Calculations in foreign currency are often used by companies across the UAE. This article describes how to calculate correct VAT for such operations.

For a deeper understanding of this matter, the following law clauses are required.

Federal Decree-LawNo. (8) (Article (69) Currency Used on Tax Invoices): if a supply is assigned in foreign currency, then for the purposes of VAT calculation, Tax Invoice amount shall be converted into the AED by the exchange rate approved by the Central Bank.

Federal Decree-Law No. (8) (Article (25) Date of Supply): Tax shall be calculated on the date of supply of Goods or Services, which shall be earlier of any of the following dates:

• The date on which the Services were completed.

• The date of receipt of payment.

 Let us look at an entity with VAT Return delivery terms as follows:

• First period: Jan 01, 2018 – Apr 30, 2018.

• Other period: May 1 to Jul 31, Aug 1 to Oct 31, Nov 1 to Jan 31, Feb 1 to Apr 30.

Let us consider the following situations:

1.      Full post-payment

2.      Full prepayment

3.      Partial prepayment: case 1

4.      Partial prepayment: case 2

1.      Full post-payment

Example

04/06/2018 The entity provided a service amounting to 800 EURO (incl. VAT 5%, EURO rate: 4,505582).

05/10/2018 The entity received a payment of 800 EURO for the services provided on 04/06/2018 (EURO rate: 4.375931).

Calculation

Date of supply – date of services delivery – 04/06/2018. Thus, to calculate supply amount and VAT amount we will use the 4.505582 rate.

• Supply amount (incl. VAT) in AED = 800 * 4.505582 = 3604.47.

• VAT amount in AED = 3604.47 * 5 / 105 = 171.64.

• Supply amount (excl. VAT) in AED = 3604.47 – 171.64 = 3432.83.

Supply amount (incl. VAT) and VAT amount must be mentioned in the Tax Invoice issued upon the services provision.

Supply amount (excl. VAT) and VAT amount must be taken into account in the VAT Return for Jan 01, 2018 – Apr 30, 2018.

Payment for VAT purposes is not taken into account separately, since it refers to services provision which is already taken into account.

2.      Full prepayment

Example

04/06/2018 Our entity received a payment of 800 EURO as a prepayment for providing services (VAT 5%, EURO rate: 4.505582).

05/10/2018 Our entity provided a service worth 800 EURO (including VAT 5%) on account of the prepayment received on 04/06/2018 (EURO rate: 4.375931).

Calculation

Date of supply – date of prepayment – 04/06/2018. Thus, to calculate supply amount and VAT amount we will use the 4.505582 rate.

• Supply amount (incl. VAT) in AED = 800 * 4.505582 = 3604.47

• VAT amount in AED = 3604.47 * 5 / 105 = 171.64

• Supply amount (excl. VAT) in AED = 3604.47 – 171.64 = 3432.83

Supply amount (incl. VAT) and VAT amount must be mentioned in the Tax Invoice issued upon receiving prepayment.

Supply amount (excl. VAT) and VAT amount must be taken into account in the VAT Return for Jan 01, 2018 – Apr 30, 2018.

Providing services for VAT purposes is not taken into account separately, since it refers to prepayment which is already taken into account.

3.      Partial prepayment: Case 1

Example

04/06/2018 Our entity received a payment of 800 EURO as a prepayment for providing services (VAT 5%, EURO rate: 4.505582).

05/10/2018 Our entity provided a service amounting to 1000 EURO (incl. VAT 5%) on account of the prepayment received on 04/06/2018 (EURO rate: 4.375931).

Calculation

First date of supply – date of prepayment – 04/06/2018. Thus, to calculate supply amount and VAT amount we will use the 4.505582 rate.

• Supply amount (incl. VAT) in AED = 800 * 4.505582 = 3604.47

• VAT amount in AED = 3604.47 * 5 / 105 = 171.64

• Supply amount (excl. VAT) in AED = 3604.47 – 171.64 = 3432.83

Supply amount (incl. VAT) and VAT amount must be mentioned in the Tax Invoice issued upon receiving prepayment.

Supply amount (excl. VAT) and VAT amount must be taken into account in the VAT Return for Jan 01, 2018 – Apr 30, 2018.

Since the prepayment was covering only a part of the services provided, the moment of services provision is also considered to be the moment of supply. Moreover, amount of the "second" supply equals to the unpaid cost of the services by the 4.375931 rate.

• Supply amount (incl. VAT) in AED = (1000 – 800) * 4.375931 = 875.19

• VAT amount in AED = 875.19 * 5 / 105 = 41.68

• Supply amount (excl. VAT) in AED = 875.19 – 41.68 = 833.51

Supply amount (incl. VAT) and VAT amount must be mentioned in the Tax Invoice issued upon the services provision.

Supply amount (excl. VAT) and VAT amount must be taken into account in the VAT Return for May 01, 2018 – Jul 31, 2018.

4.      Partial prepayment: Case 2

Example

04/06/2018 Our entity provided a service worth 800 EURO (including VAT 5%, EURO rate: 4.505582).

05/10/2018 Our entity received a payment of 1000 EURO of which: 800 is for the services delivered on 04/06/2018, and 200 is a prepayment (EURO rate: 4.375931).

Calculation

Date of supply – date of services delivery – 04/06/2018. Thus, to calculate supply amount and VAT amount we will use the 4.505582 rate.

• Supply amount (incl. VAT) in AED = 800*4.505582 = 3604.47

• VAT amount in AED = 3604.47 * 5 / 105 = 171.64

• Supply amount (excl. VAT) in AED = 3604.47 – 171.64 = 3432.83

Supply amount (incl. VAT) and VAT amount must be mentioned in the Tax Invoice issued upon the services provision.

Supply amount (excl. VAT) and VAT amount must be taken into account in the VAT Return for Jan 01, 2018 – Apr 30, 2018.

As long as the payment partially covered the services delivered on 04/06/2018 and partially comprised prepayment, the moment of payment is also considered to be the moment of supply. Moreover, amount of supply equals to amount of prepayment by the 4.375931 rate.

• Supply amount (incl. VAT) in AED = (1000 – 800) * 4.375931 = 875.19

• VAT amount in AED = 875.19 * 5 / 105 = 41.68

• Supply amount (excl. VAT) in AED = 875.19 – 41.68 = 833.51

Supply amount (incl. VAT) and VAT amount must be mentioned in the Tax Invoice issued upon the services provision.

Supply amount (excl. VAT) and VAT amount must be taken into account in the VAT Return for May 01, 2018 – Jul 31, 2018.

*For all calculations, figures are rounded according to mathematical rules.

We hope that our tips will help you to define correct date and amount of the supply for VAT accounting and avoid tax penalties.

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