This Public Clarification clarifies the VAT treatment of compensation-type payments, determining when such a payment constitutes consideration for a supply. It explains that VAT is only due on payments made for a supply of goods or services, referencing the definitions in Article 1 and Article 2 of Federal Decree-Law No. 8 of 2017. The document provides examples, distinguishing between payments outside the VAT scope, like liquidated damages for loss or penalties for breaches, and payments that are consideration for a supply, such as charges for cancelling a service. It stresses that the substance of the transaction, not the payment's label, dictates the VAT liability.
VATP001
VAT Public Clarification
VAT treatment of compensation-type payments
Issue
VAT is a tax on supplies of goods and services. Therefore, no VAT is due if no supply takes place. As part of business arrangements, businesses will often make payments to compensate each other for any loss, omissions or other wrongdoings. A question arises whether VAT is due on such payments.
Summary
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