Published On: 13 June 2024
By Admin
Published On: 13 June 2024
Financial institutions all over the world can safely exchange electronic messages and information about financial transactions through the global financial messaging network known as SWIFT (Society for Worldwide Interbank Financial Telecommunication). The SWIFT is essential to the world of constantly evolving technology and many financial transactions because it facilitates secure, methodical cross-border communication and transactions between financial institutions.
It is commonly known that non-resident banks located outside UAE provide interbank services, also known as bank charges, to the banks and exchange houses, referred to as financial institutions, in the UAE. The aforementioned services are regarded as imports of services and the VAT on them is recorded via the Reverse Charge Mechanism by the financial institutions that are registered for VAT. As a result, they have to account for these transactions, issue legitimate tax invoices for these interbank services, and satisfy all applicable tax requirements. In general, financial institutions can claim Input Tax Credits (ITC) for foreign bank fees assessed by non-resident banking institutions as long as those expenses are made in order for the financial institutions based in the UAE to make taxable deliveries.
Input tax, however, can only be recovered by the financial institutions if the charges are backed up by pertinent records and evidence. The real issue here is that financial institutions are receiving SWIFT communications for foreign bank charges that don't match the specifications of the tax invoice required by UAE VAT. To claim input tax on these bank charges, financial institutions must provide tax invoices. It would be impracticable and time-consuming to require the issue of a tax invoice for each and every SWIFT transaction, given the large volume of SWIFT communications that financial institutions in the UAE receive on a daily basis. In order to address this practical difficulty, the Federal Tax Authority (FTA) has released Public Clarification VATP036 that clarifies whether or not SWIFT messages are accepted by the FTA as supporting documentation for ITC claims.
The FTA no longer requires financial institutions to issue tax invoices for every SWIFT transaction because it recognizes the administrative burden associated with issuing tax invoices for a large number of SWIFT transactions. Instead, the FTA has established particular conditions and prerequisites for which SWIFT messages can be used as proof for purposes of input tax recovery.
A financial institution in the UAE is considered to be importing "Concerned Services" when it receives international bank charges through the SWIFT system from foreign banking institutions. When a local financial institution imports services from overseas and is registered for VAT, it is considered to be providing a service that is taxable to itself. As a result, it must fulfil all obligations pertaining to VAT, including employing the reverse charge technique to account for VAT on these acquired services.
Financial institutions can claim input tax reimbursement for costs associated with taxable supply, even if those costs are paid for through SWIFT transactions with non-resident banks. The financial institutions are able to recoup the VAT paid on the interbank costs if they save the qualifying SWIFT message. The standard VAT standards govern the input tax recovery process. This guarantees financial institutions a more equitable tax treatment, hence reducing their total tax burden.
Every SWIFT transaction that results in interbank fees must have a valid tax invoice issued to the financial institutions that have been registered for VAT in the UAE. Therefore, it would not be possible for taxable persons to produce tax invoices for a transaction if adequate documentation has been available for the establishment of the details of a supply, according to Article 59(7)(b) of the Executive Regulation. As a result, some transactions (those with sufficient documentation) are not required to issue tax invoices, which eventually simplifies paperwork procedures for financial institutions.
The FTA has set particular standards and directives for SWIFT messaging in order to minimise the administrative load on financial institutions. When these requirements are met, financial institutions are not required to provide tax invoices for each transaction.
Qualifying SWIFT messages are those SWIFT messages that have the following details:
The UAE financial institution will be regarded as having supplied the service to itself, and qualifying SWIFT messages will be acknowledged as adequate documented proof to demonstrate the delivery of the interbank service obtained from the non-resident bank. As long as it keeps the pertinent qualifying SWIFT message as proof of the transaction, the UAE financial institution is exempt from having to send a tax invoice to itself in this situation. The VAT Executive Regulations contain a provision that permits the FTA to decide whether or not to issue a tax invoice in specific situations. In these cases, the FTA may determine that it would be difficult to require the taxable person to issue a tax invoice if it believes that sufficient records are or will be available to establish the specifics of any supply or particular type of supplies.
The Public Clarification offers banking organisations a practical answer to the difficulties they encounter while recording foreign bank charges via SWIFT messaging. The UAE Federal Tax Authority hopes to facilitate compliance by streamlining procedures, reducing administrative burdens, and accepting "Qualifying SWIFT messages" as legitimate documentary evidence. In light of this clarification, financial institutions should evaluate their procedures to guarantee seamless VAT recovery while adhering to regulatory standards.