The Federal Tax Authority (FTA) of the United Arab Emirates (UAE) recently released a public clarification related to the adjustment of bad debts.
How does bad debt adjustment work for creditors?
Through VATP024, the local tax authority clarified that creditors are allowed in reducing the number of their taxable supplies equal to the amount for ‘bad debts.’ Bad debts are claims that were included in account receivables but haven’t been resolved or settled. Bad debt adjustment will be reported by a taxable entity in its tax return during which six months have elapsed or the date of expiry for payment deadline has arrived as specified in the invoice, bill, or contract. If the bad debt reduction’s value is greater compared to the taxable supplies of a taxable entity, then the amount of bad debt will be carried forward then applied to the subsequent tax periods.
If after the amount of taxable supplies has already been adjusted, a debtor settles the amount receivable, the creditor has to increase its taxable supplies for the tax period in which the settlement of debt occurred.
How does bad debt adjustment work for debtors?
The FTA also clarified the obligation of debtors in increasing their taxable supplies equal to the amount of liability left unpaid including the tax-deductible costs. An increase has to be reported with the tax return of the debtor for the tax period in which the six-month triggering period elapsed. The income of the debtor that’s VAT registered in UAE will be increased with the amount of the unpaid monetary liability.
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What are the conditions for applying bad debt adjustment in UAE?
In order to benefit from FTA’s bad debt relief, there are conditions that should be fulfilled by a commercial transaction. Where the supplier or creditor supplies goods and/or services to clients or customers but isn’t paid, either partially or wholly, within a certain period of time, the creditor will be able to adjust VAT for bad debts with the conditions listed below being addressed:
- Supply consideration has already been written off – the creditor or supplier of taxable supplies must have had already written off a portion of the entire consideration for a supply as bad debt. Bad debt relief will only be taken up to the extent of consideration that’s written off in company accounts. If only a portion of the consideration was written off, then the bad debt relief will be taken only to a portion of the bad debt.
- Six months or more has passed from the date of supply – debts must have been left unpaid for at least six months starting from the supply date. A supplier or creditor is to wait for a period of six months starting from the supply date in order to be eligible in initiating the process of adjusting bad debts in UAE. The local authority considers that in the period of six months, the supplies have already engaged multiple times with the debtor to recover or collect a debt or any outstanding amount.
- VAT has been paid and accounted for – VAT on a supply has to be charged and settled by the creditor or supplier. This condition is addressed when the supplier was charged with VAT on a tax invoice and accounted for VAT with the FTA via the tax return filing.
- The notification was given to the debtor for the amount of consideration that’s been written off – the supplier must have notified a debtor regarding the amount of consideration that has was written off. The notification has to contain the following details: the amount of consideration that’s written off, date of issuance of tax invoice which was unpaid by the debtor, and invoice number in the tax invoice left unpaid by the customer. There is no specified way that is prescribed by the FTA in sending notifications to debtors. The local tax authority considers the requirement to notify a customer is satisfied when the creditor or supplier sends out a post, email, or letter to the debtor stating the amount of consideration that’s written off. It’s not necessary in obtaining acknowledgment from a debtor; however, it’s prudent to retain the proof of having sent out the notification.
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If a taxable entity meets the conditions that are prescribed in the Executive Regulations Re: VAT in UAE, it’s eligible in claiming bad debt relief. Adjustments on accounts for bad debts are to be made in the VAT Return Adjustment Colum. Adjustment amount has to be specified and accurate for reporting to the relevant government authorities. The scheme, bad debt relief, seeks in providing relief to suppliers or creditors in cases wherein VAT was charged but has been left unpaid by customers.
To know more about bad debt adjustment and obligations of businesses related to VAT in UAE, call us here in VAT Registration UAE today!