How to determine the correct exchange rate for VAT calculation

How to determine the correct exchange rate for VAT calculation

22.06.2018
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According to the Federal Decree-Law No. (8) (Article (69) Currency Used on Tax Invoices), if an invoice for supplies is in a foreign currency, then for the purposes of VAT calculation, the invoice amount must be converted to the AED by applying the exchange rate approved by the Central Bank on the date of supply. The exchange rates for most foreign currencies with respect to the AED are available on the Central Bank website.

Also, the Cabinet Decision No. (52) (Article (59) Tax Invoices) requires that Tax Invoice must include the gross amount and the tax amount both specified in AED, as well as in the foreign currency, and the exchange rate applied for this conversion. For more information on Tax Invoice rules, click here.

Thus, when issuing a tax invoice for supplies in a foreign currency, you have to use the correct exchange rate that was in effect on the date of supply and check that the amount is correctly converted by using this rate. Also, when receiving tax invoices from your suppliers, you have to check whether the data is correct; otherwise, you will not be able to recover the tax amounts specified in these documents.

Please note that the website provides information on historical exchange rates starting from 01/01/2018. No official recommendations have been issued on how to adjust the tax invoices issued in 2018 before the Central Bank has published the exchange rates. We recommend that, if possible, you re-issue these tax invoices, now with correct rates. If by any reason, you cannot do that, you should send an official request for clarification to FTA.

Please keep in mind, that the appropriate exchange rates should be used for VAT calculation not only at the moment of sales or purchasing, but also at the moment of receiving or issuing prepayments, or returns of goods. For further information on VAT calculation for foreign currency transactions read our blog a bit later.

The exchange rates that are available on the Central Bank website are intended only for VAT calculation, as it is stated by the Bank. Therefore, you may use other exchange rates on deals with suppliers and customers.

If you use any VAT accounting software:

  • Make sure your system uses the same number of decimal places for exchange rates as Central Bank
  • Сheck that in your system the exchange rates starting from 01/01/2018 corresponds the rates published by Central Bank
  • Check and update if needed the exchange rates that were applied to foreign currency transactions
  • Make sure that foreign currency transactions are correctly reflected in VAT Return

We hope that our tips will help you apply correct exchange rates for VAT accounting and avoid errors.

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