in the return,” he added.

Naveen Sharma, director for internal audit at Al Shirawi Group, said it is a matter of awareness. “Non-awareness and limited access to information is the issue because small and medium companies are not aware of laws that bank dividends are out of supply. They are still doing the mistakes by incorporating them in their VAT returns,” he said. Sharma advised that every time smaller companies file their VAT returns, they should check the FTA circulars and clarifications.

He pointed out that small and medium-sized companies in the Northern Emirates are especially not aware about the information. “Usually the FTA website carries the new clarifications issued after the last filings by the companies,” he added. He suggested that professional bodies like ICAI, IBPC and others should regularly conduct workshops for clarifications. “It is clarification and fine print that needs to be highlighted. So now the job of tax professionals should be to emphasise on clarifications, rather than on basic information,” he added.

The UAE tax system stands out for its transparency and accuracy in all its procedures

Khalid Ali Al Bustani, Director-general, Federal Tax Authority.

The interest income earned is not deemed as a supply and the company will not have to declare this income on its VAT returns as it will out of the scope of VAT.